Consumer Law & Policy Blog

Drahozal Paper: Arbitration Innumeracy

Christopher R. Drahozal of Kansas has written Arbitration Innumeracy, Yearbook on Arbitration and Mediation, (Forthcoming).  Here's the abstract: 

Arbitration innumeracy, as I use the phrase here, is the “inability to deal comfortably with the fundamental notions of number and chance” in evaluating arbitration, particularly consumer and employment arbitration. This article discusses a number of examples of possible arbitration innumeracy — cases in which statistics about arbitration are incomplete or outdated, misunderstood or misused. In particular, it examines empirical studies on: The use of arbitration clauses in credit card agreements; Outcomes in consumer arbitration; Arbitrator selection by the National Arbitration Forum; Class arbitration waivers in consumer arbitration clauses; The incentives of arbitrators and repeat-player bias; and Unintended consequences of restrictions on consumer and employment arbitration clauses.

Each of these topics illustrates a different issue of arbitration innumeracy, ranging from samples that are not representative of the population as a whole to comparisons that do not compare like cases. The sections of this Article put the issue in more complete empirical context and discuss briefly how the arbitration innumeracy impacts the policy debate over consumer and employment arbitration. For consumers of empirical data, avoiding arbitration innumeracy requires a sensitivity to basic statistical concepts and a willingness to look skeptically at empirical research, even when it confirms one’s previously held views.

For producers of empirical data, avoiding arbitration innumeracy requires a willingness to apply proper empirical techniques and, importantly, to recognize the limitations of one’s data. As empirical data becomes ever more important to the intensifying debate over consumer and employment arbitration, avoiding arbitration innumeracy is essential to making sound public policy.

David Reiss on Shadow Banking and Mortgages

David J. Reiss of Brooklyn has written Consumer Protection Out of the Shadows of Shadow Banking: The Role of the Consumer Financial Protection Bureau, Brook. J. Corp. Fin. & Com. L., 2012 (Forthcoming).  Here is the abstract:

Consumer protection remains the stepchild of financial regulation. Notwithstanding the fact that the economic doldrums we find ourselves in originated in the under-regulated subprime mortgage sector, relatively few academic commentators focus on the role that consumer protection can play in reducing such risks as well as in restoring the balance between consumer and producer in the financial markets. This essay suggests that consumer protection regulation has an important role to play in the regulatory structure of the shadow banking sector.

This essay does four things. First, it describes the role of shadow banking in the residential mortgage market — the shadow mortgage banking sector, as it were. Second, it contrasts two mortgages. One is emblematic of shadow mortgage banking during the Subprime Boom. The other is Dodd-Frank’s response to the excesses of the Subprime Boom — the “Qualified Mortgage.” It then evaluates whether “Qualified Mortgages” can restrain some of shadow mortgage banking’s excesses, and finds that they may be able to do so. It concludes by reviewing the first steps taken by the Consumer Financial Protection Bureau as it begins implementing Dodd-Frank’s mortgage-related provisions.

Margaret Lemos on State Attorney General Representative Suits

Margaret H. Lemos of Duke has written Aggregate Litigation Goes Public: Representative Suits by State Attorneys General, 126 Harvard Law Review (2012).  Here's the abstract: 

State attorneys general represent their citizens in aggregate litigation that bears a striking resemblance to the much-maligned damages class action. Yet, while class actions are subject to a raft of procedural rules designed to protect absent class members, equivalent suits in the public sphere are largely free from constraint. The procedural disconnect between the two categories of aggregate litigation reflects a widespread assumption that attorneys general will adequately represent the interests of the state’s citizens, obviating any need for case-specific mechanisms for assuring the loyalty of lawyer to client.

This Article challenges the presumption of adequate public representation. By conflating consent of the governed with consent of the client, the conventional wisdom ignores the important differences between political and adjudicative representation. Class-action scholars have produced mountains of commentary detailing the agency costs of aggregate litigation, including substantial conflicts between the interests of class counsel and the members of the plaintiff class. I show that the same risks are present in state suits. Attorneys general may not be driven by the pursuit of attorney’s fees, but their status as political representatives means that they must negotiate between the interests of the public at large and those of the individuals they purport to represent in an adjudicative capacity. The potential for conflicted representation would not be troubling if citizens could easily monitor and control the work of the attorney general, but, as in the class context, they cannot. If anything, the costs of monitoring and control are higher in the public sphere because the only way to “fire” the attorney general is to vote her out of office — hardly a viable solution when the attorney general’s political responsiveness is the source of the conflict. Thus, far from solving the problems that scholars have emphasized in the class-action context, the fact that the attorney general is an elected or appointed official should provide cause for heightened concern. That concern assumes a constitutional character when state litigation stands as a bar to subsequent private claims for damages or other monetary relief. In order to protect the due-process rights of the individuals whose interests are at stake in public aggregate litigation, courts must either ramp up the procedural requirements for state suits, or — better — hold that public suits cannot bind private claimants.

