Consumer Law & Policy Blog

Froot Loops a Smart Choice?

by Jeff Sovern

Friday's Times brought For Your Health, Froot Loops about an industry-backed labeling campaign called "Smart Choices" that's “designed to help shoppers easily identify smarter food and beverage choices.” Designed to sell food might be closer to the truth, as the list of approved foods includes Cocoa Krispies and Froot Loops.  An excerpt: 

Froot Loops qualifies for the label because it meets standards set by the Smart Choices Program for fiber and Vitamins A and C, and because it does not exceed limits on fat, sodium and sugar. It contains the maximum amount of sugar allowed under the program for cereals, 12 grams per serving, which in the case of Froot Loops is 41 percent of the product, measured by weight. That is more sugar than in many popular brands of cookies.

“Froot Loops is an excellent source of many essential vitamins and minerals and it is also a good source of fiber with only 12 grams of sugar,” said Celeste A. Clark, senior vice president of global nutrition for Kellogg’s, which makes Froot Loops. “You cannot judge the nutritional merits of a food product based on one ingredient.”

On that theory, manufacturers should be able to stuff foods with fiber, vitamins, and cyanide and call it a smart choice. 

We allow some seller's puff in our system, but this sounds like it's on the deceptive side of the line.  To make matters worse, the article explains that manufacturers pay the program for the right to have their products labeled as Smart Choices, with the fee determined by the number of labeled products sold.  So just as the bond-rating agencies had an incentive to water down their standards for mortgage-backed securities so they could increase their revenue, this program has an incentive to have loose standards so more foods can be identified as Smart Choices, thereby increasing sales of foods so labeled, and the program can generate more revenue.

Even Consumer Law Professors Have Consumer Law Problems

by Jeff Sovern

 Last winter, I bought a computer for my daughter.  The computer came with a free sample of Norton's security program already installed (It's likely that Norton paid the manufacturer to have that program installed as a marketing measure).  When the free trial period ended, we paid to have the Norton program continue running on the program--something that many consumers probably do, as the path of least resistance, and of course that is the reason Norton is willing to pay for having its software loaded on the machine. 

The software worked fine until earlier this week, when the computer began frequently displaying popups urging purchase of a spyware program, which presumably would prevent the popups it was causing.  (Anti-spyware sellers have been known to use spyware to advertise their products in the past.  See FTC v. Seismic Entertainment Productions, Inc., 2004 WL 2403124 (U.S. Dist. Ct. D. N.H. 2004))  Yet according to the Norton product, the computer was clean.  My daughter turned to Norton, which generously offered to cure the problem--for a fee of $99.99.  The cure carried a guarantee for seven days (that's the shortest warranty I can ever remember hearing about; Norton obviously has confidence in their service).  When my daughter asked why we had to pay the additional charge since we had purchased the Norton product to prevent just this sort of problem, the technician explained:

When you purchase the product, the cost of the product is for software, updates to the software and for virus definitions. There is an additional charge for value added services. Manually removing threats from our customers' computers is a complex and often time-consuming process, which requires special expertise. Norton's Spyware & Virus Removal Service is handled by highly trained expert technicians who will work as long as it takes to locate and neutralize all known threats on a user's computer. We stand by the quality of our service and are proud to offer a seven-day, infection-free warranty period.

We declined to pay, and an IT person I know kindly fixed the problem for us without charge.  So the problem is no longer with us, but I wonder how many people pay the extra $100.  This system gives Norton at least a short-term incentive to allow some infections through their protections so that they can make the extra $100 by cleaning up the computers (over the longer term, the incentive goes in the other direction because dissatisfied consumers might not re-enlist when their current protection expires, and word of mouth may be damaging, but one thing the subprime fiasco demonstrated is that sometimes businesses put short-term interests ahead of long-term interests). 

I haven't reviewed the End User License Agreement to see if Norton had any obligation to fix the problem without charge.  I'm assuming that Norton's lawyers wrote the agreement so that Norton could engage in this practice, and that few consumers choose not to use the Norton product because of the relevant contract clause, because after all, few consumers will read the contract.  But whatever the contract says, my reaction is that this is a deceptive trade practice.  Consumers are likely to be deceived by the fact that they are purchasing computer protection software into thinking that they will not be charged extra when their computers become infected.  It also seems like an unfair trade practice.  Class action lawyers, take note!

