CFPB issues proposed rule on forced arbitration clauses that ban class actions

The CFPB has just released its much-awaited proposed rule on forced arbitration clauses -- arguably the single biggest step the Bureau can take to level the playing field for American consumers. 

If adopted after notice-and-comment, the CFPB's new rule would prohibit forced arbitration clauses that prevent consumers from banding together to hold companies accountable in court, effectively nullifying the impact of the Supreme Court's AT&T Mobility v. Concepcion decision in the market for consumer financial services. The proposed rule would also require companies with arbitration clauses to send the CFPB the claims, awards, and other information filed in arbitration cases, to allow the Bureau to monitor what until now has largely been a secret system of corporate tribunals. 

You can read the Bureau's entire 376-page proposal here. It contains an extensive history of class actions and arbitration, a summary of the Bureau's study on arbitration clauses, and a sustained defense of the policy merits of the Bureau's proposal. 

The proposal will be announced by Rich Cordray at a field hearing in Albuquerque, New Mexico on Thursday morning. I will be speaking as a consumer representative, along with Christine Hines of the National Association for Consumer Advocates and Paul Bland of Public Justice. The industry will be represented by Travis Norton of the U.S Chamber, Alan Kaplinksy, and a lawyer for credit unions.

Early coverage can be found in The Hill, the New York Times, and the L.A. Times. The U.S. Chamber came out swinging even before the proposal was released, decrying the "CFPB's class-action rule" as a "rich deal for trial lawyers" and a "raw deal for consumers." 

Along similar lines, a shadowy outfit calling itself "Protect America's Consumers" has just released a very nasty TV ad attacking the CFPB, suggesting (without a shred of evidence) that Rich Cordray's personal motive in supporting the rule is to gin up trial lawyer donations for a future gubernatorial run in Ohio. If previous campaigns by this group are any guide, the ad will likely receive signifiant airtime--possibly during the presidential debates.

The Chamber's congressional allies are likewise attempting to tie the Bureau to trial-lawyer groups. In a recent letter, Congressman Sean Duffy of the House Financial Services Committee informed the CFPB about an investigation into the rule. He asked asked for communications between bureau officials and consumer advocacy and trial-lawyer groups including the American Association for Justice, National Consumer Law Center, National Association of Consumer Advocates, Alliance for Justice, and Public Justice. 

More on the Argument that the CFPB's Single Director Structure is Unconstitutional

Last week I posted something about the latest attack on the CFPB's constitutionality because of its single-director structure and sought comment.  Americans for Financial Reform Policy Counsel Brian Simmonds Marshall addressed the issue on the ACS Blog in an informative post titled An Easy Case: Why a Federal Appeals Court Should Reject a Constitutional Challenge to the CFPB. An excerpt from the end of the post:

A decision striking down the CFPB’s structure would not only break new constitutional ground, it would have wide-reaching practical consequences as well. Such a holding would mean that the structures of at least three other agencies are also unconstitutional because they are headed by a single official removable only for cause * * * *

Unfortunately, PHH could hardly be more fortunate in the panel drawn to decide this issue. All three judges were appointed by Republican presidents. One judge on the panel has suggested in a prior case that he believes the Constitution would be best interpreted to require that all agency heads be removable by the president without cause and that the Supreme Court was mistaken when it decided otherwise 80 years ago. But even if the three-judge panel rules that the CFPB’s structure is unconstitutional, it will hardly have the last word: The CFPB can seek further review by the full D.C. Circuit and the Supreme Court.

FTC files complaint alleging companies deceived consumers with fake newspaper subscription notices

The Federal Trade Commission has charged the operators of dozens of companies with deceiving consumers by using fake newspaper subscription notices.

According to the FTC’s complaint, through a complicated web of companies, the defendants send consumers “Notice of Renewal/New Order” mailers for subscriptions to newspapers such as The New York Times, The Wall Street Journal, The Seattle Times and The Denver Post, and for magazines. The notices claim that consumers’ subscriptions will automatically renew if they pay, and that the price – “one of the lowest available rates” – is authorized by the publisher.

In fact, the FTC alleges the defendants do not have publishers’ authorization and charge up to 40 percent more than the newspapers typically charge. Only in fine print on the back of the fake notices do the defendants state that they “do not necessarily have a direct relationship with the publishers or publications” – and that disclosure refers only to magazine subscriptions, according to the complaint.

The FTC seeks to stop the operation and obtain money for return to consumers.

