Consumer Law & Policy Blog

Engstrom Article on Class Action History and the Litigation System

David Freeman Engstrom of Stanford has written Jacobins at Justice: The (Failed) Class Action Revolution of 1978 and the Puzzle of American Procedural Political Economy, 165 University of Pennsylvania Law Review (2017).  Here is the abstract:

In 1978, top DOJ officials in the Carter Administration floated a revolutionary proposal that would have remade the consumer class action and, with it, the relationship of litigation and administration within the American regulatory state. At the proposal’s core was a “public action” for widespread small-damages claims that would have replaced Rule 23 with a hybrid public-private enforcement model. Similar to the False Claims Act, this new mechanism would have granted private plaintiffs the power to bring lawsuits and recover a finder’s fee if successful, but it also gave DOJ substantial screening authority and control, including the ability to take over suits or dismiss them outright. Despite months of shuttle diplomacy among interest groups, a pair of bills in Congress, and full-scale committee hearings, this creative blend of private initiative and public oversight soon fizzled. Yet the story of the proposal’s rise and fall nonetheless provides a venue for wider reflection about American civil procedure and the political economy that produces it. Indeed, the failed revolution of 1978 reveals a contingent moment when the American litigation system was splintering into the pluralistic, chaotic one we now take for granted, including hard-charging state attorneys general, a federal administrative state with litigation authority independent of DOJ, and a sophisticated and politically potent plaintiffs’ bar. In retrospect, the proposal may have been the last best chance to counter the centrifugal tendencies of an American state that was progressively empowering ever more institutional actors within the litigation system. More importantly, lurking in the background of the story of 1978 is the bracing possibility that the Rules Enabling Act, for all its virtues in revising technocratic procedural rules, has systematically enervated efforts to address larger procedural design questions in an increasingly dense and interconnected regulatory world.

Skiba & Xiao Article on Consumer Litigation Funding

Paige Marta Skiba and Jean Xiao of Vanderbilt have written Consumer Litigation Funding: Just Another Form of Payday Lending? 80 Law and Contemporary Problems (2017).  Here is the abstract:

This article provides a side-by-side comparison of payday lending and consumer litigation funding in order to aid policymakers. Funding has similarities with payday lending because they are both alternative financial services, involve high interest rates, and cater to customers who need money for living expenses. However, they differ in ways that regulators should recognize. Many justify bans on payday lending by pointing to the fact that millions of borrowers every year are getting stuck in an inescapable cycle of interest payments. While legal finance has real costs, funding’s nonrecourse nature prevents consumers from getting stuck in a cyclical repayment of debt. Moreover, prohibitions may not be appropriate at this time because there is little empirical evidence on how funding affects consumer welfare and there is room for interest rates to fall as the industry continues to expand and competition increases among funders. States should take the initiative to partner with financiers to study the effect of this new form of credit on borrowers. Some states have implemented disclosure regulations that mandate that funders itemize the fees, present a repayment schedule, and relay the APR. However, customers do not have the legal expertise or financial sophistication to estimate case duration and to put this information together with funding contract terms to get an accurate sense of where they may end up on a repayment schedule. Thus, financiers should disclose a reasonable approximate repayment amount and date to improve borrowers’ understanding of the costs of nonrecourse advances.

Freeman Article: Racism in the Credit Card Industry

Andrea Freeman of Hawai'i has written Racism in the Credit Card Industry, 95 North Carolina Law Review 1071 (2017).  Here's the abstract:

In a social and financial climate characterized by deep racial and socioeconomic divide, racism against credit card applicants and consumers is a core piece of the systemic inequality that perpetuates dramatic disparities in wealth, employment, health, and education. Over several decades, credit cards have evolved into an essential tool for lower- and middle-class families to maintain financial stability through strategic balancing between debt and disposable income. Now, without a credit card, many households cannot manage to meet the basic needs of their families. Credit card companies take advantage of this reality, imposing exploitative fees, interest rates, and other conditions on consumers who have no choice but to use the companies’ products. Even worse, the companies do so in a racially discriminatory way, burdening Black and Latino customers with the worst credit card terms, often unrelated to credit risk. This type of consumer racism dates back to the Reconstruction era and reflects an unbroken chain of laws and policies cementing racial economic inequality. Social norms and stereotypes make the resulting inequality appear cultural and personal instead of systemic and structural.

