Consumer Law & Policy Blog

The effect of patent trolls on innovation

Though the definition varies (go here), a patent troll generally is thought of as a person or entity that buys patents and then enforces the patents through litigation against accused infringers to collect licensing fees. The troll has no intent to exploit the patent for itself -- that is, no plan to use the patent to make or sell a product or supply a service. Many people, including many politicians, think that litigation brought by trolls improperly drives up costs to innovating businesses and, ultimately, consumers.

Professor Stephen Haber and grad student Seth Werbel have recently published this study that questions the prevailing view. Read this article on their research, an earlier piece in the Wall Street Journal, and the study abstract:

Why do individual patent holders assign their patents to "trolls" rather than license their technologies directly to manufacturers or assert them through litigation? We explore the hypothesis that an asymmetry in financial resources between individual patent holders and manufacturers prevents individuals from making a credible threat to litigate against infringement. First, individuals may not be able to cover the upfront costs associated with litigation. Second, unsuccessful litigation can result in legal fees so large as to bankrupt the individual. Therefore, a primary reason why individual patent holders sell to PAEs is that they offer insurance and liquidity. We test this hypothesis by experimentally manipulating these financial constraints on a representative sample of inventors and entrepreneurs affiliated with academic institutions that are particularly known for their innovative activity: Stanford University and the University of California, Berkeley. We find that in the absence of these constraints, subjects were significantly less likely to sell their patent to a PAE in a hypothetical scenario. Furthermore, treatment effects were significant only for subjects who were hypothesized to be most sensitive to these constraints.

 

When should finanical institutions be bailed out?

Law professors Anthony Casey and Eric Posner attempt to answer that question in A Framework for Bailout Regulation. Here is the abstract:

During the height of the financial crisis in 2008 and 2009, the government bailed out numerous corporations, including banks, investment banks, and automobile manufacturers. While the bailouts helped end the financial crisis, they were intensely controversial at the time, and were marred by the ad hoc, politicized quality of the government intervention. We examine the bailouts from the financial crisis as well as earlier bailouts to determine what policy considerations best justify them, and how they are best designed. The major considerations in bailing out and structuring the bailout of a firm are the macroeconomic impact of failure; the moral hazard effect of the bailout; the discriminatory effect of the bailout; and procedural fairness. Future bailouts should be guided by principles that ensure that the decisionmaker properly takes into account these factors.

Joint Enforcement Action: Maryland Attorney General and CFPB Act On Illegal Mortgage Kickbacks

By guest blogger Peter A. Holland

In a time of limited resources, perhaps a new model is emerging of joint CFPB/State Attorney General enforcement actions.  The recent joint action by the Bureau and Maryland Attorney General Brian Frosh provides a nice case study.

Recently, Maryland Attorney General Brian Frosh and the Consumer Financial Protection Bureau took an action against a mortgage kickback scheme involving former Maryland title company Genuine Title, LLC and employees at national banks Wells Fargo and JPMorgan Chase. “Homeowners were steered toward this title company, not because they were the best or most affordable, but because they were providing kickbacks to loan officers . . . this type of quid pro quo is illegal, and it's unfair to other businesses." Said Maryland Attorney General Brian Frosh. The complaint in the case is available here.

Between 2009 and 2013, Genuine Title swapped marketing services and cash payments for referrals of business by loan officers to Genuine Title.

Loan officers typically are paid by commission. Through the Marketing Services Scheme, Genuine Title offered loan officers valuable services to increase the amount of business they generated, and thus the commissions they would earn. The scheme was also intended to increase the amount of business generated by the participating loan officers and, through referrals, to increase Genuine Title’s profits.

In some cases Genuine Title:

not only analyzed and purchased leads from a third-party vendor, it also paid for marketing letters directed to the consumer leads to be printed, folded, stuffed into envelopes, and mailed.

Genuine Title even attempted to conceal its involvement by having the company which printed the marketing materials provide “fake” invoices to the loan officers, so that it could pretend that the loan officers had paid for the materials themselves. Genuine Title went out of business in April 2014, which is why they are not named in the joint enforcement action.

Over 100 loan officers at Wells Fargo were involved in the scheme, along with 6 at the JPMorgan Chase, and an unknown number at other, unnamed banks. The enforcement action led to consent orders with Wells Fargo and JPMorgan Chase. Wells Fargo will pay over $10 million in redress to affected consumers, $21 million in penalties to the CFPB and $3 million to the Maryland Attorney General’s office. Chase will pay less than $1 million in redress and penalties.

Maryland’s First Co-Operative Action with the CFPB

This is the first case in which the Maryland Attorney General’s office and the CFPB have acted jointly to enforce the law. The investigation seems to have started in Maryland, with the Office of the Attorney General stating:

The case was referred to the Consumer Protection Division by the Maryland Insurance Administration and the investigation was conducted jointly with the Consumer Financial Protection Bureau.

