Consumer Law & Policy Blog

Ninth Circuit, once again, recognizes reality--to the benefit of consumers

The Ninth Circuit handed down an excellent decision on October 20, resolving an open question as to whether a class action plaintiff can seek future injunctive relief when she won’t get fooled again. This often arises with retail purchases, where a duped consumer who is on the ball enough to be a class representative is not going to go back to the same company to endure the same fraud.

This is a particular problem in California, where the Cali Unfair Competition Law gives a successful plaintiff the right to get prospective relief on behalf of the class without any standing issue.

Because stopping an ongoing fraud is often more costly to defendants than refunding some of their ill-gotten gains (and continuing the fraud), companies often remove state cases to federal court and then claim lack of Article III jurisdiction.

The Court noted this intentionally ironic act by defendants:

We observe—although our conclusion is not based on this consideration—that our holding alleviates the anomalies the opposite conclusion would create. As [a district] court aptly recognized, “[a]llowing a defendant to undermine California’s consumer protection statutes and defeat injunctive relief simply by removing a case from state court is an unnecessary affront to federal and state comity [and] . . . an unwarranted federal intrusion into California’s interests and laws.”

The Court firmly rejected this maneuver:

We hold that a previously deceived consumer may have standing to seek an injunction against false advertising or labeling, even though the consumer now knows or suspects that the advertising was false at the time of the original purchase, because the consumer may suffer an “actual and imminent, not conjectural or hypothetical” threat of future harm.

I can't wait to see how defendants try to put a spin on this excellent opinion.

(There's also a wonderful concurrence, discussing the anomalous treatment of standing in instances like this.)

Senate Could Vote on CRA Resolution to Block Arbitration Rule Tonight . . .

by Jeff Sovern

. . .  or  it could come later in the week. Or not. My speculation is that the Senate leadership will call the vote if they think they have the votes to pass the resolution but otherwise they will let it go until closer to the deadline. So the real question is how many votes they have.

Am Banker Reports on Economists Who Are Critical of the OCC Claims in the CFPB-OCC Data Dispute

by Jeff Sovern

The article, by Kate Berry and Ian McKendry, is headlined Fight to kill CFPB arbitration rule could rest on whose data is right. Here's some of what the article says about the OCC claims, though the article has more than I can insert here.

"The uncertainty of the OCC's estimate is very large, it's a very noisy estimate, and there is quite a high chance that
the true effect is zero," said John Campbell, the Morton L. and Carole S. Olshan Professor of Economics at Harvard
University, who is a member of the CFPB's Consumer Advisory board. "The CFPB argues in its defense that the
effect can't be a large number like 3% because it's ridiculously large, relative to any reasonable estimates or costs
based on past class-action suits."

* * *

Other economists challenged the OCC's data, casting doubt on anyone's ability to predict consumers costs
resulting from the rule.

"Any statistically significant results would be highly questionable given the level of noise in the data," Alexei
Alexandrov, a senior economist at Amazon and a former senior economist at the CFPB, who had written a paper
that was the basis for the CFPB's own arbitration study.

* * *

However, Ted Frank, a senior attorney and director at the Competitive Enterprise Institute's Center for Class Action
Fairness, said that even if the CFPB's study found that an increase in credit card rates was not statistically
significant, that "does not mean it's not significant."

"They often cherry-pick their data," said Frank. "To say it's not statistically significant, therefore there's no effect,
that's wrong. What you can say is, we can't be confident there is an effect but there probably is an effect, and more
study is needed."

I'm not sure what the basis is for Frank's claim that there probably is an effect, but I'm not a statistician by any means.  If not using arbitration clauses increased lending costs, I remain confused why more credit card issuers don't use arbitration clauses out of self-interest (roughly half don't use arbitration clauses), or alternatively, where are the credit card issuers that don't use arbitration clauses and are charging more than those who don't?  I keep waiting for someone who supports the OCC position on this to address that point, but I'm not aware of anyone who has.  Perhaps that's because they can't.

UPDATE: Please see the comment below for the basis of Frank's claim and an argument for why some credit card issuers don't use arbitration clauses.

Trump's Treasury Department issues report going after the CFPB's arbitration rule

The Treasury Department's report is called Limiting Consumer Choice, Expanding Costly Litigation: An Analysis of the CFPB Arbitration Rule. The first sentence of the report's conclusion (on page 17 of the report) would be laughable if the topic -- access to the courts -- were not so serious: "The Bureau’s Rule would upend a century of federal policy favoring freedom of contract to provide for low-cost dispute resolution."

Yes, freedom of contract, that's what fine-print mandatory pre-dispute consumer arbitration is all about! (For those who'd rather live in the real world, take a look at Emily Martin's guest post earlier today entitled Forced Arbitration Protects Sexual Predators and Corporate Wrongdoing.)

The report is useful in one way, I suppose. It provides a preview of things to come --a less sophisticated version, perhaps, of industry briefs we'll see challenging the rule in court (assuming Congress doesn't override the rule before then).