This Article is the first to apply a critical race theory analysis to the problem of racism against credit card consumers. After describing the role that history and stereotyping play in allowing credit card corporations to discriminate against consumers, it identifies fatal flaws in the two laws designed to address racial discrimination and inequality in credit, the Equal Credit Opportunity Act and the Community Reinvestment Act. It then proposes amendments to the Consumer Accountability Responsibility and Disclosure Act based on rehabilitative reparations theory and slavery disclosure laws that would require credit card companies to make significant investments into the communities they harm.

Duranske Article on Regulation Health and Wellness Claims

Sarah Duranske of Stanford has written This Article Makes You Smarter (Or, Regulating Health and Wellness Claims), Forthcoming in the American Journal of Law and Medicine. Here is the abstract:

Information has power – to inspire, to transform, and to harm. Recent technological advancements have enabled the creation of products that offer consumers direct access to a level of personal health information unprecedented in history. But how are we to balance the promise of health and wellness information with its risks?

Two agencies are tasked with protecting consumers from false claims of health products: the FDA and the FTC. This Article investigates if they are up to the task. In part a study of agency policymaking choices, and in part a prescription for more thoughtful and focused regulation, this Article compares both intra-agency and inter-agency regulation of informational health and wellness products. Certain procedural and substantive characteristics of FDA regulation are unsuited to informational health and wellness products, rendering comprehensive regulation by the FDA unrealistic. This gap creates an opportunity for the FTC to use its distinct and well-tailored enforcement tools to police harmful product claims that escape the FDA’s purview. I posit that by tailoring the FDA’s responsibility and sustaining the FTC’s engagement with health claims, the agencies can dovetail into a cohesive and comprehensive regulatory regime.

Bair Article: Dynamic Rationality

Stephanie Plamondon Bair of Brigham Young has written Dynamic Rationality, Forthcoming in the Ohio State Law Journal.  Here is the abstract:

In 1998, Christine Jolls, Cass Sunstein, and Richard Thaler published A Behavioral Approach to Law and Economics, one of the most important pieces of scholarship in decades. Their Article famously proposes a departure from the classical law and economics approach to legal analysis. Breaking from classical law and economics’ rational actor construct, the authors apply empirical insights about human behavior to introduce the concept of a boundedly rational actor limited by cognitive constraints. Over the past two decades, the behavioral law and economics approach, with its focus on the boundedly rational actor, has contributed needed realism to legal analyses.

Unfortunately, the current approach to behavioral law and economics is incomplete. Indeed, sometimes it even conflicts with empirical lessons about how the brain actually works. In particular, rationality is not exogenous to policy, but instead has a dynamic character that can be molded in long-lasting ways over time by specific laws and policies. By overlooking the dynamic nature of rationality, behavioral law and economics cannot reach its full potential, and in fact, may harm the very people it is intended to benefit. A policy enacted to preserve consumer autonomy, for instance, may actually undermine autonomous decision-making in the long term.

In this Article, I take the first step in remedying this oversight. Drawing on the insights of neuroscience, I explain why rationality is endogenous and dynamic and what this means for behavioral law and economics. Working from examples in advertising and criminal law, I explain that dynamic rationality can and should be accounted for. Doing so will increase the prescriptive and normative power of behavioral law and economics and prevent policies from being introduced that undermine rather than advance social welfare.

James Kwak on Economism and Arbitration Clauses

Here.  Excerpt:

It’s unlikely that anyone actually believes that consumers understand arbitration clauses and take them into account when making buying choices. These arguments aren’t meant to be taken seriously. They are air cover for banking executives who like taking advantage of customers and politicians who want to do favors for the financial lobby. That’s the purpose of economism, and why it continues to be so influential.

[Disclosure: He discusses my recent arbitration/Wells Fargo article at length.]

Marotta-Wurgler Study on Explanations for Privacy Policy Content

Florencia Marotta-Wurgler of NYU has written Self-Regulation and Competition in Privacy Policies, 45 Journal of Legal Studies (2016). Here's the abstract

I investigate alternative explanations for the content of privacy policies. Under one model of self-regulation, firms signal their privacy protections to consumers by highlighting compliance with third-party guidelines. However, in a sample of 249 privacy policies, only 27% claim compliance with a specific guideline and the terms of policies that do claim compliance with at least one are generally inconsistent with its requirements. Alternatively, under a market-based mechanism, firms incorporate consumer preferences directly. Consistent with this influence, there are several intuitive differences in terms across markets. Adult sites — none of which claim certification — are much more likely to give concise and clear notice of privacy practices and limit data sharing with third parties, while cloud computing sites are particularly likely to follow stringent data security standards. Overall, privacy policy content appears to be shaped at least as much by market forces as by a self-regulatory regime based on external guidelines.