The CFPB made a similar statement in its press release. The CFPB takes most of the responsibility for monitoring compliance with the consent orders and handling the payments to affected consumers. CFPB will also receive most of the penalties to be paid – which may reflect the degree of the CFPB’s involvement in the investigation and enforcement action. This case appears to be an excellent example of state-federal co-operation making a major enforcement action possible. The CFPB can only examine so many businesses and follow up on so many reports of wrongdoing on its own. Likewise, state attorneys-general may not always have the resources to take on huge market players like Wells Fargo and Chase on their own.

In a time of contracting state budgets, joint federal/state actions of consumer protection laws seems to make good sense, and seems to be an excellent way to use the Dodd Frank act to pursue both local and national actors when they engage in fraud and abuse in the area of consumer financial services.

Study of Public Participation in Rulemaking and Plain Language

Cynthia R. Farina, Mary Newhart, and Cheryl L. Blake, all of Cornell, have written The Problem with Words: Plain Language and Public Participation in Rulemaking, George Washington Law Review (2015 Forthcoming). Here's the abstract:

The connection between more understandable rulemaking materials and broader, better public participation seems obvious, Yet the series of Presidential and statutory plain-language directives issues over the last 5 decades have not even mentioned the relationship of comprehensibility to participation — until very recently. In 2012, the Office of Information and Regulatory Affairs (OIRA) issued “guidance” instructing that “straightforward executive summaries” be included in “lengthy or complex rules.” OIRA reasoned that “[p]ublic participation cannot occur … if members of the public are unable to obtain a clear sense of the content of [regulatory] requirements.”

Using a novel dataset of proposed and final rule documents from 2010-2014, we examine the effect of the executive summary requirement. We find that the use of executive summaries increased substantially compared to the modest executive-summary practice pre-Guidance. We also find that agencies have done fairly well in providing summaries for “lengthy” rules. Success in providing the summary in “complex” rules and in following the standard template included with the Guidance is mixed. Our most significant finding is the stunning failure of the new executive summary requirement to produce more comprehensible rulemaking information. Standard readability measures place the executive summaries at a level of difficulty that would challenge even college graduates. Moreover, executive summaries are, on average, even less readable than the remainder of the rule preambles that they are supposed to make accessible to a broader audience.

This article is part of the symposium commemorating the 50th anniversary of the Administrative Conference of the United States

Does Pre-Submission Media Coverage Increase the Odds of a Good Article Placement?

by Jeff Sovern

As law students, law professors, and lawyers know, most law reviews are edited by law students, which means that law students select the articles that appear in their journals.  The prime submission season is just underway, and so newly-minted law review editors—most in their second year of law school—are choosing among the flood of articles submitted by lawyers and law professors.

Most second year students have been exposed to only a limited range of legal doctrines and a limited number of articles.  That surely must make it harder to assess the quality of an article.  Consequently, it is only natural that some rely upon signals of quality.  For example, some observers claim that law review editors are subject to letterhead bias; that is, the tendency to give excessive weight to the affiliation of the author, with the result that prestigious journals publish weaker articles by professors at top law schools over better articles by scholars at schools that are ranked lower. 

I am wondering about the effectiveness of a different signal to suggest that an article is significant: media attention for the research reported in the article (Warning: self-serving statements ahead). My co-authors and I are in the process of submitting to law reviews an article (which will be familiar to regular readers of this blog), “Whimsy Little Contracts” with Unexpected Consequences: An Empirical Analysis of Consumer Understanding of Arbitration Agreements.  It’s been the subject of coverage in The New York Times DealBook, the Cleveland Plain Dealer, American Banker (here, here, and here),  and a couple more places have stated their intention to run things on it.  While I wrote most of those pieces (but not all), the various outlets undoubtedly would not have used my pieces if they did not deem them newsworthy. So will all that signal to law review editors that the article is significant?  Of course, one article is a miniscule sample, but if the article gets a good placement, law review article writers might be well advised in the future to seek more media attention for their writings (I should note that media attention is valuable for reasons other than obtaining good placements, including that it can lead to useful comments on the underlying article and also help promote the ideas expressed in the article).

New York Decision Denying Discovery of Doe Critics Casts Broad Doubts on Libel Suits over Consumer Reviews

by Paul Alan Levy

The Appellate Division in New York has today affirmed the denial of a pre-litigation petition brought by Woodbridge Structured Funding seeking to compel Opinion Corp. to provide identifying information about the authors of two critical consumer reviews on its Pissed Consumer site. 

Measuring the stakes in King v. Burwell

The latest Obamacare challenge, now pending before the Supreme Court, could if successful cost the states a lot of money. How much? Read the Post's analysis, complete with a state-by-state breakdown and a discussion of its possible implications for the outcome of the case, here.

Should Macao Music Group Be Able to Identify Twitter Users Criticizing Its CEO?

We recently filed an amicus brief about the standards for subpoenas identifying anonymous Internet users accused of defamatory or otherwise wrongful communications in a surprising venue - the United States District Court for the Northern District of California.  The underlying case was filed in the Western District of Washington by Macao Music Group, an offshore conglomerate of companies making pro audio and music equipment, and by a Washington state subsidiary, against the anonymous authors of a pair of parody Twitter accounts named "FakeUli" and "NotUliBehringer," playing on the name of Macao's CEO, Uli Behringer.  

