Casebook Supplement

Though our casebook was published only months ago, enough has occurred in the world of consumer law--including two Supreme Court decisions and a number of other events chronicled in this Blog--that a supplement seems in order.  Accordingly, we have submitted to Thomson/West a short supplement which Thomson/West will make available via their web site.  I would also be happy to email a copy to anyone using the book.

A Stinging Dissent on Arbitration

In an otherwise unremarkable case involving a homeowner's personal injury dispute, a Florida appeals court judge recently issued a remarkable dissent on the evils of mandatory binding arbitration. It opens with a somewhat sarcastic how-to guide for home manufacturers who want to deprive consumers of their judicial remedies and then launches into a critique of the state of the law. Here's an excerpt:

What we have begun to see is that virtually all consumer transactions, no matter the size or type, now contain an arbitration clause. And with every reinforcing decision, these clauses become ever more brazenly loaded to the detriment of the consumer -- who gets to be the arbitrator; when, where, how much it costs; what claims are excluded; what damages are excluded; what statutory remedies are excluded; what discovery is allowed; what notice provisions are required; what shortened statutes of limitation apply; what prerequisites even to the right to arbitrate are thrown up -- not to mention the fairness or accuracy of the decision itself. The drafters have every incentive to load these arbitration clauses with such onerous provisions in favor of the seller because the worst that ever happens, if the consumer has the resources to go to court, is that the offending provisions are severed. The state courts, demoralized by the United States Supreme Court's disapproval, have too often allowed these overreaching provisions to succeed. Most consumers can't read them, won't read them, don't understand them, don't understand their implication and can't afford counsel to help them out.

It is the role of the state courts to determine whether an arbitration provision is unconscionable and it is time that we take that responsibility seriously.

This dissent doesn't say anything that hasn't been said many times before, but it does say it forcefully--and at a time when Congress is beginning to take notice. Ultimately, the question isn't whether state courts take their role seriously, but whether federal law should stand in the way, and only Congress can decide that question. (Thanks to Paul Bland for the tip.)

Lose Your Home and Pay More Taxes

An article on the front page of yesterday's Times, "After the Pain of Foreclosure, A Big Tax Bill," reports on the tax consequences of foreclosures.  Apparently the IRS treats debts that are wiped clean as income to the consumer, which can result in tax obligations in the tens of thousands of dollars.  The same thing can happen when homeowners sell their homes for less than the value of the mortgage and the lender forgives the difference.

Merck's Strategy in Vioxx Suits Working?

Today's New York Times has this article on the litigation over Vioxx, the painkiller made by Merck that was withdrawn from the market because of its association with strokes, heart attacks, and other cardiac problems. The article discusses Merck's litigation strategy: litigate each of the 45,000 lawsuits against the company individually, and don't pay a dime until a case is final and no longer appealable in any way. Merck's strategy differs from other mass-tort defendants who have sought relatively early mass settlements or bankruptcy solutions.  To date, Merck has not paid a single judgment, and, according to a source cited in the Times, original estimates of Merck's aggregate Vioxx liability at around $25 million are now at $5 billion. The article points out that at the current pace many Vioxx plaintiffs will be dead before their cases are tried.

Will the Bankruptcy Laws Change Again?

Today's New York Times has a number of articles on the problems in the credit markets.  Among them is a lengthy piece titled "Loan by Loan, the Making of a Credit Squeeze," focused on the problems of consumers.  In that context, the article discusses attempts to ease the bankruptcy laws. An excerpt:

“The bankruptcy law was written for a different world, and we want to give the bankruptcy courts, and creditors, more flexible tools to work with borrowers to save their homes,” said Senator Richard J. Durbin of Illinois.

In September, Mr. Durbin, the Democratic whip, plans to propose amendments to the bankruptcy code, in a bill called the Helping Families Avoid Foreclosure Act. It would, among other things, permit writing down loans and stretching out payment terms.

Some bankruptcy experts agree that it is time to change the law. “Our bankruptcy laws are not well designed to deal with a massive wave of mortgage foreclosures,” said Elizabeth Warren, a professor at the Harvard Law School. In particular, Ms. Warren said, bankruptcy courts should be able to rewrite mortgages in line with market conditions.

