Consumer Law & Policy Blog

Amy Schmitz Article on Big Data and Consumer Scores

Amy Schmitz of Colorado has written Secret Consumer Scores and Segmentations: Separating Consumer 'Haves' from 'Have-Nots', Michigan State Law Review, p. 1411 (2014). Here is the abstract:

“Big Data” is big business. Data brokers profit by tracking consumers’ information and behavior both on- and offline and using this collected data to assign consumers evaluative scores and classify consumers into segments. Companies then use these consumer scores and segmentations for marketing and to determine what deals, offers, and remedies they provide to different individuals. These valuations and classifications are based on not only consumers’ financial histories and relevant interests, but also their race, gender, ZIP Code, social status, education, familial ties, and a wide range of additional data. Nonetheless, consumers are largely unaware of these scores and segmentations, and generally have no way to challenge their veracity because they usually fall outside the purview of the Fair Credit Reporting Act (FCRA). Moreover, companies’ use of these data devices may foster discrimination and augment preexisting power imbalances among consumers by funneling the best deals and remedies to the wealthiest and most sophisticated consumers. Use of these scores and segmentations increases the growing gap between powerful “haves” and vulnerable “have-nots.” This Article sheds light on these data devices and aims to spark adoption of data privacy regulations that protect all consumers regardless of their educational, economic, ethnic, or social status.

Taha Paper on Advertising Atypical Results

Ahmed E. Taha of Pepperdine has written Selling the Outlier, forthcoming in the Journal of Corporation Law.  Here is the abstract:

 

Advertisements for products ranging from weight-loss programs to mutual funds regularly feature the results of people who have used the product.  However, these advertisements often present the results only of people who had an atypically positive experience.  These advertisements harm consumers and investors, who greatly underestimate the advertised results’ atypicality.  Because advertisements of past results are used in a wide range of products, they are regulated by a number of federal agencies.  These agencies have taken different regulatory approaches to advertisements of atypical results, primarily requiring them to include additional disclosures.  This article presents evidence that these and other disclosures cannot prevent advertisements of atypical results from deceiving consumers and investors.  Indeed, the very purpose of these advertisements is to mislead people regarding their own likely results.  Thus, in light of the harm these advertisements cause and the minimal useful information they provide, the prohibition of advertisements of atypical results should be seriously considered

Steinzor Asks Why Auto Executives Have Not Been Jailed

Rena I. Steinzor of Maryland and the Center for Progressive Reform has written (Still) 'Unsafe at Any Speed': Why Not Jail for Auto Executives? Harvard Law & Policy Review (Forthcoming).  Here's the abstract:

Americans can be forgiven for wondering what has gone so drastically wrong with the companies that sell automobiles.  In 2014, 64 million, a number equivalent to one in five of the cars on the road, was recalled.  Safety defects such as the lack of torque in ignition switches installed in GM compact cars like the Cobalt put motorists in the terrifying position of coping with a stalled engine and loss of power brakes while traveling at high speeds.  GM had the audacity to classify this condition was not a safety defect, but instead was merely “inconvenient” for its customers.  It persisted in this position for many years until a private lawsuit forced the company to acknowledge that stalled engines also meant disabled airbags.  This Article uses the ignition switch debacle to consider two crucial questions.  First, is the regulatory system capable of stepping into the marketplace and stopping corporate malfeasance that creates too many incentives for executives to deny the existence of safety defects well past the time when they should be acknowledged?  Concluding that the answer to this question is no, the piece then considers whether criminal prosecution of mid- and senior-level managers, including in-house counsel for the companies, is a feasible and effective alternative to traditional regulation?  I argue that publicly available facts justify criminal prosecution of GM as well as individual managers for reckless homicide under state law, as well as such federal crimes as failure to disclose a safety defect and obstruction of justice.

Symposium on Nancy Kim's Wrap Contracts . . .

. . .  in the Southwestern Law Review, as reported with links to pdfs by the ContractsProfBlog. 

Empirical Study of Arbitration and Repeat Player Effect

David Horton and Andrea Cann Chandrasekher both of California, Davis, have written After the Revolution: An Empirical Study of Consumer Arbitration, 104 Georgetown Law Journal (Forthcoming 2015). Here's the abstract:

For decades, mandatory consumer arbitration has been ground zero in the war between the business community and the plaintiffs’ bar.  Some courts, scholars, and interest groups argue that the speed, informality, and accessibility of private dispute resolution create a conduit for everyday people to pursue claims.  However, others object that arbitration’s loose procedural and evidentiary rules dilute substantive rights, and that arbitrators favor the repeat playing corporations that can influence their livelihood by selecting them in future matters.  Since 2010, the stakes in this debate have soared, as the U.S. Supreme Court has expanded arbitral power and mandated that consumers resolve cases that once would have been class actions in two-party arbitration.  But although the Court’s jurisprudence has received sustained scholarly attention, both its defenders and critics do not know how it has played out behind the black curtain of the extrajudicial tribunal.

