Massachusetts Supreme Court Strikes Class Action Ban, Rejects Texas Law

by Deepak Gupta

Just before the holiday weekend, the Massachusetts Supreme Judicial Court issued an opinion in Feeney v. Dell Inc., holding that a statutory right to participate in class action lawsuits may not be be foreclosed by a provision in a consumer contract compelling individual arbitration. The court reached that conclusion based not on unconscionabilty doctrine, but on Massachusetts public policy. It emphasized the strong state policy in favor of class actions and relied on cases such as the First Circuit's decision in Kristian v. Comcast Corp., 446 F.3d 25, 54 (1st Cir. 2006), which reject class action bans because of their interference with consumers' ability to vindicate statutory rights: "Allowing companies that do business in Massachusetts, with its strong commitment to consumer protection legislation, to insulate themselves from small value consumer claims creates the potential for countless customers to be without an effective method to vindicate their statutory rights, a result clearly at odds with our public policy."  The decision joins the rest of the state and federal appellate courts in holding that the Federal Arbitration Act does not preempt its holding, relying on the analysis of the Ninth Circuit and the Illinois Supreme Court.

The Feeney opinion is also noteworthy for its choice-of-law analysis. The Dell contract at issue specified that Texas law--which appears to allow class action bans--would apply.  The court held that Massachusetts' fundamental policy in favor of class actions for small-value consumer claims outweighed Texas's interest in blocking consumers' access to the courthouse doors.  As the court put it, "[w]e likewise have little trouble concluding that the interest embodied in this policy--the protection of large classes of consumers and the deterring of corporate wrongdoing--is materially greater than Texas's interest, which the defendants identify as 'minimizing its companies' legal expense.'"  Massachusetts joins a growing chorus of courts that reject corporate efforts to use choice-of-law clauses to enforce otherwise impermissible class bans.  Another recent example of this trend is the Third Circuit's decision in Homa v. American Express.

The Credit CARD Act and Penalty Fees

by Jeff Sovern

One of the many interesting provisions of the Credit CARD Act that has not received much attention is the limits it imposes on penalty fees.  At present, such fees are set through contract, subject only to unconscionability limits.  When the new 15 U.S.C. § 1665d takes effect next February, however, penalty fees, including late payment fees and over-the-limit fees will have to be "reasonable and proportional" to the violation.  The statute directs the Fed to issue rules establishing standards for determining whether fees are reasonable and proportional, and identifies several factors for the Board to take into account in formulating those rules, including the costs incurred by the creditor, deterrence, and the conduct of the cardholder.  The Board can also provide for a safe harbor; that is, a presumptively acceptable fee.

This provision represents a significant change from past credit regulation.  It's rare for a governmental agency to specify fees in private transactions.  Congress generally prefers to let the market set them.  But in this case, such intervention seems justified.  Considerable empirical evidence indicates that consumers are generally over-optimistic about the likelihood that something will go wrong in their transactions.  Thus, consumers contemplating a particular credit card might ignore penalty fees, on the assumption (an assumption that will be mistaken for many) that they will not incur them.  The result is that the market will not restrain credit card issuers from charging fees that greatly exceed the costs the underlying conduct imposes on issuers; i.e., lenders can use fees as a source of profits without any check unless Congress intervenes.  This is an example of how the new law take account of actual, rather than theoretical, consumer behavior, as was more true of the original version of TILA.

No doubt the eventual proposal to issue those rules will generate lots of comments.  It will be interesting to see what the Fed does.

Harvest From the Times: Bank Fees and Debt Derails Legal Career

by Jeff Sovern

Some interesting articles in the New York Times today:  One article, Bank Fees Rise as Lenders Try to Offset Losses, may shed some light on the claim that banks are raising credit card fees in response to passage of the Credit CARD Act.  It seems that banks are raising many fees, including fees that have nothing to do with credit cards, like stop-payment charges and ATM fees.  So maybe the raising of credit card fees has nothing to do with credit cards, specifically, but with attempts to generate money from any available source. 

An article that might pain students now studying for the bar: Aspiring Lawyer Finds Debt is Bigger Hurdle than Bar Exam, about the New York Appellate Division's denial of a candidate's application to be admitted to the bar because of the failure to make substantial payments on student loans.  The candidate's loans jumped from $270,000 to $400,000 in four years, at least in part because of fees added by collection agencies.

Consumer Law & Policy Roundup

by Deepak Gupta

So much is happening so quickly in the world of consumer law and policy right now that it's hard to keep up, let alone blog about it in our spare time. In this post, I'm taking advantage of the fact that I've just finished a major briefing project to point out just a few of the more interesting stories--an assortment of (1) things I've been meaning to blog about, (2) developments in the last day or two, and (3) stories that are continuing to unfold.  