The banking industry, which pushed hard for the tougher bankruptcy law in 2005, wants no easing up now.

Ninth Circuit Strikes Cingular Class Arb Waiver

Arbitration junkies will want to read today's Ninth Circuit opinion in Schroyer v. New Cingular Wireless Services, written by Judge Reinhardt. "In this case," the opinion begins, "we consider whether a class arbitration waiver in New Cingular Wireless Service Inc.'s standard contract for cellular phone services is unconscionable under California law, and whether the Federal Arbitration Act preempts a holding that the waiver is unenforceable." Building on the California Supreme Court's decision in Discover Bank, and the Ninth Circuit's prior decisions in Ingle, Ting, and Nagrampa, the court holds that the waiver is unconscionable, and, thus, unenforceable, and that the invalidation of the contract provision is not preempted by the FAA.

American Airlines Sues Google Over Contextual Ads

by Greg Beck

If you search for "American Airlines" on Google, the first result, as you'd expect, is the official American Airlines website. On the right side of Google's search results page, however, are several "Sponsored Links" to various websites that advertise cheap airfares. This contextual advertising shows up because the cheap ticket sites paid Google for the privilege of appearing beside the results of searches for American Airlines. The owners of the websites presumably think that people searching for American Airlines would also be interested in buying cheap tickets from their sites.

Companies like American Airlines, however, are not always happy when their competition shows up in search results alongside their official websites. Yesterday, American Airlines filed suit against Google in what is likely to be a climactic legal battle on the contextual advertising issue. The airline argues that by providing paid links to the websites of competitors when users search for "American Airlines," Google is taking a "free ride on the reputation and goodwill" of its trademark. Other companies have made similar claims, with mixed results in the courts.

In Rescuecom v. Google, Public Citizen argued as amicus curiae in the Second Circuit that contextual advertising provides consumers with a valuable service by helping them identify low-cost alternatives. Contextual ads put these alternatives where consumers are likely to find them, beside a trademarked product. This practice is essentially no different than the common retail practice of placing low-cost generics on a shelf next to brand-name products. Arguably, these generics are taking a "free ride" on the good names of the trademarked products, but that's not the kind of free riding that trademark law is supposed to prevent. Trademark law is designed to protect consumers from confusion, not to protect companies from legitimate competition by lower-priced alternatives.

The American Airlines complaint is available here, via the Technology & Marketing Law Blog (warning: large file).

A Solution to the Problems Caused by Securitization?

Last week I posted a link to and some quotes from an article in the Times about the problems caused in unwinding securitized loans.  Today's Times has a column by regular op-ed columnist and Princeton economist Paul Krugman, "Workouts, Not Bailouts," in which Krugman proposes a solution to the problem.  A quote:

This looks to me like a clear case for government intervention: there’s a serious market failure, and fixing that failure could greatly help thousands, maybe hundreds of thousands, of Americans. The federal government shouldn’t be providing bailouts, but it should be helping to arrange workouts.

And we’ve done this sort of thing before — for third-world countries, not for U.S. citizens. * * *

The mechanics of a domestic version would need a lot of work, from lawyers as well as financial experts. My guess is that it would involve federal agencies buying mortgages — not the securities conjured up from these mortgages, but the original loans — at a steep discount, then renegotiating the terms. But I’m happy to listen to better ideas.

Comparing Search Engine Privacy Policies

CNET compared the privacy policies of the major search engines and found that, on the whole, they are becoming more responsive to their users' privacy concerns. However, of the five largest search engines, only Ask.com said it would not keep records of its users' searches. For its part, Google recently announced that it would anonymize its users' search records after 18 months.

Airline Passengers' "Bill of Rights" Endorsed

For what it's worth, The Washington Post has endorsed the airline passengers' "bill of rights" legislation pending before the Congress.  Its aimed at the worst of the problems experienced by delayed airline travelers, such as waiting on the tarmac for hours without adequate food and water.