The full press release is here.

Marketers of Simple Pure Supplements settle FTC court action

Marketers of green coffee bean extract weight-loss supplements, male enhancement products, and skin care products will forfeit assets totaling approximately $9.2 million, and have already turned over a Ferrari to settle the Federal Trade Commission’s court action brought against them in October 2014.

The proposed stipulated final order bans individual defendants Danelle Miller and Jason Miller and 42 corporations the couple controlled (the Health Formulas defendants) from advertising or selling weight-loss supplements and negative option sales plans, making unsupported health claims for other products, and debiting consumers’ bank accounts without their consent.

The FTC's press release is here.

Trademark Bullies Beware: Fifth Circuit Jettisons Bad Faith Requirement for Lanham Act Fees

by Paul Alan Levy

When I saw the Popehat Signal a few years ago, seeking counsel to help Todd DeShong fend off a lawsuit in federal court in Texas claiming that he defamed Clark Baker on his "HIV Innocence Group Truth blog, which criticizes Baker for profiting through charlatanism (Baker claims that HIV status is unrelated to AIDS), I was tempted to pass on the case.   After all, we generally don't take cases in which defamation is the main issue, and although we were interested in the contention that DeShong infringed the trademark on Baker's “HIV Innocence Project” by using the domain names "hivinnocenceprojecttruth.com” and "hivinnocencegroup.com," we had already won that issue in the Fifth Circuit back in 2004 we had already established in the Fifth Circuit, in defending a gripe site owner who was sued for a site about “Trendmaker Homes” that a non-commercial gripe site about a trademark holder may use the trademark in the site's domain name.  Consequently, the trademark issue was not novel in the jurisdiction.

But a ground-breaking issue was lurking in the case: the Fifth Circuit was one of several courts holding that, because the Lanham Act only provides for awards of attorney fees in “exceptional” trademark cases, a prevailing defendant cannot be awarded fees unless he not only shows that the plaintiff sued in bad faith, but proves bad faith by “clear and convincing evidence.”  That sort of standard makes it very hard for online speakers to find pro bono trademark counsel, and of course if non-commercial gripers have to pay tens of thousands of dollars in attorney fees just to maintain a web site that readily comes to the attention of Internet searchers looking for information about the companies about which they have complained, they have already lost.

The facts of Baker v. DeShong presented an excellent vehicle for urging the Fifth Circuit to change its approach to Lanham Act fees,

NYT profiles first "climate refugees" in the U.S.

A sign of things to come, reports the Times:

In January, the Department of Housing and Urban Development announced grants totaling $1 billion in 13 states to help communities adapt to climate change, by building stronger levees, dams and drainage systems.

One of those grants, $48 million for Isle de Jean Charles [in southern Louisiana], is something new: the first allocation of federal tax dollars to move an entire community struggling with the impacts of climate change. The divisions the effort has exposed and the logistical and moral dilemmas it has presented point up in microcosm the massive problems the world could face in the coming decades as it confronts a new category of displaced people who have become known as climate refugees.

Read the whole piece here.

Are Uber drivers employees or contractors?

That question was the subject of a recent class action lawsuit on behalf of the drivers in California and Massachusetts.

Now Uber will pay $100 million to settle the case and will allow the drivers to collect tips, but will keep workers classified as contractors under the deal. The classification issue seems likely to arise again.

Read coverage of the settlement here.

Chamber of Commerce Letter on Arbitration: Does it Make the Case for Class Actions?

by Jeff Sovern

Earlier today, the US Chamber of Commerce released a letter to CFPB Director Richard Cordray from David Hirschmann, President and CEO, Center for Capital Markets Competitiveness, urging the Director to address certain issues at Thursday's CFPB arbitration field hearing. Here's one of those issues, as stated in the letter:

[T]he public would benefit if your remarks were to include a discussion of how a consumers with a small claim based on unique circumstances would be able to vindicate those legal claims if companies, faced with the need to reserve millions of dollars for class action defense, were to cease subsidizing consumer arbitration programs. Under the current class action litigation rules, many small claims that involve issues that customers actually care about, such as alleged overcharges or the failure to credit a deposit on time, are unlikely to be classable because they are individualized disputes. For these claims, consumers will therefore have virtually no economically rational options for seeking redress: arbitration (in which most companies pay for consumers to bring claims against them, making it free to the consumer) will be gone; class action litigation will not be available; and rational consumers are not going to pay a $400 filing fee to pursue a $25 claim in court. Taking the opportunity to highlight how consumers will obtain redress for these types of claims would be very helpful in advancing the discussion.