InfomercialScams.com is no more — a sad end for a useful consumer web site

I have been receiving inquiries about the apparent disappearance of two consumer commentary web sites operated by Justin Leonard, whose rights I (and other colleagues at Public Citizen) have defended in the past — www.infomercialscams.com and www.infomercialratings.com. Said one such correspondent, Antoine Simmons (quoted here with permission):

Is it under a different name or have the deep pockets of the INDUSTRY finally won? I truly hope the latter is not the case. It would be a shame if the masses will not have a venue to warn and encourage (depending on the product) each other before sinking their hard earned cash into an unknown and largely unsupported product.

The answer is that the sites are down for now, and the reason has its roots in both the deep pockets of an infomercial purveyor and, apparently, the efforts of the new owners of the web site to exploit the site for extra profits. But as discussed at the end of the post, there remains some hope that a new version of the site may be restored to the web soon.

California's 17200: Have rumors of its death been greatly understated?

by Stephen Gardner

Yesterday, the California Supreme Court issued an opinion, Arias v. Superior Court, that seems to have gutted any hopes of a representative action under California Business & Professions Code § 17200, holding:

[W]e construe the statement in section 17203, as amended by Proposition 64, that a private party may pursue a representative action under the unfair competition law "only if the party complies with Section 382 of the Code of Civil Procedure" to mean that such an action must meet the requirements for a class action.

So, to bring a 17200 case, you must have suffered "injury in fact" and must have lost "money or property" (again, thanks to Prop. 64) and you have to bring it as a class action. Which means getting certified, giving notice, etc. The Court decided against a strict reading of Prop. 64, which would have required a rep plaintiff to meet the requisites of a class action without actually bringing the case as a class action.

Thus, I don't see that there is now a lick of difference between a representational plaintiff, who must also bring suit as a class rep, and any other class rep, except to the extent that the standing requirements as a rep plaintiff under 17200 are stricter than those for many class reps. Bummer.

The case was issued  with a companion case, Amalgamated Transit Union v. Superior Court, which holds that representational plaintiff status can't be assigned to another.

But, who would want that, since it confers effectively no benefit?

I gotta go sit shiva for consumer rights in California now.

FTC Seeking Public Comments for Studies on Consumer Susceptibility to Fraud

Here's an excerpt from one announcement:

The FTC intends to conduct two exploratory studies on consumer susceptibility to fraudulent and deceptive marketing. This research will be conducted to further the FTC’s mission of protecting consumers from unfair and deceptive marketing. Before gathering this information, the FTC is seeking public comments on its proposed research. This notice seeks comments on the Fraud Susceptibility Experiment Study, one of the two studies. * * * Comments must be submitted on or before August 10, 2009.

The other announcement, also seeking comments by August 10, seeks comments on the Fraud Susceptibility Internet Panel Study.  (HT to Chris Hoofnagle of Berkeley).

Signs of life at the FTC

by Steve Gardner

Yesterday, the FTC showed significant signs of life, announcing a consent decree against the Kellogg Company for claiming that it had scientific proof that its Frosted Mini-Wheats cereal improved children's attentiveness by 20 percent (!!!).

In terms of sheer gall in marketing food for kids, Kellogg's efforts to promote this sugary cereal as an alternative to ADD medication is surpassed recently only by Coke's claim (in Australia) that  Coca-Cola cannot contribute to weight gain, obesity and tooth decay (!!!!!). The Australian government shut down those claims.

In the FTC action, the most notable thing (aside from Kellogg's aforementioned gall) was this statement by the newly appointed Chair of the FTC, Jon Leibowitz:

We tell consumers that they should deal with trusted national brands. So it’s especially important that America’s leading companies are more ‘attentive’ to the truthfulness of their ads and don’t exaggerate the results of tests or research. In the future, the Commission will certainly be more attentive to national advertisers.

After years of not-so-benign neglect of consumers, it's good to see that the Commission will focus more attention on the companies who are setting the standards for deceptive advertising, rather than just taking action against smaller companies.

Buyology and Consumer Law

I've been listening to the audio version of Martin Lindstrom's Buyology, a book about the neurological basis of marketing.  Lindstrom is a branding expert and marketer and reports on what brain scans have contributed to the art of marketing.  For example, as Lindstrom recently wrote about in a New York Times op-ed, Inhaling Fear, brain scans of smokers indicated that not only did health warnings about smoking not light up the fear section of the brain, but they actually stimulated the brain's craving spot.  Lindstrom describes a host of other discoveries about how the brain responds to marketing.  Among these are "mirror neurons," neurons that fire in response to stimulation and cause us to feel what the people we observe are feeling.  For example, when we watch a movie with people who feel sad, we feel sad.  Similarly, when teens observe attractive models at Abercrombie and Fitch wearing Abercrombie clothes, their mirror neurons flash, and they think they too will feel attractive if they wear Abercrombie clothes (I still don't get why Abercrombie has shirtless guys at the front of their stores, though maybe I don't really want to know the answer to that one). 

