Consumer Law & Policy Blog

Bar-Gill & Ben-Shahar paper on manipulation of consumers

Oren Bar-Gill of Harvard and Omri Ben-Shahar of Chicago have written Manipulation by Mislaid Priorities. Here is the abstract:

This paper lays a foundation for a new theory of manipulation, based on the misprioritization of (truthful) information. Since consumers review only a subset of all available information, firms can harm consumers by prioritizing information that maximizes firms’ profits but has a smaller impact on the utility that consumers stand to gain from the purchase. Moreover, the distortions due to misprioritized information can arise not only from firms’ boastful disclosures, but also from the warnings and disclosures mandated by lawmakers. The paper identifies the product and market characteristics that determine the optimal prioritization of information and, correspondingly, the incidence of harm when the wrong information is prioritized for disclosure—either voluntarily by sellers or by legal mandate. It provides a framework for optimal legal intervention.

Study on beneficiaries and benefits of student-loan forgiveness

Countering assertions that student-loan forgiveness would primarily benefit wealthy people, a new study from the Roosevelt Institute determined that "student debt cancellation would provide more benefits to those with fewer economic resources and could play a critical role in addressing the racial wealth gap and building the Black middle class." The study, titled “Student Debt Cancellation IS Progressive: Correcting Empirical and Conceptual Errors,” is available here.

AAJ report indicates arbitration has a diversity problem

by Jeff Sovern

The report is titled Where White Men Rule: How the Secretive System of Forced Arbitration Hurts Women and Minorities. CNBC has a story here. Here's an excerpt from the report:

Arbitrators in consumer and employment cases are mostly male and overwhelmingly white. At AAA and JAMS, the two largest consumer and employment arbitration providers in the country, 88% of arbitrators are white and 77% are male.

* * *

Trust in the civil justice system is enhanced when the public sees that the judges deciding their cases reflect the diverse racial, ethnic, and cultural background of American society. As such, there have been, and continue to be, significant efforts to increase diversity in the federal judiciary. But the arbitration world is far behind even the judiciary. * * *

Federal and state courts face similar issues with regard to diversity but there is one major difference in arbitration. In the courts, whatever the race of the judge, a plaintiff can still face a jury. In arbitration, the arbitrator is judge and jury.

[Disclosure: AAJ gave St. John's University a grant to fund some of my research about half a dozen years ago.]

FTC looking into deceptive subscription marketing practices

Use of automatic subscriptions has exploded in recent years. Some companies make it easy to sign up but very difficult to cancel, and consumer complaints have piled up. The Washington Post reports, here, that the Federal Trade Commission is looking at ways to make it harder for companies to trap consumers in monthly subscription.

Guest Post by Mark Budnitz on why opt-in is the only fair method in pre-dispute arbitration agreements

Recently, the blog posted two items (here and here) arguing that the Consumer Financial Protection Bureau should issue a rule barring the use of arbitration clauses unless consumers opt in to them. The second item was in reply to Mark Levin's blog post at Ballard Spahr's Consumer Finance Monitor blog response to our first blog post. Mark Budnitz, Georgia State Professor of Law Emeritus, has contributed the following guest post to the debate: 

Opt-in is the only fair method of obtaining a consumer’s consent in pre-dispute arbitration agreements: It is impossible for consumers to make a knowing and intelligent pre-dispute waiver of their right to a judicial forum except in rare circumstances. That rare situation is where the consumer knows for a certainty what type or types of disputes they may have with the company, and there is no way arbitration is not the superior route to take.

Otherwise, the consumer cannot know, pre-dispute, which forum is better.

Discovery is one example. Does the dispute depend on documents within the sole possession of the company? If so, the limited discovery in arbitration should be avoided. Would it help the consumer prove their case to be able to make motions to produce documents, submit interrogatories, take depositions? There’s no way to know pre-dispute.

Will the company be suing the consumer, or will the consumer be suing the company? Will both have claims against the other? If the consumer may be the plaintiff or have a counterclaim, does the consumer have a sound legal argument for punitive damages? Does the arbitrator have the authority under the arbitration service rules or case law to award them? There’s no way to know pre-dispute if punitives are even an issue.