I'm going to assume for this blog post that the industry would indeed no longer use arbitration if they couldn't combine it with class action waivers.  Would consumers really suffer if they couldn't bring arbitration claims for $25?  Well, the CFPB study found that consumers almost never bring arbitration claims when less than $1,000 is at issue, so the ability to assert small claims in arbitration isn't worth much.  But if consumers want to bring $25 claims, they could still do so in small claims courts (I would be curious to hear about small claims courts that charge a $400 filing fee for a $25 claim).  So even if arbitration goes away, consumers would lose something they don't use and don't need when it comes to small claims.

Perhaps the most notable part of the paragraph is its concession that consumers will not devote substantial resources to winning $25 claims. That is precisely why we need class actions to protect consumers against being taken advantage of in small amounts: so that companies will be deterred from bilking consumers in amounts too small to justify consumers investing resources in stopping them.

 

Galle Paper: Externalities, Internalities, and When to Use Nudges

Brian D. Galle of Georgetown has written The Problem of Intra-Personal Cost.  Here is the abstract:

“Externalities”, or harms to others, provide a standard justification for government intervention in the private market. There is less agreement over whether government is justified in correcting “internalities,” or harms to self the self is largely powerless to avoid. While some of the internality dispute is philosophical, some is practical. Critics suggest government lacks information to regulate internalities, and that any intervention would inefficiently distort a private market for self-help. In this Article, I show that these critiques of regulation overlook well-established tools of externality regulation, as well as a burgeoning literature on the measurement of internalities.

Having answered the “should” question, I move on to “how?” I examine the established tools of externality regulation, and consider to what extent the standard advice of the externality literature extends to internality regulation. I find some surprising results, such as that “carrots” may at times be an attractive alternative to “sticks,” and that even large taxes on internalities can produce a so-called “double dividend.” I also compare the traditional regulatory options to “nudges” and other forms of cognitively-informed government interventions. I show a set of cases in which nudges may be preferable to either taxes or command and control regulation.

Thus, my analysis also helps to resolve a second, related, debate over the propriety of nudges. The nudge debate has almost exclusively revolved around whether nudges avoid philosophical objections to paternalistic government regulation. I offer instead a new reason to employ nudges in some cases: they are more efficient.

Article on Credit Scores and Psychosocial Disability

Christopher P. Guzelian of Thomas Jefferson, Michael Ashley Stein of Harvard Law School and the University of Pretoria Faculty of Law, and H. S. Akiskal of UC San Diego Department of Psychology have written Credit Scores, Lending, and Psychosocial Disability, 95 Boston University Law Review 1807 (2015).  Here is the abstract:

Credit scores have become a near-universal financial passport for Americans to meet common personal needs including employment, loans, insurance, and home and car purchases or leases. At the same time, Elizabeth Warren and others have documented the horrific economic, emotional, and health consequences of low creditworthiness for score-bearers and their families. Individuals with psychosocial disabilities (previously called mental disabilities or mental illnesses) can make disastrously poor financial decisions during the active phases of their conditions; during inactive phases they are as capable as others of making sound or poor financial decisions. Yet, in computing credit scores and selling credit reports, national and transnational credit-reporting agencies (like Equifax) do not account for the implications of psychosocial disability. Worse, evidence shows that businesses rely on these reports to predatorily target borrowers with psychosocial disabilities — and especially those who are also women and racial minorities — in deciding terms of lending, employment, and housing. In theory but not in practice, the Americans with Disabilities Act and the Fair Housing Act each prohibit discriminatory financial decisions arising from disability status, while also requiring reasonable accommodations to equalize opportunities for disabled persons. The United Nations Convention on the Rights of Persons with Disabilities (which the United States has signed) further mandates enabling the financial decision making of these individuals, but does not provide guidance on achieving this obligation. Further, despite the crucial and direct implications this situation also raises for vast numbers of Americans without psychosocial disabilities who likewise make poor credit decisions, it has not undergone legal analysis. We engage this significant gap by suggesting schemes drawn from historical and comparative contexts that could enable the creditworthiness of persons with psychosocial disabilities, and then critiquing the costs and benefits of each. In doing so, we proffer the first analysis of this issue in the legal literature and seek to stimulate future dialogue among academics and policymakers. The Article concludes with thoughts on the implications of its analyses for the broader issue of credit scoring.