Illustration of the problem of judges substituting their own opinions of facts

by Stephen Gardner

On February 27, the Northern District of California issued an opinion on a motion to dismiss in Becerra v. The Coca-Cola Company. The court got the law right, but then ruled based on incorrect conclusions on disputed facts.

There are two parts to the opinion. First, the court analyzed Coke’s various attempts to avoid liability under state law, based on preemption and safe harbor, and rejected each attempt. So far, so good.

But then the court turned to Rule 9(b). Here, too, the court was generally correct on the law, but ruled based on its own beliefs of what a reasonable consumer would think.

For example, the court said that “a reasonable consumer would simply not look at the brand name Diet Coke and assume that consuming it, absent any lifestyle change, would lead to weight loss.”

The court is wrong. Diet Coke’s name itself indeed suggests (really, outright says) that it’s part of a diet, and many consumers do not know that reduced calories alone will not likely lead to weight loss. Consumers are not nutrition scientists, and often turn (wrongly, but encouraged by companies like Coke) to quick fixes. The FTC’s many weight loss cases are evidence of this.

The court is expert on law, but not on consumer behavior, and it erred in substituting its opinion of the facts—at the motion to dismiss stage—for a disputed merits question.

The court compounded its error with the unsupported statement that “Reasonable consumers would understand that Diet Coke merely deletes the calories usually present in regular Coke, and that the caloric reduction will lead to weight loss only as part of an overall sensible diet and exercise regimen dependent on individual metabolism.”

Again, the court wrongfully draws its own conclusions as to how consumers reasonably behave. The court is also wrong on the facts—Diet Coke did not “merely delete[] the calories usually present in regular Coke.” It also added aspartame, which is an artificial non-nutritive sweetener.

Consumers are chary of artificial sweeteners, with good reason. The Center for Science in the Public Interest says, “Three key studies funded by an independent lab (rather than by a maker of aspartame) found that the sweetener caused lymphomas, leukemias, kidney, and other cancers in rats and mice. That should be reason enough for the Food and Drug Administration to ban aspartame from the food supply, says CSPI. In addition, aspartame might cause headaches or other neurological symptoms in a small number of people.” (For a longer discussion of risks, see this article from CSPI's excellent magazine Nutrition Action Healthletter.)

The court concluded, “In order to overcome the otherwise sensible view of reasonable consumers that Diet Coke consumption alone will not lead to weight loss, the complaint would need to cite far more powerful evidence than is now provided to make a claim of fraud plausible.”

The court gave plaintiff the chance to file an amended complaint, saying that “Plaintiff must plead her best case.”

Let’s hope she does.

Ninth Circuit Holds National Banks Must Comply With State Laws Requiring Interest on Mortgage Escrow Accounts

National banks have long argued for broad preemption of state laws that would otherwise apply to their activities, and their federal regulator, the Office of the Comptroller of the Currency (OCC) has often gone along. In an important decision issued Friday, the U.S. Court of Appeals ruled that preemption is more limited than the banks and OCC would like to believe it is.

The decision, in a case called Lusnak v. Bank of America, holds that a California law requiring mortgage lenders to pay interest on escrow accounts is not preempted as applied to national banks. Bank of America had refused to comply with California's law, claiming preemption.

A federal district court agreed with the bank and dismissed a class action on behalf of California borrowers who had received no interest on their escrow accounts. The Ninth Circuit reversed.

The court relied heavily on a provision of the Dodd-Frank Act saying that a state consumer financial protection law affecting national banks is preempted only if it "prevents or significantly interferes with the exercise by the national bank of its powers." 12 U.S.C. § 25b(b)(1)(B). The law requiring payment of interest on escrow accounts, the court held, didn't prevent national banks from exercising their power to engage in mortgage lending, nor did it significantly interfere with mortgage lending.

In so holding, the court relied in part on another Dodd-Frank provision that says mortgage lenders must comply with applicable state laws requiring interest on escrow accounts. Congress wouldn't have said that, the court reasoned, if it thought interest requirements significantly interfered with lending.

Importantly, however, the court stressed that Dodd-Frank didn't change the preemption standard that was already applicable before its enactment. Instead, Dodd-Frank just clarified the limits the Supreme Court announced on National Bank Act preemption in Barnett Bank v. Nelson, 517 U.S. 25 (1996), which in the court's view already restricted preemption to laws that prevent or significantly interfere with the exercise of national banks' powers. Thus, the court held that even before Dodd-Frank's preemption language and its section about interest on escrow accounts became law, California was free to apply its law to national banks. The court also noted repeatedly that OCC's more restrictive views about preemption were inconsistent with both Barnett Bank and Dodd-Frank. 

