Read All About the Financial Meltdown

It's fashionable to skewer the "main stream media." But that's where I'm finding some of the best day-to-day coverage of the credit crisis, the mortgage meltdown, etc. Highlighted by Lehman Brothers's bankruptcy filing, today's Washington Post has a series of stories:

Lehman Brothers: Massive Shifts on Wall Street

World Stock Markets Sink on Wall Street Crisis

Merrill Lynch: Weekend Merger Struck With Bank of America

System in Crisis: A New Architecture for the Financial World

The Effects at Home After Wall Street's Shake-Up

Special Report: Credit Crisis   

Behavioral Law and Economics, Lenders, and the Subprime Mortgage Meltdown

Behavioral law and economics maintains that people are subject to certain biases that impair their decision-making.  Many consumer law scholars, including me, argue that policy-makers should take these biases into account in formulating consumer protection rules.  But one thing suggested by the subprime mortgage meltdown is that businesses, which are, after all, staffed by people, are also subject to some of these biases.  Thus, one possible explanation for the fact that so many lenders lost so much money betting that housing prices would continue to rise is the optimism bias; that is, the tendency of individuals to be more optimistic than the facts justify (you can find lots of discussion of the optimism bias if you look; I wrote about it in the text accompanying notes 145-150 of my article "Toward a New Model of Consumer Protection: The Problem of Inflated Transaction Costs," 47 Wm. & Mary. L. Rev. 1635 (2006)).  While businesses may be better off when consumers suffer from these biases--because if they understand them, they can take advantage of them--the converse seems unlikely to be true: put another way, the consumers who are losing their homes did not benefit from the tendency of lenders to be unduly optimistic.  When the full story of the mortgage disaster is figured out, we may well find that these biases played a significant part on both sides.  I wonder if we'll discover other biases that contributed to the willingness of lenders to make the loans.  One final point: businesses are unlikely to suffer from all the cognitive limits consumers experience.  For example, businesses can avoid information overload by simply hiring other employees to deal with additional information and help them process it. 

New York Times: Congress Should Enact Credit Cardholders "Bill of Rights"

Today's New York Times editorializes here in favor of the Credit Cardholders "Bill of Rights" pending before Congress. The legislation takes aim at retroactive rate increases, double cycle billing that allows assessment of interest on amounts already paid, multiple over-limit fees, and similar credit card company policies. Rep. Carolyn Maloney (D-NY), a champion of the legislation, has a webpage devoted to the issue, with links to key documents, including the legislation itself.

The Failure to Regulate Fannie and Freddie

This major story in today's Washington Post takes the position that the failure of congressional leaders and the Clinton Administration to curb the uncontrolled growth of Fannie Mae and Freddie Mac -- and to withstand the enormous lobbying pressure from the two mortgage giants -- led to their meltdown.

CPSC and NHTSA Recalls for August 2008

The Consumer Product Safety Commission's product safety recalls for August 2008 can be found here, and the National Highway Traffic Safety Administration's vehicle and related recalls for the same month can be found here.

Eighth Circuit Finds Class Action Aribtration Ban Not Unconscionable

by Brian Wolfman

In Pleasants v. American Express, No. 07-3235 (Sept. 8, 2008), the Eighth Circuit has upheld an adhesion contract requiring pre-dispute mandatory arbitration and banning class actions in arbitration. The case involved a dispute over pre-loaded store cards (or gift cards). Applying Missouri law on unconscionability, the Eighth Circuit held that the contract was not procedurally unconscionable because the relevant contractual provisions were conspicuous (although it appears that they would not have been seen by the consumer until after he or she had purchased the card) and was not substantively unconscionable because the contract did not waive the damages and fees available to consumers under applicable substantive law. The Eighth Circuit distinguished a Missouri Court of Appeals case finding a class action ban unconscionable (read the decision and decide for yourself whether the Missouri case was properly distinguished). The Eighth Circuit also noted that in deciding questions of state law it was not bound by the decisions of intermediate state appellate courts (as opposed to state high courts).

Supreme Court of Virginia Strikes Down Anti-Spam Law on First Amendment Grounds

Yesterday, in Jaynes v. Commonwealth, No. 06-2388 (Sept. 12, 2008), the Supreme Court of Virginia struck down a state statute that criminalized the sending of unsolicited bulk email to consumers. The defendant in question had been sentenced to 9 years in prison. Noting our long tradition protecting anonymous speech, the Viriginia high court struck down the statute because it included all spam, including non-commercial spam addressing political and religious matters at the core of the First Amendment.  The court's website synopsizes the opinion as follows:

In a prosecution for violations of Code § 18.2-152.3:1, the unsolicited bulk electronic mail provision of the Virginia Computer Crimes Act, the circuit court had jurisdiction over the person of the defendant, and defendant had standing to raise a First Amendment overbreadth claim as to the statute. Because Code § 18.2-152.3:1 is overbroad on its face, prohibiting the anonymous transmission of all unsolicited bulk e-mails – including those containing political, religious or other protected speech – the judgment of the Court of Appeals upholding the defendant's convictions is reversed and those convictions are vacated.

Today's Washington Post has this informative article on the decision. The Virginia attorney general has vowed to take the case to the U.S. Supreme Court.

