CFPB issues policy on contractual ‘gag’ clauses and fake review fraud

The Consumer Financial Protection Bureau had issued policy guidance regarding potentially illegal practices related to consumer reviews. "The CFPB seeks to ensure that customers can write reviews, particularly ones posted online, about financial products and services that accurately reflect their opinions and experiences. The guidance also highlights that practices such as posting fake reviews or inserting clauses that forbid a customer from publishing an honest review may violate the Consumer Financial Protection Act."

The CFPB’s guidance describes certain business practices related to customer reviews that are generally unlawful under the Consumer Financial Protection Act, including:

• Contractual ‘Gag’ Clauses: Attempting to silence consumers from posting an online review can undermine fair competition. Banks and financial companies that include clauses in form contracts that forbid a consumer from posting an honest review may be engaged in unfair or deceptive practices.
• Fake Reviews: Markets can be harmed if consumers cannot trust that online reviews are legitimate. Laundering fake reviews in ways that appear completely independent from the company to improve their ratings may constitute a deceptive practice.
• Review Suppression or Manipulation: Consumers cannot easily shop and compare products and services when firms engage in practices to limit the posting of negative reviews or manipulate reviews to trick or confuse consumers. The guidance explains why these practices may be unlawful.

The guidance document is here.

Student essay asks if anyone would have standing to sue in federal court to challenge student loan cancellation

by Jeff Sovern

Jack Hoover, a 3L at Virginia, has written Standing and Student Loan Cancellation, 108 Va. L. Rev. Online (Forthcoming 2022).

Here's the abstract:

As the public policy debate over broad student loan cancellation continues, many have questioned whether the Executive branch has the legal authority to waive the federal government’s claim to up to $1.6 trillion in debt. Some have argued that loan nullification would prompt a years-long battle in the courts. However, commentators and policymakers should not assume that federal courts would have anything at all to say about the legality of federal debt cancellation, as it is likely that no party would have standing to challenge the Executive action. This article considers taxpayers, former borrowers, Congress, state governments, and loan servicers, determining that none of these parties could assert both the Article III standing and the prudential standing required to sustain a suit against the Executive for student loan forgiveness. Even if student loan cancellation never occurs, this “standing dead zone” has broader implications for debt cancellation powers held by department heads across the federal government, as well as the wisdom of current federal standing doctrine.

And who better to look at student loan cancellation than a student? But one thing I wonder is whether a state court with less restrictive standing requirements could hear a challenge, even if the federal courts could not.

Remolina paper on the role of financial regulators in the governance of algorithmic credit scoring

Nydia Remolina of Singapore Management University - Centre for AI & Data Governance has written The Role of Financial Regulators in the Governance of Algorithmic Credit Scoring. Here's the abstract:

The use of algorithmic credit scoring presents opportunities and challenges for lenders, regulators, and consumers. This paper provides an analysis of the perils of the use of AI in lending, such as the problem of discrimination in lending markets that use algorithmic credit scoring, the limited control financial consumers have over the outcomes of AI models due to the current scope of data protection law and financial consumer protection law, the financial exclusion caused by the lack of data from traditionally excluded groups, the regulatory arbitrage in lending markets, and the little oversight of the use of alternative data for algorithmic credit scoring. I provide a comparative overview of the current approaches to algorithmic credit scoring in different jurisdictions such as Kenya, the European Union, the United Kingdom, Hong Kong, Singapore, the United States, Australia, and Brazil to argue that these models do not solve the problems illustrated. To address the problems of algorithmic credit scoring and effectively protect consumers as end users of these models, and therefore, promote access to finance, this paper proposes a set of tools and solutions for financial regulators. First, a testing supervisory process for algorithmic credit scoring models will effectively promote fair lending. Second, to create a right to know the outcomes of the algorithm, including opinion data and inferences, to promote digital self-determination. This solution empowers consumers affected by algorithmic credit scoring so they can verify and challenge the decision made by the AI model. Third, to level the playing field between financial institutions and other lenders that use algorithmic credit scoring. Fourth, to use the sandbox as a test environment for lenders to create data of traditionally excluded groups in a controlled environment. And finally, to foster data sharing and data portability initiatives for credit scoring through open finance schemes in an environment controlled by the financial regulatory authority. Better algorithms, unbiased data, AI regulation, fair lending regulation and AI governance guidelines do not solve the perils of the use of AI for creditworthiness assessment. In contrast, these proposals aim to solve the problems of algorithmic credit scoring in any jurisdiction.

FTC report on e-cigarette sales and advertising, including effect on young people

A Federal Trade Commission report on e-cigarette products "paints a disturbing picture of surging e-cigarette sales and advertising that are likely to damage the health of America’s youth." The FTC found that "flavored cartridges, nicotine concentration, and deep discounting surged between 2015 and 2018, likely fueling increased underage consumption."

