Category: Consumer Protection Law


Tin Men

As a follow-up to my post about an apparently sleazy car sales tactic a few days ago, I thought I’d point you to a fascinating undercover look at the world of car sales from The reporter spent 3 months as a new car salesman, part of it at a high-pressure showroom dedicated to a Japanese brand, and the other at a “no-haggle” dealership for an American brand. In general, the article reminds me of the movie Boiler Room, as well as my own brief career in high-pressure sales (don’t ask). The traditional car lot is a shark pit of deceptive maneuvers aimed at separating marks from their money. The “no-haggle” lot seems much better, but it also seems like it’s not doing a lot of business.

There’s evidence the Internet is changing the whole business:

I was already beginning to see the impact of the Internet because of something that happened during my first few days there. [The reporter talked to a man waiting in the maintenance area, who tells him he got an “awesome deal” on one of the dealership’s new SUVs — $300 below invoice.] I asked how he did it. He said he checked prices on the Internet. He then called the fleet manager and made the deal over the phone.

I had a schizophrenic reaction to this. Part of me admired the fact that he had outfoxed the dealer. But the car salesman side of me was angry that I never “got a shot at him.” It seemed like just a matter of time before people who, in the past, walked onto our car lot, would be on the Internet making deals.

The salesmen are only vaguely aware of this developing trend. I was standing on the curb next to George and we saw one of these high-demand SUVs ready for delivery.

“Another damn Internet sale,” George said. “Why don’t they turn that car over to us? We’d get a grand over sticker. Instead they’re selling it at invoice. Does that make sense?” As the days passed I noticed more and more cars marked “” And as I approached people on the car lot they often informed me that they were here to see the fleet manager. More Internet customers.

This indicates that wealthier, computer-savvy customers may be circumventing the sleazy sales tactics, leaving the sharks to prey only on poorer, less-informed customers. It could develop into yet another element of the “poor tax.”

HT: Consumerist


Claim of Unilateral Mistake Confers Right to Repossess Non-Financed Car?

A quick contracts/property/tort/consumer law hypothetical for incoming first-year law students (and their professors) to ponder over:

Car dealer sells a used pick-up truck to Buyer for $8,100 and a trade-in. Buyer pays the full amount by personal check and drives the truck off the lot. Dealer then calls Buyer at home and tells him that they looked up the wrong number in their book; the truck actually costs $10,000 more. Dealer tells Buyer that either he has to return the car and they’ll pay him $500 for his trouble, or he needs to cough up the extra $10,000. Buyer refuses.

In the middle of the night, the Dealer comes and “repossesses” the truck from Buyer’s driveway. Buyer’s trade-in is returned to him. Buyer’s check is not cashed.

Dealer claims that the contract was invalid because “one party ma[de] a mistake, and the other party knew or should have known that a mistake was made.” (See here for more details from WTVF-Nashville, and note the video link on the upper right. The file-dropping bit seems right off the Daily Show.) Assume that the Blue Book value of the truck is $21,240, and the trade-in was worth only a nominal amount.

Discuss; was there a valid contract? What claims does Buyer have, and even more important, what remedies should he get?

(HT: Consumerist)


Setting the Bar, and the Limits of Empirical Research

Larry Ribstein and Jonathan Wilson are debating the merits of a strong, exclusionary, state bar.

Wilson’s position is pro-Bar:

Deregulating lawyers as punishment or retribution for a profession that has lost its way would be a recipe for disaster. Deregulating the practice of law would open the floodgates to fraud of every conceivable variety and would only compound the problems that the readers of these pages see in our civil justice system.

Ribstein, naturally, is pro-market:

Big law firms provide a strong reputational “bond” . . . Lawyers can be certified by private organizations, including existing bar associations, which can compete with each other by earning reputations for reliability. . . .We could have stricter pleading rules, or require losers to pay winners’ fees. Or how about this: let anybody into court, but adopt a loser pays rule for parties that come into court represented by anything less than a lawyer with the highest possible trial certificate . . . Even if only licensing would effectively deal with this problem, the licensing scheme should be designed specifically to protect the courts. Instead of requiring the same all-purpose license to handle a real estate transaction and to prosecute a billion-dollar class action, we could have a special licensing law for courtroom practice, backed by tight regulation of trial lawyers’ conduct – something like the traditional barrister/solicitor distinction in the UK.

Josh Wright has picked up the thread of the discussion at TOTM, and suggests that empirical evidence would inform this debate. Unfortunately, as both Larry and he note, there is a paucity of useful studies on point:

If I recall, the Federal Trade Commission has recently been involved in some advocacy efforts in favor of limiting the scope of unauthorized practice of law statutes. My sense is that a number of states must have relaxed unauthorized practice of law restrictions (I think Arizona is one), or similarly relaxed restrictions on lawyer licensing, such that one could directly test the impact of these restrictions on consumers in terms of prices and quality of service. There must be work on this somewhere.

Solove and I have gone around on this question before (see here for the powerful pro-licensing position, and here and here for Solove’s “response”).

Generally, I like Josh’s intuition. It would be quite useful to look to Arizona, or other natural experiments, to help us to answer the problem of the utility of the Bar Exam and other licensing barriers. Surely, there is no reason in the abstract to preserve an ancient system that keeps lawyer fees artificially high, diverts millions of dollars from law students to Barbri, and causes no end of mental anguish simply because it provides a new jurisprudential lens!