 

 

Register Now for the Tenth Teaching Consumer Law Conference

"Teaching Consumer Law--Where We've Been--Where We're Going" will be held in Santa Fe, New Mexico, May 18-19th. The Conference is designed for those teaching consumer law, those interested in teaching consumer law full-time or as an adjunct, and anyone interested in discussing the consumer law issues law professors are thinking about. The registration fee is $200, and includes all your meals.

For more information (including the Conference schedule) or to register, click here. For question, contact Richard Alderman, alderman@uh.edu.

I hope to see you in Santa Fe in May.

 

 

Horton Empirical Study of How Arbitrators and Judges Decide Differently on Whether to Allow Class Actions

David Horton of California, Davis has written Clause Construction: A Glimpse into Judicial and Arbitral Decision-Making, Duke Law Journal, Vol. 68, Forthcoming. Here is the abstract:

For decades, the U.S. Supreme Court has insisted that forcing a plaintiff to arbitrate — rather than allowing her to litigate — does not affect the outcome of a dispute. Recently, the Court has invoked this “parity principle” to expand arbitral jurisdiction. Reasoning that it does not matter whether an arbitrator or a judge resolves a particular issue, the Justices have allowed arbitrators to decide important questions about the arbitral proceeding itself.

The parity principle has proven impossible to test. First, cases that are arbitrated differ from those that end up in the judicial system, complicating efforts to compare outcomes from each sphere. Second, arbitral awards are rarely published, and thus remain shrouded in mystery.

However, one important topic defies these limitations. Jurisdictions are divided over whether courts or arbitrators should perform a task known as “clause construction”: determining whether an arbitration clause that does not mention class actions permits such procedures. As a result, both judges and arbitrators have been weighing in on the same question. Moreover, because class members are entitled to notice of rulings that impact their rights, the American Arbitration Association requires arbitral clause construction awards to be available to the public. For once, then, it is possible to assess how the two decision-makers resolve the identical issue.

The Article capitalizes on this opportunity by analyzing a dataset of 134 recent judicial and arbitral clause construction decisions. Its logit regression analysis concludes that the odds of class actions being allowed increase nearly 27 times when an arbitrator, rather than a judge, resolves the issue. The Article then uses its findings to propose a solution to the circuit split over clause construction and inform the broader debate over the boundaries between judicial and arbitral power.

Mulvaney's Evisceration of the CFPB Continues in Multiple Ways

by Jeff Sovern

The CFPB protects consumers in a number of ways. Perhaps the three most important things it does are enforce the law, supervise some financial institutions, and create rules.  A less important mechanism, but still important, is maintaining its complaint database. All of these seem to be coming under attack under Interim director Mulvaney.

Enforcement. As I pointed out earlier this week, Mr. Mulvaney has promised vigorous and consistent enforcement of consumer law, but the CFPB has not announced a single enforcement action in the more than three months he has been on the job--which contrasts strikingly with the numbers of actions his predecessor brought. Instead, Mr. Mulvaney said on Wednesday that the CFPB should let states take the lead on consumer protection. That sounds fine, except it's not what Congress intended when it created the CFPB and gave it enforcement powers. Another problem is that some attorneys general are more protective of consumers than others, for reasons of ideology and resources, and so in some states only the CFPB protects consumers in financial matters (or at least it did before the Mulvaney era). Still another problem is that AGs are not equipped to conduct national actions, unlike the CFPB. While AGs offices do occasionally band together to pursue common goals--sometimes quite effectively--such collectives require coordination among multiple offices, which can be less efficient than having a single office enforce the law. Mr. Mulvaney has also said he wants to use education rather than enforcement.  But serious doubt exists about the efficacy of consumer education. Like disclosure, it may create the illusion of consumer protection without the reality.

Supervision. Yesterday, Mr. Mulvaney reportedly said that the CFPB should take a back seat to the prudential regulators in supervision.  Those would be the same regulators, like the OCC and Fed who were captured by lenders and allowed the disastrous subprime lending that led to the Great Recession. Congress created the CFPB and gave it supervisory power precisely because of the failure of the regulators Mr. Mulvaney wants the CFPB to let drive the supervisory process.

Rules. Rules take a long time to create and so it isn't surprising that the CFPB hasn't announced any new rules under Mr. Mulvaney. But he has said the Bureau may revisit the payday lending rule. 

The Complaint Database. Though less heralded, the complaint database has also been an effective consumer protection mechanism as well as a useful research tool. But the Bureau has just issued a request for information on the complaint database. Nothing wrong with that.  But I fear that the Bureau will use the resulting filings to reduce the information made public, especially as the RFI asks that commenters address that issue (as well as whether more information should be made available).  Given that industry advocates already have compared the Bureau complaint database unfavorably to Yelp, I think we know much of what the industry will say. 