Eric Voigt on Voluntary Refund Policies as an Alternative to Class Actions

 

Eric Voigt

 of Faulkner University, Jones School of Law has written A Company's Voluntary Refund Program for Consumers Can Be a Fair and Efficient Alternative to a Class Action, 31 Review of Litigation 617 (University of Texas) 2012. Here's the abstract:

Consumer product companies are establishing internal programs where they are voluntarily compensating consumers for damages caused by their products. When a company implements a refund program in response to a threatened or pending class action, may federal courts rely solely on the voluntary refunds in denying class certification? The short answer is yes.

This Article analyzes Rule 23(b)(3) of the Federal Rules of Civil Procedure and the requirement that a class action be "superior to other available methods for fairly and efficiently adjudicating the controversy." The Article argues that courts must compare the superiority of a class action not only to judicial procedures but also to a company's voluntary refund program. This Article also contends that a court must deny class certification when a reimbursement policy is fair and efficient. These arguments are strongly supported by the Advisory Committee Notes to the 1966 amendment to Rule 23, commentary by two former members of the Committee, the original purpose of the superiority requirement, and courts' and commentators' initial interpretations of the 1966 amendment. Last, the Article discusses what features a refund program must have to be a fair and efficient alternative to a class action.

Surprisingly, no federal court or scholar has analyzed the history or purpose of Rule 23(b)(3) as it applies to voluntary refund programs. Further, the relevancy of a refund program to the denial of class certification has been addressed in only one article (which took an opposing view) and by only a few courts.

 

Paper Reports on Survey on Mobile Phones and Privacy

Jennifer M. Urban, Chris Jay Hoofnagle, and Su Li, all of Berkeley, have written Mobile Phones and Privacy.  Here's the abstract

Mobile phones are a rich source of personal information about individuals. Both private and public sector actors seek to collect this information. Facebook, among other companies, recently ignited a controversy by collecting contact lists from users’ mobile phones via its mobile app. A recent Congressional investigation found that law enforcement agencies sought access to wireless phone records over one million times in 2011. As these developments receive greater attention in the media, a public policy debate has started concerning the collection and use of information by private and public actors. To inform this debate and to better understand Americans’ attitudes towards privacy in data generated by or stored on mobile phones, we commissioned a nationwide, telephonic (both wireline and wireless) survey of 1,200 households focusing upon mobile privacy issues. We found that Americans overwhelmingly consider information stored on their mobile phones to be private — at least as private as information stored on their home computers. They also overwhelmingly reject several types of data collection and use drawn from current business practices. Specifically, large majorities reject the collection of contact lists stored on the phone for the purposes of tailoring social network “friend” suggestions and providing coupons, the collection of location data for tailoring ads, and the use of wireless contact information for telemarketing, even where there is a business relationship between the consumer and merchant. Respondents evinced strong support for substantial limitations on the retention of wireless phone usage data. Respondents also thought that some prior court oversight is appropriate when police seek to search a wireless phone when arresting an individual.

 

 

Rutledge & Drahozal Paper on Arbitration Clauses

Peter B. Rutledge of Georgia and Christopher R. Drahozal of Kansas have written Contract and Choice, forthcoming in the Brigham Young Law Review.  Here is the abstract:

This paper contributes to an ongoing debate, afoot in academic, legal and policy circles, over the future of consumer arbitration. Utilizing a newly available database of credit card agreements, the article offers an in-depth examination of dispute resolution practices within the credit card industry. In some respects, the data cast doubt on the conventional wisdom about the pervasiveness of arbitration clauses in consumer contracts and the presence of unfair terms. For example, the vast majority of credit card issuers do not utilize arbitration clauses, and by the end of 2010, the majority of credit card debt was not subject to such an agreement. Likewise, while the use of class waivers is widespread in arbitration clauses, most clauses lack the sorts of unfair procedural terms for which arbitration is often criticized. The upshot of these and other findings is that consumers, in some respects, have more choice in their contracts than the literature suggests. Our work also responds to the suggestions of some scholars that businesses favor arbitration clauses in their consumer contracts but not their business-to-business agreements. On the contrary, our research suggests that the difference may not be as dramatic as previous research suggests. These results hold important implications for ongoing policy debates, including the work of the newly minted and controversial Consumer Financial Protection Bureau (“CFPB”). The CFPB has been charged with studying and, if appropriate, regulating the use of arbitration clauses in credit card agreements. Our findings signal a note of caution and suggest that a blanket prohibition on the use of arbitration clauses would be difficult to defend under principles of administrative law.

Stephen Friedman Paper on the Federal Arbitration Act

 

Stephen E. Friedman

 of Widener has written The Lost Controversy Limitation of the Federal Arbitration Act, 46 University of Richmond Law Review (2012).  Here's the abstract:

Despite Congress’s deliberate limitation of the Federal Arbitration Act (the “FAA”) to disputes arising out of a contract containing an arbitration provision, broader arbitration provisions are ubiquitous. Courts invariably enforce such provisions under the FAA. Notably, the Supreme Court has almost entirely disregarded the relevant language of the FAA and has ignored the conflict between the FAA’s narrow language and the broad language typically found in arbitration provisions. In so doing, the Court has quietly and inappropriately elevated the language of private agreements above the language of the statute.