This Article offers fresh perspective on this debate by analyzing nearly 5,000 complaints filed by consumers with the American Arbitration Association between 2009 and 2013.  It provides sorely-needed information about filing rates, outcomes, damages, costs, and case length.  It also discovers that the abolition of the consumer class action has changed the dynamic inside the arbitral forum.  Some plaintiffs’ lawyers have tried to fill this void by filing numerous freestanding claims against the same company.  Yet these “arbitration entrepreneurs” are a pale substitute for the traditional class mechanism.  Moreover, by pursuing scores of individual disputes, they have inadvertently transformed some large corporations into “extreme” repeat players.  The Article demonstrates that these frequently-arbitrating entities win more and pay less in damages than one-shot entities.  Thus, the Court’s consumer arbitration revolution not only shields big businesses from class action liability, but gives them a boost in the handful of matters that trickle into the arbitral forum.

Woodward on "Contraps"

William J. Woodward Jr.of Santa Clara has written Contraps, 66 Hastings Law Journal (2015). Here is the abstract:

Forms that purport to govern consumer transactions are a central component of our modern consumer economy. They are routinely enforced because consumers are said to “manifest assent” to them, despite the fact that they are not read and not intended to be read. Recent empirical work shows that virtually no one reads or understands consumer forms. This has cast into substantial doubt the conventional explanation for enforcement — that enough people are reading the forms to cause vendors to worry about lost sales resulting from nasty terms, that “market discipline” will thus limit vendor excess. Given the empirical findings, “assent” (in any common understanding of the word) cannot explain why we enforce terms found in forms; our attempts to reconcile enforcement with some version of knowing, voluntary action characteristic of “contract law” simply confuses the analysis. Policy choices would be substantially clarified if the confounding idea of “assent” were simply removed from the analysis. Removing consumer forms from the assent-based law of contracts — that is, changing how we teach and speak about this area of law — could be a first step towards reform.

Study Shows Disclosures Can Boomerang and Produce Unintended Consequences

by Jeff Sovern

Some years ago, I wrote an article in which I speculated that disclosing to consumers that consumers rarely redeem rebates might cause consumers to disregard rebate offers.  Better-known scholars, like Ian Ayres and Oren Bar-Gill, have expressed similar thoughts.  Well, a new study suggests that the contrary is true. Molly Mercer of DePaul's Business School and Ahmed E. Taha of Pepperdine have written Unintended Consequences: An Experimental Investigation of the (In)Effectiveness of Mandatory Disclosures, 55 Santa Clara Law Review (2015 Forthcoming).  Here's the abstract:

Nearly everyone who purchases a product that offers a mail-in rebate intends to redeem the rebate.  Yet most consumers, including those who purchased the product because of the mail-in rebate, never submit the materials required to receive their rebates.  Thus, prominent legal scholars propose requiring rebate offers to disclose actual redemption rates. The idea, of course, is that such disclosures will improve consumers’ purchase decisions by causing consumers to realize that they too are unlikely to redeem rebates.  But is this what would really happen?  We report the results of a controlled experiment that examines the effects of such disclosures on U.S. consumers.  Surprisingly, we find that these disclosures backfire, increasing rather than decreasing consumers’ willingness to purchase rebated products.  We discuss how our experimental results inform both the rebate debate and the more general debate about the likely success of other non-restrictive legal interventions.

Quoting now from the conclusion:

[M]any lawmakers mistakenly believe that even if disclosure-based solutions do not help, they cannot hurt. That is, unlike other regulatory approaches, mandatory disclosures do not restrict consumer behavior because consumers are free to ignore the disclosures. Consequently, many lawmakers and academics assume that such disclosures will have either, (a) a positive effect, if consumers are influenced by the disclosures, or (b) no effect, if consumers are not influenced by the disclosures. Our results provide support for a third alternative – that disclosures can harm consumers– and highlight the potential danger of using mandatory disclosures to improve consumer decision-making.

