Consumer Law & Policy Blog

Matt Edwards Paper on the FTC's Use of Behavioral Law and Economics

Matt Edwards's article, The FTC and the New Paternalism, can be found at http://ssrn.com/abstract=1014652.  Here's the abstract

During the past decade, we have witnessed a renaissance of paternalism in legal scholarship fueled by the rise of behavioral law and economics ("BLE"). This paper addresses the potential impact of BLE and the "new paternalism" on the Federal Trade Commission's consumer protection mission. After providing a survey of some of the basic teachings of BLE, the paper reviews the fascinating political and legal history of the FTC's unfairness authority to show how a major political battle helped to transform the legal concept of unfairness from a market morality norm into a law and economics concept grounded in the concept of consumer sovereignty.

The latter parts of the paper use three examples - mail-in consumer rebates, inducement of supermarket impulse purchases, and payday lending - to explore the challenges that the FTC faces if it decides to press unfairness claims based on alleged behavioral exploitation. These tasks include weighing uncertain costs and benefits of business practices, determining what harms are "reasonably avoidable" in cases of purported consumer irrationality, and elaborating a principle to mediate disputes between consumers' multiple selves. Given these empirical and normative challenges, and the FTC's unfairness history, one might expect the Commission to be cautious in its use of BLE and resistant to more radical strains of the new paternalism.

Subprime: the Lawsuits

By Alan White
Borrower class actions comprised 43% of subprime mortgage litigation filed in federal courts in 2007 according to a new report from Navigant Consulting, based on a survey of 278 cases. Other categories included securities investor claims (22%), commercial contract claims, mostly efforts to force originators to repurchase bad mortgages (22%), employment class actions (9%) and bankruptcy and miscellaneous (4%).

Among the consumer class actions, 36 alleged disclosure violations, 31 claimed improper charges (e.g. RESPA kickbacks), and 26 asserted discrimination claims under the Equal Credit Opportunity Act, Fair Housing Act or similar laws. A majority of the disclosure cases seem to have been brought by one firm challenging disclosures for "option-ARM" (i.e. negative amortization teaser rate) mortgages. The survey did not include any state court lawsuits, nor did it include lawsuits filed by lenders, which of course include hundreds of thousands of foreclosures filed in judicial foreclosure states, some of which are contested. As a result, the conclusions about the scope of litigation so far are necessarily understated. Pending cases filed before 2007, like the Ameriquest MDL class actions in Illinois federal court, are also not covered. HT to Kathleen Keest at the Center for Responsible Lending for spotting this.

David Adam Friedman Article on Free Offers

David Adam Friedman's article, Free Offers: A New Look, to appear in the New Mexico Law Review, is available at http://ssrn.com/abstract=1010238.  Here's the abstract:

Free offers - the practice wherein firms market goods and services by claiming that they are free - have been overlooked for too long from a structural regulatory perspective. These offers have become so ingrained into our consumer culture that they often go unnoticed, viewed as part of the natural commercial landscape. The courts and the FTC have effectively left free offer regulation untouched since the 1950s. Even legal scholarship has largely ignored free offers. I argue that advances in the study of human behavior require a new look and a new approach to the half-century-old free offer regulatory regime.

A truly free offer would be a gift. In contrast, a free offer attached to another definite commercial commitment is not free under our common understanding of the word. Under the legal standard, however, the use of the word free is lawful, provided there is adequate disclosure of the attached commercial commitment.

Free offers can be perceived as merely harmless exaggerations or simple puffery. In fact, why wouldn't consumers want free goods and services? Rational consumers should want truly free goods and services. However, free offers subvert rationality. Cognitive psychology and reciprocity theory demonstrate that the power of a free offer induces consumers to behave differently, making them more likely to engage in certain transactions. The powerful expressive function of the word free tactically puts consumers at a disadvantage even in the situations where the conditions of our laws and regulations are satisfied.

I argue that current law and regulations require wholesale reevaluation, especially given the date of their original formation and the advances in our understanding of human behavior. This ubiquitous practice should be reexamined. Moreover, policymakers should go even as far as banning the practice of the free offer in certain contexts and seeking other appropriate means to even the playing field.

Article on Peer Promotions and False Advertising Law

Ellen P. Goodman of Rutgers--Camden has written an article on how "peer promotions," such as postings on Facebook or blogs, fit into false advertising law.  The article, Peer Promotions and False Advertising Law, 58 South Carolina Law Review (2007), can be found at http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1009304.  Here's the abstract:

What many call social media or Web 2.0 applications - podcasts, blogs, and services such as Facebook and Wikipedia - allow individuals to communicate on a massive scale often anonymously or under assumed identities. Businesses are learning to take advantage of these social media to connect with consumers in ways designed to feel authentic and personal. The result is a massive flow of information to individuals, sometimes from their peers, and sometimes from institutions disguised as peers. When the information flow consists of advertising and promotion, it challenges the structure and application of false advertising law, which was designed to manage information in relatively controlled environments where few speakers were capable of mass communication.

This essay offers tentative thoughts on how “peer promotions” fit into the structure of federal false advertising law. In the first instance, it is important to set aside peer promotions that are spontaneous commentary on a product with no connection to the brand owner. These communications are not advertising at all, but editorial comment. Increasingly, however, brand owners themselves create “peer” promotions or adopt such communications for marketing purposes. In these cases, there is commercial speech which, depending on its content, may be regulated.