Does the consumer need a lawyer? She may not be able to retain one unless she has a claim against the company and can get into court and file a class action. Most consumer disputes do not involve enough money for it to be worthwhile for consumers to hire a lawyer whether they are the plaintiff or the defendant.

Pre-dispute, it is impossible for the consumer to know if she will have a dispute that can be brought and awarded satisfactory damages in small claims court. I know that some companies give consumers the option of arbitration or filing in small claims court. But if the consumer has a claim for substantial damages, she will not be able to recover what she is entitled to in small claims court. In addition, it is reasonable to assume many agreements do not provide that choice.

Which route will be less expensive for the consumer? Does the agreement require a panel of three arbitrators, all of which charge by the hour with the costs split between the parties? The answer is in the rules that govern arbitration under the agreement. Often the agreement merely provides a link to the arbitration service or services and depends on the consumer to read the rules of the services. How likely is it that consumers will do that before a dispute arises; if they do, how likely is it they will understand the full significance of the provisions?

Arguably AAA and JAMS are reputable and fair within the constraints of their rules. However, in doing research for an article years ago, I found arbitration agreements specifying that AAA’s Commercial Rules would apply, not its Consumer Rules. Some agreements just provided that AAA’s rules apply and did not specify which rules.

We should not forget that there are other arbitration services besides AAA and JAMS, and they may be of questionable legitimacy. Remember NAF? They were the darling of industry and often the sole arbitration service allowed under arbitration agreements. NAF was so corrupt that they completely shut down their consumer arbitrations within a week of being sued by the Minnesota A.G. for its illegal operations. Swanson v. Nat’l Arbitration Forum, (Minn. Dist. Ct., July 14, 2009). I don’t know what the situation is now, but for many years in Georgia the builders of all new homes required consent to pre-dispute consumer arbitration agreements. The arbitrations were administered by a service that was controlled by the builders, and in which consumers rarely won.

And of course, the arbitration services are not subject to any specific regulations governing their rules and can change their rules and procedures at any time without first obtaining approval from any government body.

Arbitration is private. After a dispute arises, the consumer may want the dispute to be public; she may want a public airing of her grievances in court. She may hope that, even if she loses her case, other consumers will learn of her dispute and take action if they have similar experiences. With today’s social media and some disputes going viral, consumers have more opportunities to make their grievances public. A company’s reputation is often its most precious asset. Pre-dispute, the consumer has no way to know if she may have a dispute that she wants to make public.

A favorable arbitration award has no precedential effect. A consumer may believe, after a dispute arises and consulting with her lawyer, that she has a strong case that would make an important precedent benefiting thousands of consumers if it were adjudicated in court.

Levin argues that agreeing post-dispute “would severely curtail consumer arbitration [because]…one side or the other, or both inevitably use the in terrorem ‘threat’ of expensive and prolonged litigation as a negotiating tool.” Levin assumes consumers can obtain legal representation. Consumers cannot make this threat persuasively if they don’t have a lawyer, but most don’t because unless the dispute involves a substantial amount of money, hiring a lawyer does not make financial sense.

It is interesting and revealing that Levin admits companies engage in this threat. Unlike consumers, when a company makes the threat, it really has an in terrorem effect because the company has a lawyer so the threat can be carried out. And the company has the resources to make the threat a realistic possibility, unlike most consumers.

Many years ago when I used to debate with industry lawyers at PLI and ABA conferences, they would argue that arbitration was much better for consumers than going to court because of supposedly lower cost, quicker resolution, etc. I countered that if it’s so wonderful, companies could easily convince consumers, post-dispute, to agree to arbitration. Whereupon the industry lawyers would immediately acknowledge that consumers would always choose court over arbitration if given the choice post-dispute. 

For all of these reasons and probably many more, there’s no way for consumers to intelligently and knowledgeably decide, pre-dispute, if they should agree to arbitration. Therefore, opt-in is the only fair method to provide consumers in pre-dispute agreements.

Cobb County School District Tries Bogus Trademark Claims to Suppress Anti-Racist Organizing

by Paul Alan Levy

Civil rights activists in Cobb County, Georgia, have been urging members of the community to come in force to the impending school board meeting on June Tenth to celebrate Juneteenth by signing up to speak in support of  minority members of the school board, who have been under fire recently. Somebody created a flyer for that purpose; the flyer reproduces the local school district’s logo to help the public focus easily on which school district is at issue.