The complaint in the case asserts that various tweets accused Behringer of consorting with prostitutes, and accused the companies of making shoddy products and encouraging domestic violence and child abuse.  Plaintiffs then issued a subpoena in the Northern District of California.  Twitter, however, resisted the subpoena on the ground that there was no proof of wrongdoing, and plaintiffs moved to compel, telling the Court about the Dendrite line of cases (with emphasis on one of the cases, Salehoo v Doe, decided in the forum court, the Western District of Washington, and arguing that those standards were met because the statements were so plainly defamatory.  Twitter took no position on whether the standard had been met, but simply urged the Court not to compel compliance with the subpoena unless the Court was satisfied that the Dendrite standard had been satisfied.

Why the Northern District of California Needs to Get These Cases Right

ABA Consumer Protection Conference Focuses on Big Data, Internet of Things and Ad Substantiation Standards

By Dee Pridgen

The ABA Consumer Protection Conference held February 12 on the campus of the George Washington University in Washington, D.C., focused on the work of the Federal Trade Commission (FTC), as well as the work of advertising self-regulatory bodies, especially in the areas of big data and the “Internet of Things.”  FTC Chair Edith Ramirez kicked things off by summarizing the FTC’s consumer protection agenda.  She praised the recent DC Circuit Court opinion in the POM Wonderful case, stating that the decision shows that health claims need to be backed by “strong science.”  She also said that the FTC will focus on the growing sector of mobile payments, especially unauthorized billings, as well as privacy and data security issues.  She stated that the FTC wants to eliminate the common carrier exemption from the FTC Act so that it can better pursue issues like billing practices and “cramming” of unauthorized charges onto telephone bills.

This conference featured two “interactive oxford style debate” sessions, one of which was on the proper standards for advertising substantiation.  I debated Howard Beales (photo below), former FTC Bureau of Consumer Protection Director and currently an economics professor at George Washington.  The proposition to be debated was:  “Even in a world of evolving science and new products, the FTC’s traditional advertising substantiation standard of competent and reliable scientific evidence best maximizes consumer welfare.”  Beales argued in favor, stating among other things that requiring anything more than competent and reliable evidence would deter advertisers from disseminating truthful health and nutrition claims, and that otherwise safe food products did not need to be tested in the same way as drugs.  I argued against the resolution, saying that the traditional standard, while necessary, is not sufficient to protect consumers who pay more for certain products based on specific disease related claims that are said to be “proven.”  For these specific claims, as was the case in POM Wonderful, a higher level of substantiation may be required.  Before the debate, 79% of the audience was in favor of the resolution and 21% were against.  After the debate, 55% were in favor and 45% were against. 

Several sessions dealt with privacy.  Ilana Westerman, CEO of Create with Context, suggested that marketers persuade customers to want to give their data, due to the convenience and benefits, rather than just taking it for the marketer’s benefit.  An example was consumers who share a “wish list” of gifts they desire for special occasions with friends and relatives, and an app that alerts the consumer when he or she is in a store that has an item on their friend’s wish list.  This was well received by consumers, whereas an app that tells you in the store that you need to buy milk (because of prior buying patterns) would
feel “creepy.” 

Another panel discussed the “Internet of Things,” the subject of a just released FTC staff report, available here.  There are now over 25 billion devices that are interconnected and that collect personal information, such as in cars, “wearable” technology, and “smart” appliances.  The consensus at the FTC seems to be that there should be “privacy by design” incorporated into such devices to avoid security breaches and unauthorized access and misuse of personal information, and that consumers should have some notice and choice with regard to sharing their data.  No one advocated special regulations for this aspect of data sharing, but the FTC wants to have a general federal privacy statute that would be broad, flexible and not technology specific, that would allow the FTC to give guidance on data security and online tracking, among other things.

The packed agenda also featured a discussion of third party liability for fraud (e.g., payment processors), globalized privacy norms, and consumer protection in the direct selling industry. The conference closed with a panel on the advertising industry’s premier self-regulation body, the National Advertising Division of the Better Business Bureau. 

Sens. Warren and Brown: regulatory changes shouldn’t conflate small banks, large banks

At a hearing on Capitol Hill last week, lawmakers from both parties expressed interest in exempting small banks and credit unions from new financial rules, reported the Wall St. Journal.

But there must be a limit, warned two of the committee’s most pro-consumer voices:

Sens. Sherrod Brown of Ohio, the top Democrat on the powerful Senate Banking Committee, and  Elizabeth Warren of Massachusetts drew a line in the sand: Legislation targeted at helping truly small lenders is fine, but bills that scale back rules intended for larger, riskier banks have no chance.

“The big banks are going to keep using the small banks as a cover for their special rollbacks… we shouldn’t fall for that trick,” Ms. Warren warned her colleagues.

Read the full WSJ article here.