In the coming days, I also plan to say something about how the consumer docket is shaping up for the Supreme Court's next term. (There are interesting cases on, among other things, arbitration, class actions, debt collection, and the interaction between the bankruptcy reform law and the First Amendment.)

• Auto bankruptcies and consumers' future claims. Chris Jensen at the Times had a story today on the different treatment of consumers' future products claims in the two big automaker bankruptcies: The Chrysler sale extinguished such claims, while the GM agreement will allow them (although it's unclear at this point whether that includes lemon-law claims). My Public Citizen colleague Adina Rosenbaum has been serving as lead counsel for the national consumer groups in both the GM and Chrysler cases. The litigation has been incredibly fast-paced; the Chrysler case made its way through every level of the federal court system--from bankruptcy court to the Supreme Court--within a matter of days. We recently posted the GM objections; here are the petition for certiorari and stay application from the Chrysler case, which we somehow neglected to post earlier.             

• Not everyone likes reinvigorated consumer protection: Given everything that's happened over the past couple years, is anyone still against increased enforcement of consumer protection laws?  Well, the folks at the conservative Point of Law blog reported today on our former colleague David Vladeck's first joint press conference as head of consumer protection at the FTC, and took the opportunity to remind us that they still don't like robust regulation. They do like Cass Sunstein's views on cost-benefit analysis, however, and are quite content to have him -- as opposed to, say Lisa Heinzerling -- running regulatory affairs at OMB.  (Oddly, it appears that Sunstein's published musings on animal rights are what's holding up his nomination in the Senate!)

• A new consumer financial protection agency?: Along the same lines, the Times reports that banks don't like plans for the new consumer financial protection agency, and "are placing top priority on killing President Obama's proposal." Public Citizen and Americans for Financial Reform released statements on the White House proposal, both stressing the need to supplement the agency with private rights of action for consumers. Graham Steele has more at the Fair Arbitration Now blog. The WSJ had a story recently focusing on Elizabeth Warren's central role; you can read one version of her original proposal here. Finally, here's the Times editorial making the case for a new agency.  

• The Cuomo bank preemption decision. Chris Peterson blogged on Monday about the Supreme Court's decision, in the Cuomo v. OCC case, to allow states to enforce their fair-lending laws against banks in court. The OCC's strange "enforcement preemption" argument--under which substantively non-preempted state law could not be enforced by the states--was thus rejected. You can read Justice Scalia's opinion here, the SCOTUSblog summary here, and some interesting thoughts at the Credit Slips blog by Bob Lawless here. Professor Lawless had a similar reaction to mine--that by preempting state subpoenas but not lawsuits, the decision creates a strange incentive for states to sue first and ask questions later. 

• Times profiles consumer advocate on energy policy: A really nice profile today of Tyson Slocum, who runs our energy policy shop, and who is finding himself less of a voice in the wilderness as the mood begins to shift in D.C.  

• FTC seeks comments on debt collection & arbitration: Following up on its February report on the 30th anniversary of the Fair Debt Collection Practices Act, the FTC is soliciting comments on protecting consumers in debt collection litigation and arbitration, in anticipation of a roundtable discussion at Northwestern Law School next month. Interested parties are "highly encouraged" to submit written comments or original research through August 1, 2009. Much of the focus will be on the problems posed by mandatory arbitration, and those with an interest in consumer arbitration should consider weighing in.

• First Amendment challenge to FDCPA rejected: In the first published appellate decision on point, the Sixth Circuit yesterday rejected a challenge to the Fair Debt Collection Practices Act (as applied to misrepresentations made in state-court litigation) under the First Amendment and the Noerr-Pennington doctrine. I argued that same issue in a case before the Alaska Supreme Court just over a month ago, so this is welcome news.

Credit Card Issuers Raise Minimum Payments: Is it Because of the Credit CARD Act?

Arthur Delaney of the Huffington Post has the story.

Fallout From Credit CARD Act?

by Jeff Sovern

This morning, the Pittsburgh Post-Gazette published the following essay I had written: 

Private Sector Commentary: New credit card law has teeth

Tuesday, June 30, 2009

By Jeff Sovern

The credit card legislation President Obama signed into law represents a sharp break from previous federal credit card statutes.

Ever since the landmark Truth in Lending Act was enacted in 1968, Congress has focused largely on disclosures of credit card terms on the theory that informed consumers would select the best credit terms available to them.

But rather than just mandating improved disclosures, the legislation contains outright prohibitions on certain credit card terms, such as increases in the interest rates charged on existing balances or sending monthly statements to consumers less than three weeks before the payment due date.