My Latest Law Review Article: Free-Market Failure: The Wells Fargo Arbitration Clause Example

by Jeff Sovern

It's for an arbitration symposium at Rutgers and is available for download here.  I would love to hear comments!  Here's the abstract:

In September 2016, regulators charged Wells Fargo with opening millions of unauthorized accounts on behalf of its customers. When some of those customers filed class actions against Wells, the bank initially responded by moving to compel arbitration on the ground that the consumers had agreed to arbitrate disputes and waive their class action rights. Because most customers with claims in small amounts would probably have foregone filing an arbitration claim, the effect would have been to leave their damages uncompensated except for the refunding of fees, which Wells agreed to in the consent order it entered into with regulators.

The Consumer Financial Protection Bureau has proposed a regulation which, if it had been in effect at the relevant time, would have enabled the injured Wells customers to obtain class action relief. But the proposed rule is encountering objections in Congress, based partly on free-market economic theory. This Article argues that free-market economics is not sufficient to protect consumers from the type of problem present in the Wells Fargo case for two reasons. First, free-market economics assumes that consumers have complete information while empirical evidence shows that consumers do not understand arbitration clauses, much less that consumers realize that such clauses would bar class actions as to fraudulent accounts that the consumers did not know about. Second, the number of primary checking accounts at Wells consistently increased as the fraud became public, suggesting that the free market did not discipline Wells for its misconduct until regulators intervened, and did so only modestly at that point. It is even possible that by enforcing arbitration clauses as written, free-market economics prolonged the Wells fraud, thus enabling more consumers to be injured.

In short, some device beyond the free market is necessary to prevent financial institutions from cheating many consumers out of small amounts. Class actions are one such device, but arbitration clauses as currently enforced enable financial institutions to prevent their use, thus reducing their incentive to comply with the law.

Study Finds Many Consumers Can't Tell That Native Ads are Paid Content

David A. Hyman of Georgetown, David J. Franklyn of the University of San Francisco, Calla E. Yee of Kilpatrick, Townsend & Stockton, and Mohammad Rahmati of Sharif University have written Going Native: Can Consumers Recognize Native Advertising? Does it Matter? 19 Yale J.L. & Tech. 77 (2017).  Here the abstract:

Native advertising, which matches the look and feel of unpaid news and editorials, has exploded online. The Federal Trade Commission has long required advertising to be clearly and conspicuously labeled, and it recently reiterated that these requirements apply to native advertising. We explore whether respondents can distinguish native advertising and “regular” ads from unpaid content, using 16 native ads, 5 “regular” ads, and 8 examples of news/editorial content, drawn from multiple sources and platforms. Overall, only 37% of respondents thought that the tested examples of native advertising were paid content, compared to 81% for “regular” advertising, with variation by platform, advertiser, and labeling. Modest labeling changes materially increased the number of respondents that correctly recognized that native ads are paid content – but even these improved results fell well short of those for “regular” advertising. We also explored labeling preferences and self-reported concern about native advertising. Our findings indicate that native advertising involves a significant risk of deception which self-regulation has not addressed.

Cortez Article: Regulation by Database

Nathan Cortez of SMU has written Regulation by Database, University of Colorado Law Review, Vol. 89, 2017. Here is the abstract:

The federal government currently publishes 195,245 searchable databases online, a number of which include information about private parties that is negative or unflattering in some way. Federal agencies increasingly publish adverse data not just to inform the public or promote transparency, but to pursue regulatory ends ⎯ to change the underlying behavior being reported. Such "regulation by database" has become a preferred method of regulation in recent years, despite scant attention from policymakers, courts, or scholars on its appropriate uses and safeguards.

This Article, then, evaluates the aspirations and burdens of regulation by database. Based on case studies of six important data sets (published by the CFPB, CPSC, EPA, FEC, FDA, and Medicare), the article proposes what I call "Good Government Data Practices" to ensure that databases are reliable, useful, and fair. More optimal data disclosures require careful design choices that consider both data inputs and outputs, including how to gather and process data, how to characterize them, and how to present them. The article envisions a decidedly modern role for government agencies as data "stewards" rather than as mere publishers or repositories.

Agency databases have proliferated on the belief that markets, regulation, and even democracy all require transparency, that sunlight is the best disinfectant. But as transparency has moved online ⎯ becoming more pervasive, more powerful, and more burdened with regulatory dimensions ⎯ we also must recognize that sunlight can also blind or even burn. It is in this spirit that I call for policymakers to embrace the government’s role as a data "steward," a sentinel that helps maximize the quality of data inputs and outputs via tailored procedures. The more reliable government data are, the more they can enlighten us and perhaps even deter unwanted behavior.