The report, which is based on industry data provided for the years 2015 to 2018, shows that total e-cigarette sales, including both disposable units and those using changeable cartridges, increased more than six-fold from $304.2 million to $2.06 billion in those three years alone. The sales of fruit and other flavored e-cigarette cartridges preferred by youth increased seven-fold over that time, and nicotine concentrations in disposable e-cigarette products also increased.

The press release, with a link to the full report, is here.

Upcoming symposium: Consumer Protection in the Online Ecosystem

Loyola Consumer Law Review is holding a symposium titled: Consumer Protection in the Online Ecosystem

*Friday, April 1, 2022, 9:00 a.m. – 2:30 p.m. (CT), Via Zoom

Here is announcement:

Please join Loyola University Chicago School of Law’s Consumer Law Review for its annual symposium on April 1, 2022. This year’s symposium will focus on Consumer Protection in the Online Ecosystem. While technological advancements and increasingly interconnected platforms have brought about many positive changes for consumers, simultaneously, they have created consumer protection concerns, problematic concentrations of power, and new inequalities. Experts from a variety of disciplines will provide key insights for a robust discussion on issues of consumer law in the rapidly expanding online ecosystem.

Agenda

Panel I: Consumer Privacy in the Online Ecosystem

Panel II: Protecting Consumers through Competition, Regulation, and Enforcement

Panel III: Consumer Decision-Making in a Technology-Driven World

This program has been approved for 3.75 hours of CLE credit by the Illinois MCLE Board.

*This program was previously scheduled to take place over two days. Now, all three panels will be held on April 1st.

Registration here.

Data breach prevention and response: Lessons from the CafePress case

A Federal Trade Commission blog post about data breach and prevention is here.

Some first thoughts about methodological problems with the Chamber of Commerce Arbitration Study

by Jeff Sovern

The Chamber of Commerce has released a study about arbitration. I paste in immediately below the relevant portion of the press release, and then I identify some methodological issues with the study.

A new study released today by the U.S. Chamber of Commerce Institute for Legal Reform found that consumers and employees win more money, more often, and more quickly through arbitration than in litigation. The analysis of more than 300,000 consumer and employment arbitration and court claims from 2014-2021 was conducted by ndp analytics, a Washington-based strategic economic and communication research firm.

Fairer, Faster, Better III: An Empirical Assessment of Consumer and Employment Arbitration is the most comprehensive study undertaken of consumer and employment arbitration. The new study comes as the U.S. House of Representatives is set to vote this week on the so-called FAIR Act, which would effectively ban arbitration and force people into class action litigation.

The study found that in claims initiated by consumers: 

• • Consumers were more likely to win in arbitration (almost 42 percent) than in court (about 29 percent).  
  • On average, consumers won more money through arbitration (almost $80,000) than in court (about $71,000).  
  • Arbitrations on average were resolved faster (321 days) than litigation (439 days).  

The study found that in claims initiated by employees:  

• • Employees were more likely to win in arbitration (almost 38 percent) than in court (almost 11 percent). 
  • On average, employees won more money through arbitration (around $444,000) than in court (about $408,000).  
  • Arbitrations were resolved on average faster (659 days) than litigation (715 days).   

“The data shows exactly why it’s the trial bar’s number one priority to prohibit arbitration and increase the number of lawsuits. Arbitration is a simpler, faster, and fairer way for consumers and employees to resolve disputes,” said Harold Kim, president of the U.S. Chamber of Commerce Institute for Legal Reform. “The so-called FAIR Act is a smokescreen designed to increase class actions, where lawyers often get big fees and class members get little to no money.”

I am not convinced that the study's methodology supports its argument that arbitration is faster, fairer, or better. Here are some issues:

1. For the litigation sample, the study used only federal cases. The study tells us nothing about how cases filed in state court compare to arbitration. Only something like 5% of all cases are filed in federal court. And that 5% is not a random sample. Cases can be filed in federal court only if there is federal subject matter jurisdiction (typically, diversity of citizenship and amount or federal question). Consequently, cases filed in federal court are not likely to be typical of civil cases overall.
2. The sample of cases screened into arbitration is also not random. Probably, nearly all of those cases were heard in arbitration because the underlying contract included an arbitration clause. For example, the big cell phone providers all include arbitration clauses in their contracts. Hence, the arbitration sample probably includes cell phone cases and the litigation sample probably includes very few of them, if any. So the comparison is one of apples and oranges because certain types of cases will predominantly be heard in arbitration and others predominantly in litigation. In that case, it is not at all surprising that the results would differ.
3. The sample excluded personal injury cases. No explanation is given as to why. Could it be that personal injury cases, which tend to produce high damages, were disproportionately heard in litigation and that including them would have changed the results?
4. The sample excluded class actions. But much of the dispute about arbitration clauses revolves around their class action waivers. Class actions provide an economical way of aggregating and litigating many small claims but arbitration frustrates that process. A more useful study would have compared what happens with small claims in the different forms of dispute resolution. For that, we have to see the CFPB study.

No doubt, the industry will cite this flawed study as often as it can. It will be up to the rest of use to point out the problems with relying on it.