 Here is the report's executive summary:

Nearly a century ago, Congress made private agreements to resolve disputes through arbitration “valid, irrevocable, and enforceable” under the Federal Arbitration Act. This longstanding federal policy in favor of private dispute resolution serves the twin purposes of economic efficiency and freedom of contract. In the Dodd-Frank Act, Congress authorized the Consumer Financial Protection Bureau to limit or ban the use of arbitration agreements in consumer financial contracts only if the Bureau concludes that its restrictions are “in the public interest and for the protection of consumers.” Against this background, in July 2017, the Bureau issued its final rule (the “Rule”) prohibiting consumers and providers of financial products and services from agreeing to resolve future disputes through arbitration rather than class-action litigation.

    The Rule follows the Bureau’s study of arbitration, summarized in a 2015 report to Congress. The Arbitration Study attempted an empirical analysis of both the arbitral awards and class action settlements that consumers obtained for a variety of claims. But the data the Bureau considered were limited in ways that raise serious questions about its conclusions and undermine the foundation of the Rule itself. More fundamentally, the Bureau failed to meaningfully evaluate whether prohibiting mandatory arbitration clauses in consumer financial contracts would serve either consumer protection or the public interest—its two statutory mandates. Neither the Study nor the Rule makes that requisite showing. Instead, on closer inspection, the Study and the Rule demonstrate that:

"Forced Arbitration Protects Sexual Predators and Corporate Wrongdoing"

Guest post by Emily Martin, General Counsel and Vice President for Workplace Justice. National Women's Law Center

Fox News.  Sterling Jewelers.  Wells Fargo. 

What do they all have in common?  For years, they successfully kept corporate wrongdoing secret, through forced arbitration.

Buried in the fine print of employment contracts and consumer agreements, forced arbitration clauses prohibit you from going to court to enforce your rights.  Instead, employees who experience harassment and discrimination, or consumers who are the victims of financial fraud or illegal fees, are sent to a private arbitration forum.  Frequently designed, chosen, and paid for by the employer or corporation, in arbitration everything is conducted in secret. People who suffered the same abuses often can’t join together to show how rampant a problem is and confront a powerful adversary—and people are less likely to come forward at all, because they have no idea they aren’t alone.

When Gretchen Carlson sought her day in court over sexual harassment allegations against Roger Ailes, her former boss at Fox News, Mr. Ailes’s lawyers had a quick response: send the case to forced arbitration.  After she filed suit, he also invoked a clause that reportedly required absolute secrecy: “all filings, evidence and testimony connected with arbitration, and all relevant allegations and events leading up to the arbitration, shall be held in strict confidence.” It was only because she resisted that clause through a creative legal theory that her allegations were made public—unleashing a tsunami of claims of sexual harassment by Ailes and others at Fox News.

Hundreds and maybe thousands of former employees of Sterling Jewelers, the multibillion-dollar conglomerate behind Jared the Galleria of Jewelry and Kay Jewelers, known for advertising slogans such as “Every kiss begins with Kay,” were allegedly groped, demeaned, and urged to sexually cater to their bosses to stay employed.  The evidence of apparent rampant sexual assault was kept secret for years from other survivors and the general public through gag orders imposed in forced arbitration.

The same thing happened at American Apparel, where employees and models were forced to arbitrate sexual harassment claims and keep the details secret, and the proceedings were reportedly a sham.

We don’t yet know if Hollywood producer Harvey Weinstein used forced arbitration to suppress allegations of his decades-long campaign of sexually harassing, abusing, and assaulting young assistants, temps, employees and executives at the Weinstein Company and Miramax.  But the clauses may well have played a role, and his nondisclosure agreements and secret one-by-one settlements worked to the same effect.

And forced arbitration clauses do not only hide wrongdoing in sexual harassment cases.  Corporations also use forced arbitration to isolate victims and cover up massive, widespread wrongdoing in the financial sector.

Scalia and arbitration law

That's the topic of The Bold Ambition of Justice Scalia's Arbitration Jurisprudence: Keep Workers and Consumers Out of Court by law prof. Katherine Stone. Here's the abstract:

Arbitration clauses have become a pervasive feature of modern life. The expanding scope of arbitration has become a cause for alarm amongst consumer and worker advocates, who see it as a judicial roll back of hard-won consumer and worker rights. Justice Antonin Scalia played a key role in the trend by which arbitration has largely displaced the civil justice system for ordinary Americans. Between 2006 and 2016, Justice Scalia authored six important Supreme Court decisions interpreting the FAA – no other Justice came close. Scalia’s singular contributions to arbitration law are implicated in three consolidated cases that are currently before the Supreme Court, and which pose the question of the impact of the FAA on workers’ rights to engage in collective activity to improve their working conditions. This article traces the Justice Scalia’s contributions to arbitration jurisprudence and considers the implications of the edifice he has created by these decisions.