In an apparent effort to discourage this campaign, the school board has deployed an education law specialist at the firm of Nelson Mullins, to claim that the use of the logo is misleading, threatening to sue Richard Pellegrino, the field director for the Cobb County chapter of the Southern Christian Leadership Conference, for trademark infringement. In a letter sent today, we have explained why such a lawsuit would have no chance of success. 

They might have been wiser to check with one of that firm's many IP specialists first.

FTC provides 2020 Annual Financial Acts Enforcement Report to CFPB

The Federal Trade Commission staff has provided its 2020 Annual Financial Acts Enforcement Report to the Consumer Financial Protection Bureau on its enforcement and related activities regarding the Truth in Lending Act, Consumer Leasing Act, and Electronic Fund Transfer Act.

The report highlights the FTC’s enforcement actions related to automobile purchases and financing, payday lending, credit repair and debt relief, and electronic fund transfers. It also addresses the FTC’s research and policy efforts related to truth in lending, including the release of two staff reports based, in part, on a study of auto buyers.

A reply to Mark Levin's claims about my proposal for a new CFPB arbitration rule

by Jeff Sovern

Last week, I suggested that the CFPB adopt a new arbitration rule. Yesterday, Ballard Spahr's Mark Levin commented on my proposal, in a blog post titled Professor Sovern’s opt-in arbitration proposal is neither new nor supportable. This post responds to some of Mr. Levin's arguments.

Mr. Levin wrote that my suggestion would be "barred by the Congressional Review Act because it is 'substantially the same' as the earlier CFPB rule barring the use of class action waivers that Congress vetoed." I don't see how my rule giving consumers a choice to opt in to arbitration clauses, which could include class action waivers, could be substantially the same as the earlier rule which blocked consumers and companies from agreeing to class action waivers. I am not familiar with this idea that allowing choice is the same as prohibiting conduct. 

Mr. Levin sees my proposal to allow consumers to opt in to arbitration before a dispute arises as "the latest spin" on proposals allowing the parties to agree to arbitration after a dispute has arisen. He cited an article reporting on a survey of employment lawyers addressing employment disputes for the proposition that parties don't agree to arbitration after a dispute has arisen. But whatever merit that survey has for the willingness of parties to enter into agreements to arbitrate employment disputes after a dispute has arisen, it has little bearing on arbitration clauses that people can agree to before a consumer dispute has arisen.  Mr. Levin seems to believe both that consumers understand arbitration clauses and that arbitration is better for consumers. If that is so (spoiler alert: it isn't), Mr. Levin's clients should be able to explain arbitration clauses to their customers in such a way as to persuade those customers to opt in to arbitration. 

Mr. Levin repeats a deceptive industry talking point: "consumers who arbitrate fare much better, recovering an average of $5,389 in individual arbitration compared to $32.35 recovered by the average class member." The reason that's deceptive is because, as has repeatedly been demonstrated, including by the CFPB Study, consumers rarely seek to arbitrate unless they have quite a bit--$1,000 and more--at issue. In contrast, many class actions are brought for tiny claims. Of course if a consumer seeks only $30, they're not going to recover $5,000. One reason the industry like arbitration clauses is because they prevent consumers from asserting small claims, and this statistic merely reflects that fact.

I hope the CFPB moves swiftly to adopt a new arbitration rule. Consumers need protection from these incomprehensible clauses that take away their constitutional rights and leave them exposed to unfair treatment.

WSJ: Amazon eliminates arbitration clause after facing 75,000 arbitration demands by Echo users

Here. Excerpt:

*  * With no announcement, the company recently changed its terms of service to allow customers to file lawsuits. Already, it faces at least three proposed class actions, including one brought May 18 alleging the company’s Alexa-powered Echo devices recorded people without permission.

The retail giant made the change after plaintiffs’ lawyers flooded Amazon with more than 75,000 individual arbitration demands on behalf of Echo users. That move triggered a bill for tens of millions of dollars in filing fees, according to lawyers involved, payable by Amazon under its own policies.

 

 

American Banker: FTC Commissioner-Nominee Khan expected to be confirmed in the next week and CFPB Director-Nominee Chopra by the August recess

Here, in an article by Kate Berry. The article is behind a paywall but should soon be available on Lexis if it isn't already.