Register Now: Teaching Consumer Law in the New Normal- Keynote speaker, Richard Cordray

Presented by the Center for Consumer Law, University of Houston,
and the Center for Consumer Law & Economic Justice, UC Berkeley

Live in Santa Fe, New Mexico. May 20-21, 2022.

Conference for Clinical Faculty, May 19th.*

It may seem like forever since there has been an in-person conference.... but we are proud to present the twelfth biennial international Teaching Consumer Law Conference. We are also pleased to announce that the Teaching Conference has combined forces with the Law School Consumer Clinics Conference.*

Both Conferences will be held at the Hilton Hotel in Santa Fe, New Mexico. For the Conference rate of $159 per night, use "special rate" Code CLC. Santa Fe, the "City Different, is one of the oldest and most fascinating cities in the United States.

The Teaching Conference will focus on all aspects of teaching consumer law, as well as on traditional substantive issues of consumer protection and economic justice. There will be presentations and discussions on US and international consumer law issues, as well as discussions regarding pedagogical techniques. Substantive updates will cover the most significant areas of consumer law. We are especially proud of our Keynote speaker, Richard Cordray, Chief Operating Officer of Federal Student Aid and former Director of the Consumer Financial Protection Bureau. Click here for a list of topics and speakers.

The Teaching Conference is directed toward those currently teaching or interested in teaching consumer law or a consumer clinic, full-time or as an adjunct. Registration and hotel information is now available here. Proposals for presentations are still accepted. For more information, click here or contact Richard Alderman at alderman@uh.edu.

We look forward to seeing you in Santa Fe, May 2022!

* If you are interested in or have questions about the Clinical Faculty Conference on May 19, click here.

Arbitration and the myths of freedom of contract and free choice

by Jeff Sovern

Earlier this week, the Senate Banking Committee held a hearing on consumer arbitration clauses. The consumer side was ably represented by Paul Bland, Myriam Gilles, and Remington Gregg. I want to say something about the arguments put forth at the hearing by Senator Toomey and Professor Todd Zywicki. Professor Toomey argued that regulation of arbitration would undermine freedom of contract. And Professor Zywicki testified that "Available evidence suggests that the presence of arbitration clauses in consumer finance contracts is consistent with the operation of a competitive market with consumer choice."

But here's the thing: consumers don't understand arbitration clauses. I don't see how it can be said that consumers have freedom of contract and free choice when they don't understand the meaning of the terms they are supposedly agreeing to. We know consumers don't understand arbitration clauses because two studies have found that they don't. I co-authored one. We found, among other things, that when we showed consumers a credit card contract with an arbitration clause, less than 9% of consumers understood both that the contract contained an arbitration clause and that it barred them from going to court. We also learned that at least 87% of the consumers who thought they had never agreed to an arbitration clause had in fact done so. The CFPB study also found that consumers did not understand arbitration clauses. In fact, I am not aware of any study that has found that consumers understand arbitration clauses.

In other words, arbitration clauses are about as meaningful to consumers as they would be if they were printed in a language the consumers don't speak. Or not printed in the contract at all. That's not freedom of choice. Freedom of choice requires that you understand enough to choose among alternatives. And as for freedom of contract, what we have is a system in which businesses have the freedom to impose on consumers contract terns they don't understand. Businesses have freedom of contract, but consumers don't.

Ironically, if we want to preserve freedom of choice, we should allow parties to choose whether they want to go to court or arbitration after the dispute has arisen. At that point, consumers would be more likely to consult an attorney who would help them make the choice that is in their best interests, just as businesses consult attorneys to advise them whether to insert arbitration clauses in contracts. But with forced arbitration clauses, freedom of contract and free choice are no more than a myth.

Amy Schmitz asks: Will the United States Remain Exceptional in Enforcing Predispute Arbitration Clauses in Consumer Contexts?

Amy J. Schmitz of Ohio State has written Will the United States Remain Exceptional in Enforcing Predispute Arbitration Clauses in Consumer Contexts? MARC. Revista de Medios Alternativos de Resolución de Conflictos, no 2, 34-39 (August 2021) at Venezuelan American Chamber of Commerce and Industry. Here's the abstract:

American exceptionalism” has been used to reference the United States’ outlier policies in various contexts, including its love for litigation. Despite Americans’ reverence for their “day in court,” their zest for contractual freedom and efficiency has prevailed to result in U.S. courts’ strict enforcement of arbitration provisions in both business-to-business (“B2B”) and business-to-consumer (“B2C”) contracts. This is exceptional because although most of the world joins the United States in generally enforcing B2B arbitration under the New York Convention, many other countries refuse or strictly limit arbitration enforcement in B2C relationships due to concerns regarding power imbalances and public enforcement of consumer protections. The resulting clash in arbitration policy has left consumers in cross-border cases uncertain whether they must abide by arbitration clauses in an increasingly global marketplace. This short essay, published in a Venezuelan journal, chronicles the evolution of laws proposed in the United States to limit this enforcement of predispute arbitration clauses in consumer cases.