It is the gray area between brand control and no control where peer promotions most severely strain the application of advertising law and its efficacy. Where brand owners sponsor peer promotions but conceal their involvement, the resulting communication mixes the commercial speech of the sponsor with the noncommercial speech of the peer. The borders of commercial speech have shifted with each innovation in modern marketing, particularly as advertising has become more image-based and integrated into other forms of media content. Mixed peer-advertiser promotions take the blurring of commercial and noncommercial speech one step further and pose more insistently the central question of advertising law: how do we balance the desirability of regulating for transparent commercial communications with the free speech dangers of regulating at the commercial-expressive interface?

Report on Rebate Laws

The American Association for Justice's Trial Magazine has an article here about recent litigation and legislation involving rebates.  The article mentions our blog (except that it says that I host it for Public Citizen rather than that Public Citizen hosts it and I'm just one of the people who posts to it.  Oh well).

Stephen Colbert Exposes the "Center for Consumer Freedom"

by Deepak Gupta

Judging by the name alone, you might think that the Center for Consumer Freedom is an independent organization that advocates for consumers' rights to make informed choices in the marketplace. But consumer choice and consumer rights are pretty malleable concepts. As my favorite prankster faux-conservative Stephen Colbert revealed in a recent segment (below), CCF is an industry front group; its way of defending "consumers' rights" is to lobby aggressively for the interests of the industries that fund its public-relations campaigns. Here's Colbert with Rick Berman, the lawyer-lobbyist behind CCF:

Colbert: What do you do for the Center for Consumer Freedom?

Berman: I defend consumers' rights.

The Alcoholic Beverage Industry’s Response to Underage Drinking: Add Stimulants

by Stephen Gardner

Capitalizing on the success of Red Bull in persuading bars to serve Red Bull as a mixer, Miller and Anheuser-Busch have decided to see Red Bull’s bid and raise the pot: They are selling ready-made concoctions of speed and alcohol —pre-mixed alcoholic beverages containing stimulants.[1]  Miller, Anheuser-Busch, and other smaller companies market these products in a way that is unfair and deceptive to consumers and that capitalizes on the popularity of energy drinks with youth – thereby marketing an alcoholic product to an underage population.

Alcospeed beverages are of unique concern — worse than just beer or just energy drinks. The special harm to consumers is twofold:

·              There are not enough studies to ensure the safety of – and much anecdotal evidence on the negative bodily effects of – consuming stimulants and alcohol together.

·                    There is a physiological effect – and marketing message – that consuming alcohol and caffeine together allows one to drink more alcohol and to feel less intoxicated.

This second effect may lead drinkers to engage in risky behavior such as driving, because they do not feel drunk. A recent study on the interaction between alcohol and energy drinks found that stimulants did nothing to reduce alcohol’s negative effects on motor coordination skills and visual reaction times, but did reduce subjective perception of alcohol intoxication.[2]

Times Articles on Lemons, Nonprofit Payday Loans, Responses to the Mortgage Meltdown, and More

It's time for another roundup of recent New York Times articles on consumer law, including some articles that don't have anything to do with the mortgage crisis.  On Sunday, the Times ran a piece on cars that had been declared lemons but that were nevertheless resold without being so designated.  An excerpt: 

To see what happens to lemons, Experian Automotive, which specializes in collecting and analyzing automotive data, picked at random 1,000 Florida vehicles that were branded lemons, from a list on a state Web site. Experian found that 555 had been taken out of the state. And four-fifths of those 555 cars no longer had titles branding them as lemons, according to an analysis conducted for The New York Times.

The article also notes that some states require that lemons be so labeled, discusses litigation by those who have unwittingly purchased such lemons, reports on the FTC's failure to act, and quotes consumer advocates as suggesting a national database of lemons is needed.

Today's paper included a report on nonprofit payday loans, while yesterday's included an editorial titled "The College Credit Scam" in which the Times called upon colleges that allow credit card issuers to solicit students on campus to take steps to protect vulnerable students, an issue that is highlighted in the documentary "Maxed Out."  The editorial concluded "Congress, when it convenes next week, should move forward with planned legislation that would tighten federal supervision over the credit card industry while improving disclosure laws and outlawing deceptive practices."

But the mortgage meltdown has also come in for its share of attention.   Last Friday the Times reported here on state statutes intended to limit the damage from subprime lending.  North Carolina, Maine, Minnesota, and Ohio have enacted such statutes and other states are considering them.  And an article in today's paper reports on possible federal responses to the problem.

Is This a Deceptive Practice Aimed at Law Professors and Lawyers?

Over at Balkinization, my colleague, Brian Tamanaha, reports on a possible deceptive practice aimed at law professors and lawyers, in a post titled "Have You Received This 'Honor?'"  I did receive the "honor," along with quite a few of my colleagues.  We're wondering how widely this "honor" has been bestowed, which would bear on whether it truly is deceptive.

Another Form of Predatory Lending?

Saturday's Times had an article headlined "Enticing Ad, Little Cash And Then a Lot of Regret," about what Steve Cox, spokesperson for the Council of the Better Business Bureaus called "another form of predatory lending" that "generates more complaints than any other business."  The practice involves businesses that offer computers to consumers with poor credit and then deliver the computers late (or never) while deducting payments over time directly from the consumer's bank account and charging far more than the computer is worth.