Put another way, you will not be able to agree to those terms with your credit card lender even if you wanted to. This shift reflects a better understanding of consumer decision-making. Classical economic theory of the sort in vogue 40 years ago presupposed that rational consumers, if properly informed, would choose wisely.

White House Proposal Includes Authority to Ban Forced Arbitration

by Deepak Gupta

Included in President Obama's proposed Consumer Financial Protection Agency Act of 2009 is the following provision giving the new agency the authority to ban pre-dispute mandatory binding arbitration clauses:

SEC. 1025. AUTHORITY TO RESTRICT MANDATORY PRE-DISPUTE ARBITRATION.

The Agency, by rule, may prohibit or impose conditions or limitations on the use of agreements between a covered person and a consumer that require the consumer to arbitrate any future dispute between the parties arising under this title or any enumerated consumer law if the Agency finds that such prohibition, imposition of conditions, or limitations are in the public interest and for the protection of consumers.

This is a big step forward for arbitration fairness.

The measure follows up on a specific recommendation in the Treasury Department's blueprint for financial regulatory reform, which also suggests that the SEC should explore banning forced arbitration . (Jump to pages 62-63 and 72 of the report.) The Wall Street Journal wonders whether this is "The Beginning of the End of Mandatory Arbitration."

NPR's All Things Considered recently ran this excellent report on the forced arbitration debate, featuring Public Citizen's David Arkush.

White House Sends Consumer Financial Protection Bill to Capitol Hill

by Deepak Gupta

Today, President Obama sent a bill to Capitol Hill that would create a Consumer Financial Protection Agency.  You can read the text of the proposed Consumer Financial Protection Agency Act of 2009 here. The package also includes amendments to the Federal Trade Commission Act. The Washington Post has a story on the announcement here.  

Additional information is available at www.financialstability.gov and at the website of Americans for Financial Reform, a two-week-old coalition of 200 national, state and local consumer, employee, investor, community and civil rights organizations that Public Citizen has helped to launch. 

Here's the administration's press release:

With leaders in Congress committed to enacting regulatory reform by the end of the year, the Administration today delivered to Capitol Hill a bill that would create the Consumer Financial Protection Agency. The agency will be dedicated to looking out for American families when they take out loans or use other financial products or services – with a mission to promote access and protect consumers from unscrupulous practices across the market. This new agency will implement and enforce the new credit card bill signed into law by President Obama and Congress and have authority to combat the worst abuses in mortgage markets. This legislation creates an agency to promote transparency, simplicity, fairness, accountability, and access – laying the cornerstone for the effort to fundamentally reform our system of financial regulation.

“This agency will have the power to set standards so that companies compete by offering innovative products that consumers actually want – and actually understand. Consumers will be provided information that is simple, transparent, and accurate. You'll be able to compare products and see what's best for you. The most unfair practices will be banned. Those ridiculous contracts with pages of fine print that no one can figure out – those things will be a thing of the past. And enforcement will be the rule, not the exception.”  - President Obama

California's 17200: Have rumors of its death been greatly understated?

by Stephen Gardner

Yesterday, the California Supreme Court issued an opinion, Arias v. Superior Court, that seems to have gutted any hopes of a representative action under California Business & Professions Code § 17200, holding:

[W]e construe the statement in section 17203, as amended by Proposition 64, that a private party may pursue a representative action under the unfair competition law "only if the party complies with Section 382 of the Code of Civil Procedure" to mean that such an action must meet the requirements for a class action.

So, to bring a 17200 case, you must have suffered "injury in fact" and must have lost "money or property" (again, thanks to Prop. 64) and you have to bring it as a class action. Which means getting certified, giving notice, etc. The Court decided against a strict reading of Prop. 64, which would have required a rep plaintiff to meet the requisites of a class action without actually bringing the case as a class action.

Thus, I don't see that there is now a lick of difference between a representational plaintiff, who must also bring suit as a class rep, and any other class rep, except to the extent that the standing requirements as a rep plaintiff under 17200 are stricter than those for many class reps. Bummer.

The case was issued  with a companion case, Amalgamated Transit Union v. Superior Court, which holds that representational plaintiff status can't be assigned to another.

But, who would want that, since it confers effectively no benefit?

I gotta go sit shiva for consumer rights in California now.

Should section 230 be broadened to the traditional media?

by Paul Levy

General Motors’ retreat from its effort to use bankruptcy proceedings to shed tort liability represents a great victory for consumers.  But the Washington Post reported that, in the course of the consumer campaign to achieve that result (which Public Citizen and other groups pursued in the courts as well as in the court of public opinion), GM successfully suppressed an ad by consumer groups.  The story provides a stark reminder about the crucial role played by section 230 of the Communications Decency Act in protecting free speech by consumer interests online.