Does this have any implications for consumer law?  I'm not sure.  You could argue that brain-scan-based marketing raises questions for consumer law, like is it fair or deceptive to use marketing that is based on how the brain reacts to stimuli.  In terms of the FTC's deception analysis, is seeing an attractive model in Abercrombie clothes likely to deceive the teenage consumer acting reasonably under the circumstances into thinking that he or she will be more attractive in Abercrombie clothes, given that the teen's mirror neurons are flashing just that message, even though nothing to that effect is said or implied?  I think we have a while to go before the FTC and courts adopt that approach, if indeed they ever do, which may only mean that our consumer protection laws have become somewhat outmoded.  Similarly, does the use of mirror neurons, using the FTC's unfariness analysis, cause a substantial injury which cannot reasonably be avoided by the consumer that is not outweighed by countervailing benefits to consumers?  It's hard to see a benefit to consumers in the triggering of mirror neurons to stimulate purchases, and consumers can't reasonably avoid something that they're not aware of.  Manipulating a consumer into making a purchase the consumer would otherwise not make seems like a substantial injury.  But do we want regulators to prohibit the use of this technology to stimulate sales?  I'm not sure. 

This seems like a fruitful subject for a law review article, and perhaps for FTC study.  Science fiction meets consumer law.  I hope someone will have fun with it.

Butler and Johnston Provide Economic Analysis of UDAP Statutes

Henry N. Butler of Northwestern and Jason Scott Johnston of Penn have written "Consumer Harm Acts? An Economic Analysis of State Consumer Protection Acts."  Here's the abstract:

State Consumer Protection Acts (CPAs) were adopted in the 1960s and 1970s to protect consumers from unfair and deceptive practices that would not be redressed but for the existence of the acts. In this sense, CPAs were designed to fill existing gaps in market, legal and regulatory protections of consumers. From an economics perspective, CPAs were designed to solve two simple economic problems: 1) individual consumers often do not have the incentive or means to pursue individual claims against mass marketers who engage in unfair and deceptive practices; and, 2) because of the difficulty of establishing elements of either common law fraud or breach of promise, those actions alone are too weak an instrument to deter seller fraud and deception. The most striking lesson of our analysis is that the typical state CPA - with relaxed rules for establishing liability, statutory damages, damage multipliers, attorneys fees and costs, and class actions - solves the basic economic problem that CPAs were intended to address several times over. The effect of this redundancy in solutions is that CPAs can deter the provision of valuable information to consumers and, thus, harm consumers. That is, as currently applied state Consumer Protection Acts harm consumers. This need not be the case. A few modest reforms would dramatically improve the impact of CPAs on consumer welfare.

Times Reports on Home Equity Loans, Countrywide Litigation, Subprime Borrowers, and More

Another roundup of article in recent issues of the Times: Friday's Times brought another important installment in "The Debt Trap" series, this one headlined "Home Equity Frenzy Was a Bank Ad Come True," about how banks reframed second mortgages--once seen as a product for those experiencing dire financial problems--as home equity loans.  These loans were presented as ways to use the home as a source of funds for "living richly," and thereby vastly increased consumer indebtedness and reduced the amount of equity Americans have in their homes. 

Today's Times includes Bob Tedeschi's Mortgages column, "Finding Cash in a Home," about an alternative to reverse mortgages which cuts down on the normally high closing costs for reverse mortgages--but because the lender takes out a life insurance policy on the owner, only owners eligible for life insurance can take advantage of it.  In an August 3 column titled "Subprime Loans' Wide Reach," Tedeschi reported on a study by Compliance Technologies that contradicted standard wisdom about subprime loans:

WHILE subprime loans deeply penetrated low-income and minority groups, a new study suggests that more upper-income borrowers and more whites took out such loans than any other groups.

* * * [R]oughly 56 percent [of subprime loans originated in 2006] went to non-Hispanic whites. Affluent borrowers, those with annual income at least 120 percent of their given area’s median income, meanwhile, took out more than 39 percent of the loans.

That seems like a rather low definition of affluent.