In this article, Professor Friedman first identifies the origin of the Court’s disregard for the FAA’s language. Second, he describes the conflict between the narrow language of the statute and the broad language found in arbitration agreements. Third, Professor Friedman describes and critiques both the judicial disregard of this conflict and the corresponding expansion of the FAA’s scope. Finally, he urges courts to focus on the language of the FAA to limit the statute’s scope to only those controversies that Congress intended.

Beales, Muris, and Pitofsky on the Standard for Advertising Substantiation

 

Howard Beales

 of George Washington Business School,

Timothy J. Muris

 of George Mason, and

Robert Pitofsky

 of Georgetown have written In Defense of the Pfizer Factors. Here is the abstract:

Since the Federal Trade Commission’s 1972 Pfizer decision, advertisers have been required to possess and rely on a “reasonable basis” for product claims. From its inception, the requirement was a flexible one, taking into account the costs and benefits of requiring additional substantiating evidence. In particular, the Commission has considered the relative costs of possible errors in setting the level of evidence, evaluating both the costs of mistakenly allowing false claims and the costs of mistakenly prohibiting truthful claims. In contrast to the FTC, the FDA applies a less flexible standard, often requiring elaborate scientific evidence before even non-drug products can make claims about health and nutrition benefits. In a notable clash between these conflicting approaches, the FTC, joined by the National Cancer Institute, overcame the FDA’s objections to Kellogg’s 1984 claims that diets high in fiber could reduce the risks of cancer. Despite previous bipartisan application of the substantiation doctrine, the current FTC is replacing its flexible standard with stringent evidentiary standards similar to those required for new drugs. This approach threatens to deny consumers the benefits of information that enhances the performance of product markets.

 

Can Consumers Have Facebook and Privacy Too?

 

Andrew Chin

 and

Anne Klinefelter

, both of North Carolina, have written Differential Privacy as a Response to the Reidentification Threat: The Facebook Advertiser Case Study, 90 North Carolina Law Revi

 

Recent computer science research on the reidentification of individuals from anonymized data has given some observers in the legal community the impression that the utilization of data is incompatible with strong privacy guarantees, leaving few options for balancing privacy and utility in various data-intensive settings. This bleak assessment is incomplete and somewhat misleading, however, because it fails to recognize the promise of technologies that support anonymity under a standard that computer scientists call differential privacy. This standard is met by a database system that behaves similarly whether or not any particular individual is represented in the database, effectively producing anonymity. Although a number of computer scientists agree that these technologies can offer privacy-protecting advantages over traditional approaches such as redaction of personally identifiable information from shared data, the legal community’s critique has focused on the burden that these technologies place on the utility of the data. Empirical evidence, however, suggests that at least one highly successful business, Facebook, has implemented such privacy-preserving technologies in support of anonymity promises while also meeting commercial demands for utility of certain shared data.

This Article uses a reverse-engineering approach to infer that Facebook appears to be using differential privacy-supporting technologies in its interactive query system to report audience reach data to prospective users of its targeted advertising system, without apparent loss of utility. This case study provides an opportunity to consider criteria for identifying contexts where privacy laws might draw benefits from the adoption of a differential privacy standard similar to that apparently met by Facebook’s advertising audience reach database. United States privacy law is a collection of many different sectoral statutes and regulations, torts, and constitutional law, and some areas are more amenable to incorporation of the differential privacy standard than others. This Article highlights some opportunities for recognition of the differential privacy standard as a best practice or a presumption of compliance for privacy, while acknowledging certain limitations on the transferability of the Facebook example.

Kathleen Engel Revisits Suits by Cities Against Financial Firms

 

Kathleen C. Engel

 of Suffolk has written The State of Play in City Claims against Financial Firms.  Here's the abstract:  

In 2006, before the subprime mortgage crisis and the collapse of the financial markets, I wrote an article, “Do Cities Have Standing? Redressing the Externalities of Predatory Lending.” In the article, I addressed the possibility that cities had standing to recover for the damage that predatory lenders were inflicting on their communities. At the time, exploitative lenders were putting unsophisticated borrowers in loans they could not afford, and many of those borrowers have since lost or will lose their homes.

Municipalities were in impossible positions. They were powerless to prevent abusive lending. Only states and federal legislatures and regulators had the authority to restrict unfair loan products; yet the cities bore the burden of unaffordable loans in the form of abandoned property, displaced families, increased demands for police and fire protection, and declining tax revenues.

Six years later, we now know more about the role of lenders in exploiting borrowers. We also know more about the impact that irrational and unfair lending has had on communities. And, most importantly for this essay, several cities have brought lawsuits that test some of the theories I put forth in my original article.

Jon Entin and Shadya Yazback wrote an article in response to “Do Cities Have Standing,” in which they echoed my analysis of city standing as parens patriae and as claimants for injuries to their proprietary interests. They also explored the potential for claims under the Fair Housing Act and discussed the role that preemption has played in limiting cities’ ability to directly regulate lenders. This essay is a follow-up to both my article and the Entin and Yazback piece.