Trademark Abuse by Jones Day to Suppress Free Speech

by Paul Alan Levy

A new entry in the contest for “grossest abuse of trademark law to suppress speech the plaintiff doesn’t like” comes from Chicago, where the giant law firm Jones Day has sued BlockShopper.com, a web site that reports on real estate purchases in two upscale specific Chicago neighborhoods, as well as in Las Vegas, Palm Beach, and St. Louis.  The defendant’s crime?  In discussing condo purchases by Jones Day associates Dan Malone and Jacob Tiedt here and here, BlockShopper used the name “Jones Day” to identify the employer of each of the two associates, and linked from each associate’s name to Jones Day’s own web site here and here. 

According to Jones Day, linking to its web site dilutes its trademark and creates a likelihood of confusion.    But that is preposterous.  The link is in connection with a comment on Jones Day; when a trademark is used to comment on the trademark holder, the use reinforces the association with the trademark holder, rather than blurring it, and besides use for commentary is expressly protected as fair use under the Lanham Act as amended in 2006.   Moreover, nobody could visit the BlockShopper web site and think that it is sponsored by or affiliated with Jones Day, even if they follow the links from BlockShopper’s mention of Jones Day associates to Jones Day’s own web site.  That is what web sites do – they link to other web sites (that’s what makes it a “World Wide Web”).   

Indeed, throughout the first paragraph above, I used Jones Day's name (because I am writing about that firm) and linked to Jones Day’s web site and elsewhere.  Is Public Citizen equally liable for trademark infringement and dilution?   If Jones Day is right here, it is hard to see how the Web could survive.

DOJ Disgraces Itself in Support of Nursing Homes

by Paul Bland

The United States Justice Department has completely disgraced itself. On July 30, 2008, Keith Nelson, Principal Deputy Assistant Attorney General of the United States, wrote a letter to the U.S. Senate Judiciary Committee in which he attacked S. 2838, a bill that would ban the use of pre-dispute mandatory arbitration clauses in nursing home contracts.

[Update: Yesterday, a coalition of consumer groups sent this response letter.]

Why does the United States of America oppose the idea that nursing home patients – perhaps the most vulnerable segment of our entire nation – should be given a choice of whether or not to take disputes (many of which involve medical neglect like untreated bed sores that become severely infected leading to serious disease or death, or elder abuse such as rape or murder of very old people) to court or arbitration?

Well, first Mr. Nelson argues that arbitration is better than the court system for nursing home residents. In his happy imaginary world, nursing homes insist that their patients submit to these contracts before they can receive medical treatment because the nursing homes WANT their patients to be able to get more money if the nursing home mistreats them. Mr. Nelson’s assertions on this point are actually contradicted by the nursing home industry itself – nursing home lobbyists and lawyers openly acknowledge that the entire POINT of their mandatory arbitration clauses is to reduce their liabilities (no matter what they have done).

The second point that Mr. Nelson makes is the really troubling one, though. According to Mr. Nelson, the United States Congress does not even have the POWER to regulate the contracts of nursing home residents, because nursing homes are supposedly not within the scope of the interstate commerce clause. This is not just misguided federalism, this is nonsense on stilts.

At the outset, his statement would only be true IF:

• Every patient in a nursing home had been born and raised in the state where the nursing home was based. (It’s like the U.S. hasn’t noticed that lots of retirees MOVE to states like Florida and Arizona.)
• All the employees in the nursing home would have to have been born and raised in that state. (A ridiculous assumption.)
• All the food, all the medicine, all the furniture, all the equipment in the nursing home would have to have been grown, manufactured, etc., in that state. (A ridiculous assumption.)

If a nursing home patient went into court and told a judge "the Federal Arbitration Act doesn’t apply to this nursing home’s arbitration clause, because nursing homes are not part of interstate commerce," the lawyer would run a serious risk of being sanctioned for making a frivolous argument. The U.S. Supreme Court has twice rejected this kind of argument (in the Allied Bruce v. Terminix and Alafabco cases).

What’s even more troubling, is consider the implications of Mr. Nelson’s argument. If the position taken in the name of the United States to the Senate was true, then the federal government could not regulate ANYTHING that the nursing home does. So, under Mr. Nelson’s slipped-cog claims:

• nursing homes could refuse to hire, or treat, African-Americans, Latinos, or any other group, and none of the federal civil rights laws would apply. This is the official position of the United States in 2008? It’s almost as if Trent Lott got his wish and Strom Thurmond HAD won the 1948 Presidential election. It’s unbelievable that the United States of America would take this position today.
• nursing homes could pollute and be exempt from the environmental laws. A nursing home could take all of the sewage from its facility and dump it in a river just upstream from a school, and not be subject to the Clean Water Act.

It’s a pretty sad day when the official representatives of the United States will say pretty much anything in order to help the nursing home industry limit its liability, even in the ugliest cases. And these cases are ugly – we’ve helped families of nursing home patients who died after thousands of ANT BITES, we’ve helped families of women in their nineties who were trusted to a nursing home by their families, and then were RAPED by "caregivers" who never should have been trusted with such a position.

But it’s even sadder when the United States will go so far as to advance a theory which is not only demonstrably, obviously untrue as a matter of fact and completely unsupported as a matter of law, but that if it was true, would wind the clock back to the 1930s (or earlier).

The Justice Department disgraced itself when it let this letter out the door.

CPSC Establishes Web Page on Consumer Product Safety Improvement Act

The Consumer Product Safety Commission has established a new web page devoted to informing the public about the Consumer Product Safety Improvement Act recently passed by Congress and signed by President Bush. See our earlier post for a synopsis of this important legislation. Thanks to U.S. PIRG's Consumer Blog for bringing the new CPSC web page to our attention.