Hyman & Kovacic Article on Who Should Do What on Privacy

David A. Hyman of Georgetown and William E. Kovacic of GW and , King's College London – The Dickson Poon School of Law have written Implementing Privacy Policy: Who Should Do What?. Here's the abstract:

Academic scholarship on privacy has focused on the substantive rules and policies governing the protection of personal data. An extensive literature has debated alternative approaches for defining how private and public institutions can collect and use information about individuals. But, the attention given to the what of U.S. privacy regulation has overshadowed consideration of how and by whom privacy policy should be formulated and implemented. 

U.S. privacy policy is an amalgam of activity by a myriad of federal, state, and local government agencies. But, the quality of substantive privacy law depends greatly on which agency or agencies are running the show. Unfortunately, such implementation-related matters have been discounted or ignored -- with the clear implication that they only need to be addressed after the "real" work of developing substantive privacy rules is completed.

As things stand, the development and implementation of U.S. privacy policy is compromised by the murky allocation of responsibilities and authority among federal, state, and local governmental entities -- compounded by the inevitable tensions associated with the large number of entities that are active in this regulatory space. These deficiencies have had major adverse consequences, both domestically and internationally. Without substantial upgrades of institutions and infrastructure, privacy law and policy will continue to fall short of what it could (and should) achieve.

FTC Releases Annual Summary of Complaints Reported by Consumers

The Federal Trade Commission reports that the number of consumer complaints about fraud dropped in 2017, but consumers reported losing more money than they did in 2016.

The data book includes national statistics, as well as a state-by-state listing of top report categories in each state, and a listing of metropolitan areas that generated the most complaints per capita. The top states in 2017 reporting fraud were Florida, Georgia and Nevada, while Michigan, Florida and California had the most reports about identity theft, per capita.

The FTC produces the Consumer Sentinel Network Data Book annually using reports received by the Consumer Sentinel Network. These include reports made directly by consumers to the FTC, as well as reports received by state and federal law enforcement agencies, national consumer protection organizations, and non-governmental organizations.

FTC's "Consumer Sentinel Network Data Book 2017" is here.

Article on How Different Countries Regulate Food Advertising to Children

Belinda Reeveand Roger Magnusson, both of The University of Sydney Law School have written Regulation of Food Advertising to Children in Six Jurisdictions: A Framework for Analyzing and Improving the Performance of Regulatory Instruments, 35 Arizona Journal of International and Comparative Law (2018).  Here is the abstract:

Childhood obesity is a public health crisis, and globally, at least 170 million young people are overweight or obese. Research identifies food marketing as a key risk factor for childhood weight gain, yet there is significant debate over how food marketing to children should be regulated. This paper analyzes regulatory controls on food marketing in six jurisdictions—the United States, United Kingdom, Australia, Ireland, Canada, and Quebec— with the aim of evaluating whether regulation in each jurisdiction exhibits the features of an effective, transparent, and accountable regulatory regime. These jurisdictions use different forms of regulation to restrict food marketing to children (e.g. self-regulation, co-regulation and statutory regulation), yet research suggests that none have been entirely successful in protecting children from exposure to marketing of unhealthy food. Drawing on the disciplines of public health and regulatory studies, we present a theoretical framework for the design of effective food advertising regulation. We use this framework to evaluate the strengths and weaknesses of regulation in each jurisdiction, and to explain why both public and private regulation has been less than successful in improving the food marketing environment. Our analysis reveals significant loopholes in the substantive provisions of regulatory instruments used to restrict food marketing to children, as well as limitations in the processes of monitoring, review, and enforcement established by each scheme. Our paper concludes by pointing to ways in which food advertising regulatory schemes could be progressively strengthened, including through the use of regulatory “scaffolds” to improve the transparency, accountability and performance of regulatory instruments.

The farcical (and hurtful) Trump tax cut

In this Atlantic piece, Derek Thompson helps expose the farcical Trump tax cut for what it is: Corporate stock buybacks in the first 6 weeks of 2018 "reached historical high[s], totaling about $170 billion. That’s 28 times larger than the total value of end-of-year [worker] bonuses that were [wrongly] credited to the corporate tax bill."

Concealing Required Disclosures: How One Restaurant Hid Its Health Department Grade

by Jeff Sovern

Many localities require restaurants to post their health department grades at their entrance so diners can decide whether the restaurant is safe to patronize.  One of my students, Vasilios D. Lolis, saw the picture below on Instagram. Can you spot the grade? (I lack the technical know-how to eliminate the caption)

This points up a problem with disclosures in general: the entity doing the disclosing often doesn't want the consumer to have the information and so does what it can to make the disclosure less salient.