Yesterday's Times reported "Judge Rejects Countrywide Settlement" about how a bankruptcy judge rejected the settlement between Countrywide and nearly 300 of its borrowers, saying he wasn't convinced it was fair to the borrowers.  The complaint charges Countrywide with making inaccurate claims, and demanding improper fees, among other things.  Meanwhile, back on August 7, the Times noted that "Connecticut Joins Other States in Suing Countrywide."

On Wednesday, the Times published a short but ominous-sounding piece, "Some New York Loans Shunned," at the tail of a longer article.  Here's an excerpt:

Freddie Mac said Tuesday that it would stop buying subprime loans issued in New York State as a new law takes effect that holds investors accountable for mortgage fraud.

Freddie will not buy loans dated on or after Sept. 1 that meet the state’s subprime definition, the government-chartered company said in a lender bulletin on its Web site. Gov. David A. Paterson of New York signed new foreclosure and lending laws last week that tighten legal protections for borrowers.

The legislation holds mortgage buyers like Freddie liable in ways that “we have no way of monitoring and preventing,” Brad German, a company spokesman, said.

It's not clear how many such loans would be made even if Freddie Mac was willing to buy them: the state law will almost certainly be preempted as to federal lenders, and in the past, lenders have tended to avoid loans labeled as high-interest loans, thus making mini-HOEPA laws effectively usury statutes. 

On Monday the Times ran "Web Privacy on the Radar in Congress," about behavioral marketing.  An excerpt:

On Aug. 1, four top members of the House Committee on Energy and Commerce sent letters ordering 33 cable and Internet companies, including Google, Microsoft, Comcast and Cox Communications, to provide details about their privacy standards. That followed House and Senate hearings last month about privacy and behavioral targeting, in which advertisers show ads to consumers based on their travels around the Web. * * *

As advertisers become more sophisticated about behavioral targeting, and online privacy standards become increasingly varied, regulators and privacy advocates are becoming concerned. A few companies have taken precautionary measures to try to fend off criticism; in the last few days, for instance, both Yahoo and Google have made it easier for people to opt out of targeted ads on their sites. But that may not be enough.

“Some type of omnibus electronic privacy legislation is needed,” said Representative Edward J. Markey, Democrat of Massachusetts, chairman of the House Subcommittee on Telecommunications and the Internet, “regardless of the particular technologies or companies involved.”

Back on August 6, the Times ran an editorial,"Listen to the 56,000," about the response to the Fed's call for comments on its proposed rules on credit cards.  Excerpts:

This anguished deluge should send a clear message to leaders in Washington. The Federal Reserve should swiftly adopt its proposed rules against unfair or deceptive credit card practices. But the real burden to curb these abuses falls on Congress.

For too long, members of Congress have shirked the responsibility to ensure fair lending to credit card customers and have listened more intently to the banking lobbyists. A low point came in 2005, when Congress passed a bankruptcy law that was badly tilted against borrowers. * * *

Ronald Mann, a Columbia Law School professor, has argued that the law creates a “sweat box of credit card debt.” 

The editorial also noted that the House Financial Services Committee had voted for a cardholder's bill of rights, but that banks oppose it.

Moving right along, here is an article about deceptive advertising of "free" credit reports that end up costing money.  And finally, an article that may scare some, "If You Run a Red Light, Will Everyone Know?" reports on a web site, www.CriminalSearches.com that enables people to conduct free searches to see who has a criminal record.

New Mexico Supreme Court strikes down class-action ban

by Deepak Gupta

On Friday, New Mexico's highest court unanimously handed consumers an important victory, holding that, "in the context of small consumer claims that would be prohibitively costly to bring on an individual basis, contractual prohibitions on class relief are contrary to New Mexico's fundamental public policy of encouraging the resolution of small consumer claims and are therefore unenforceable in this state."  New Mexico joins a unanimous and growing group of state and federal courts in declaring that the Federal Arbitration Act does not preempt such state-law rulings--a question the U.S. Supreme Court refused to hear last month.

The New Mexico case involved allegations that Dell misrepresented the amount of memory in its computers--a misrepresentation that was widespread, but which cost each customer only $10-$20 each.  The opinion has some great language about the value of the class action device in cases involving small consumer claims.  The court recognized that "the class action functions as a gatekeeper to relief when the cost of bringing a single claim is greater than the damages alleged." Dell's class-action ban had "essentially foreclosed the possibility that Plaintiff may obtain any relief," such that "enforcing the class action ban would be tantamount to allowing Defendant to unilaterally exempt itself from New Mexico consumer protection laws." Congratulations go to Paul Bland and Amy Radon of Public Justice, who argued the unconscionability issue as amicus curiae.