* * *

[The] disclosures were not only ineffective, they were harmful: the disclosures generally increased, rather than decreased, consumer optimism and the percentage of consumers who chose the rebated product.

Lauren Willis Article on the CFPB and Consumer Comprehension

Lauren E. Willis of Loyola Los Angeles has written what looks like another important article,  The Consumer Financial Protection Bureau and the Quest for Consumer Comprehension.  Here is the abstract:

To ensure that consumers “understand [financial products’] costs, benefits, and risks,” the CFPB has been redesigning mandated disclosures, primarily through iterative lab testing. But no matter how well disclosures perform in experiments, firms will run circles around them when studies end and marketing begins. To meet this challenge, the Bureau should require firms to demonstrate that their customers understand the products they buy. Comprehension rules would induce firms to educate consumers and to simplify products, tasks that firms are better equipped than the Bureau to perform. Such performance-based regulation is crucial for adaptive management of the dynamic twenty-first century consumer financial marketplace.

Dennis Hirsch Paper on Big Data and the FTC's Unfairness Authority

Dennis D. Hirsch of Capital has written That's Unfair! Or Is It? Big Data, Discrimination and the FTC's Unfairness Authority, 103 Kentucky Law Journal (2015). Here is the abstract:

Big data and data analytics (“big data”) can produce many social and economic benefits.  But they can also generate privacy injuries and harmful discrimination.  The governance of big data should, accordingly, focus on balancing benefits and risks.  Where the potential benefits outweigh the risks, the big data application should be seen as appropriate.  Where the risks outweigh the benefits, it should be seen as inappropriate.  This provides a framework for sorting beneficial from harmful uses of big data, and so for figuring out which big data applications are in bounds, and which are not.

Others have advocated a risk-benefit approach to big data.  However, the scholarly literature has not yet identified a legal basis on which to ground such an approach.  This Article does.  It argues that the FTC could use its Section 5 “unfairness authority” to draw the line between those big data uses that are appropriate and fair, and those that are inappropriate and unfair. In this way, it could provide guidance to big data businesses that are struggling to find a coherent, legally-grounded framework for making such calls.  It could also take an important step towards protecting privacy and civil rights in the era of big data.

This raises an important legal question. Does the Commission’s unfairness authority encompass the governance of big data?  Or does this task lie outside the scope of the FTC's  statutory jurisdiction?  Here, the essay offers an original reading of FTC v. Wyndham Worldwide Corp., a district court decision (on appeal at the time of this writing) that provides the latest word on the scope of the FTC’s unfairness jurisdiction.  It shows that the Wyndham decision both supports the FTC’s authority to govern big data practices and provides guidance on how the Commission could go about doing so.

Johnston Paper Questions Whether Product Bans Help Consumers

Jason Scott Johnston of Virginia has written Do Product Bans Help Consumers? Questioning the Economic Foundations of Dodd-Frank Mortgage Regulation. Here is the abstract:

The system of residential mortgage contact regulation enacted by the 2010 Dodd Frank Wall Street Reform and Consumer Protection Act of 2010 has been justified as necessary to prevent lenders from exploiting consumer misperception and impatience through the sale of complex mortgage contracts with back-loaded or postponed charges, fees and penalties. Among other things, Dodd Frank creates a regulatory regime under which complex mortgages are penalized, amounting to de facto regulatory restrictions on such contracts. While behavioral law and economics scholars and regulatory practitioners have criticized complex mortgages as exploiting consumer misperception and impatience, such scholars and practitioners have neither advocated nor rigorously analyzed the costs of Dodd Frank style contract restrictions. Drawing on a large body of both theoretical and empirical work in neoclassical (rather than behavioral) financial economics, this article argues that while some consumers undoubtedly did fail to understand such complex mortgages, the terms of those mortgages had a solid economic rationale and made welfare-increasing mortgage credit available to consumers when it otherwise would not have been available.  By severely discouraging complex mortgages from being written, Dodd Frank and regulations promulgated thereunder by the Consumer Financial Protection Bureau have priced out of the mortgage market entire groups of potential homeowners – including younger people, minorities and the self-employed.  Welfare losses to such people from restricting contractual freedom are very real, and must be balanced against the benefits to those consumers who are arguably protected against ex ante undesirable mortgage contracts and to others in society arguably harmed when mortgages default.  A policy of minimizing such harms by speeding and lowering the cost of recovery from mortgage contract failure is argued to be superior to policies, such as Dodd Frank’s mortgage contract restrictions, designed to prevent such failures by mandating or manipulating private contractual choice.