Politico Got Two Statisticians to Look at the CFPB-OCC Arbitration Statistical Dispute

by Jeff Sovern

The story is headlined 'Plague on both your houses': Cordray, Noreika get scolding from statisticians. Excerpt:

" * * * There isn’t strong evidence either way,” said Bruce Meyer, a professor at the University of Chicago.

“There is weak evidence that says more than likely there is a positive effect on the cost of credit,” Meyer said of the OCC analysis. “But the accepted approach is you don’t crow about something unless you have stronger evidence.”

As for Cordray’s rebuttal, “it was wrong, too,” Meyer said. “You can say that there’s an 88 percent probability if you believe that the study that’s being quoted. There are always potential problems with research studies.”

* * * 

Campbell Harvey, a Duke University professor and a past president of the American Finance Association, scolded both the bureau and OCC for fighting over things like p-values, which can be hacked or manipulated. He called the OCC’s probability calculations “vague” and said agency researchers “left themselves open to criticism that they don’t understand basic statistics.”

But he also said both sides should stop bickering and rethink what’s important. In that light, he noted that the CFPB couldn’t rule out the chance, however remote, that an arbitration ban could increase the cost of consumer borrowing by more than 3 percentage points.

“By standard methods we wouldn’t consider this significant. That doesn’t mean that you ignore it,” Harvey said. “While it’s not significant at traditional levels, so what? It could be economically important.”

There's more in the article. Two statisticians is better than we had, but still only a small (you should forgive the expression) sample.  I wonder what others would say. I would also like to know more about what Harvey meant when he said that the agency researchers left themselves open to the criticism that they don't understand basic statistics.  The agency in question seems to be the OCC rather than the Bureau, judging by the earlier reference in the sentence to the OCC.

Times Op-Ed Shows How Markets Sometimes Fail to Curb Companies That Cheat Consumers

by Jeff Sovern

The piece is by Richard Coniff and is titled Why We Don’t Vote With Our Wallets. Excerpt:

[W]e get bored and look away from the dull crimes companies commit every day, like Wells Fargo foisting phony accounts and unwanted auto insurance on its customers. * * * Like Volkswagen selling “clean diesel” cars that ran clean only long enough to fool emissions testing equipment. * * *

* * * 

* * * Heavy discounting helped make scandal-ridden Volkswagen the world’s largest automaker in 2016. * * *

It is often striking to me how free marketers continue to believe that consumers always punish companies that cheat their customers when there is so much evidence to the contrary. As for Wells Fargo, the number of consumers who chose to maintain checking accounts there actually rose after the phony account scandal became public.

Credit Bureau Industry Still Seeking Caps on Damages After Equifax Breach

by Jeff Sovern

Much has been made of the fact that the day the Equifax breach became public, Congress held a hearing on bills that would have limited damages credit bureaus would have to pay for misconduct.  This past Tuesday, the Senate Banking Committee held a hearing titled Consumer Data Security and the Credit Bureaus (we posted a link to a report on the hearing from The Hill here). The witnesses included an attorney representing the industry trade group, the Consumer Data Industry Association: Andrew M. Smith, Partner, Covington & Burling LLP. Mr. Smith testified that the industry still seeks a cap on damages for liability under the Fair Credit Reporting Act.  Some other interesting thing that came up in the hearing: some committee members support the idea of flipping the default on credit freezes, so that the default would be that credit bureaus would not be able to disclose consumer information without consumer consent, rather than the current system in which credit bureaus can disclose information unless consumers freeze their files. There seemed to be agreement that, as we reported earlier in the week, the CFPB generally lacks authority over data breaches--but the CFPB and FTC are both investigating the breach, so it appears the CFPB believes it may have some jurisdiction in the area (if any readers know the basis for its jurisdiction, I hope they will post about it in the comments below; maybe the Bureau's UDAAP powers?). Mr. Smith opposed congressional action on credit bureau security breaches until after the FTC and CFPB concluded their investigations. On another point, when it was pointed out that an FTC study in 2013 found that about a quarter of consumers had errors in their credit reports, Mr. Smith took the position that only 2% of consumers had credit report errors because he defined errors as errors affecting the consumer (e.g., errors that would lead to a lender charging a higher interest rate or declining a loan altogether).  Another witness, Marc Rotenberg of the Electronic Privacy Information Center, argued that the credit bureau industry should provide freezes without charge because otherwise the industry profits from a harm that it itself makes possible.  Many of the senators from both parties were critical of Equifax; I continue to wonder whether  legislation will result or if this is merely political posturing.  

"Regulator Blasts Wells Fargo for Deceptive Auto Insurance Program"

The New York Times reports that "Wells Fargo engaged in unfair and deceptive practices, failed to properly manage risks and hasn’t set aside enough money to pay back the customers it harmed, according to a confidential report by federal regulators."

"The report, prepared by the Office of the Comptroller of the Currency and reviewed by The New York Times, criticizes Wells Fargo for forcing hundreds of thousands of borrowers to buy unneeded auto insurance when they took out a car loan, as well as its handling of the problems once they were detected."

The full article is here.