But I’m quite skeptical that this is an answerable question, at least in the short term. My thinking is informed somewhat by the new Malcolm Gladwell New Yorker essay about basketball. Although Gladwell extols the virtues of statistical analysis (instead of anecdote, judgment, and valuing the joy of watching Allen Iverson triumph despite his height), the lesson I took from the piece was that:

Most tasks that professionals perform . . . are surprisingly hard to evaluate. Suppose that we wanted to measure something in the real world, like the relative skill of New York City’s heart surgeons. One obvious way would be to compare the mortality rates of the patients on whom they operate—except that substandard care isn’t necessarily fatal, so a more accurate measure might be how quickly patients get better or how few complications they have after surgery. But recovery time is a function as well of how a patient is treated in the intensive-care unit, which reflects the capabilities not just of the doctor but of the nurses in the I.C.U. So now we have to adjust for nurse quality in our assessment of surgeon quality. We’d also better adjust for how sick the patients were in the first place, and since well-regarded surgeons often treat the most difficult cases, the best surgeons might well have the poorest patient recovery rates. In order to measure something you thought was fairly straightforward, you really have to take into account a series of things that aren’t so straightforward.

I know how I would test the direct cost of legal service in Pennsylvania, and I’ve no doubt that it would go down if I (by fiat) abolished the state bar. But I have no good idea of how we can measure lawyer “quality”. To take something as obvious as criminal defense, some really good public defenders will lose every case for a year, but take comfort in having not lost on the top count of a single indictment. Saying that a public defender who went 0 for 50 in 2005 was a less “good” attorney than a prosecutor who went 50-0 would be a real problem. Facts drive litigation, and make empirical investigation of lawyer quality as a quantitative matter hard. And that is for attorneys who perform in public. How do you evaluate the relative strength of deal counsel on a gross level? Count the typos in the document? Talk with the business folks, and ask who got in the way less? [Obviously, deal counsel can be very good and very bad: the point is we need metrics that are easily coded by, say, research assistants.]

So here is the question for our readers. Can you design an empirical project that measures both litigation and transactional practice quality as a function of licensing?


No Longer A Nation of Miniature Coke Addicts?

The nation’s biggest soft drink manufacturers agreed today that they will no longer sell soda (or “Coke”, for those of us lucky enough to be born Southerners) in the nation’s schools. (Read the New York Times’ account here.) (Somewhat inexplicably, it’s still okay to sell diet soda and “fitness drinks” to high school students.) The deal was brokered by the Alliance for a Healthier Generation, a joint initiative of the Clinton Foundation and the American Heart Association. President Clinton, in announcing the agreement, declared his firm conviction that the soda companies have nothing but benevolent intentions:

“This is a truly significant thing for an industry to do, not entirely free of risks on their part, not only economic risks but backlash from the consumer. … And they did it, I believe, because … they care about the future of our young people.”

Call me a cynic, but couldn’t the threat of massive class action litigation have had a little something to do with it, as well? As reported by several media outlets back in December, the Center for Science in the Public Interest had teamed up with the anti-tobacco plaintiffs’ bar to bring a series of lawsuits in state courts to force the soda companies to give up their lucrative sales contracts with the nation’s schools. Back then, the industry was reportedly “gearing up for a counterattack” – for example, publishing their own studies that purported to show that the average high school student only drinks one can of Coke per week from a school vending machine (a claim that I personally find very difficult to, um, swallow). Apparently the industry decided that a quick surrender was a better way to go.

And in related news on the Arkansawyers-who-would-be-President front (see my previous post on the subject here), Arkansas Governor Mike Huckabee is getting some of the credit for brokering the agreement – and thus some much-needed publicity in his as yet-undeclared dark-horse candidacy for the 2008 presidential election. Huckabee – now being described by the New York Times as a “leader in the movement to help stamp out childhood obesity” – has clearly found an issue to call his own, and one that fits him to a tee. (For an insightful — and amusing — look at Huckabee’s chances, check out the incomparable John Brummett’s editorial on the subject here.)

All of which has me pondering the following:

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Fat: The Terror Within

William Saletan has an interesting column up today on the anti-fat litigation and regulatory movement newly afoot. The Surgeon General apparently said the fight against obesity would “dwarf 9-11.” Saletan previews the stages of the coming battle: (1) activists will define the harmed class as a particularly susceptible one (kids); (2) experts will show how that the food industry and its audience (the obese) are externalizing costs on the rest of society; and (3) regulators will redefine junk-food as non-food.

This stages-of-battle could probably be generalized to most consumer protection/muckracking crusades. But why do we need all of this work to justify paternalistic interventions?

There are a few reasons, I think, but the most significant is that libertarians have been, relative to their number in American society, remarkably successful norm entrepreneurs. Over time, they have encouraged folks to think of consumption as an (a) individualized; (b) expression of freedom; that (c) is the product of free choice. And why not? The alternative, that folks’ tastes are created and managed by industry, that choice is limited, and that bad decisions abound, leads to increasingly large regulatory interventions that almost always turn sour.

The idea that we’re about to see a real resurgence of federal regulation seems farfetched, and I have to think that if obesity lawsuits ever got purchase (which they have not, to date) we’d see a rush to congress for immunity/preemption. That’s because, as Saletan alludes to, but my co-blogger Dan Filler has nailed, obesity is an example of a “risk society panic,” with no clear moral victims, but more importantly, no folk devils to focus society’s ire. Thus, whatever strategy activists come up with in the battle against fat, to justify uprooting the libertarian background rule, we’ll need a villain.


The Datran Media Case: Information Privacy Due Diligence

datran.jpgRecently, New York AG Eliot Spitzer settled a case against Datran Media that could have some wide-ranging implications for information privacy law. Datran Media styles itself “a leading performance-based marketing company with Enabling Technology that connects marketers to consumers through a comprehensive set of email marketing and digital media services.” This is basically a verbose way of saying that it sends unsolicited email, which is perhaps a kind way of describing spam.

Datran obtained personal information from other companies which violated their privacy policies in selling the data to Datran. According to the AP:

The Internet “customer acquisition” companies proclaimed on their websites that they wouldn’t lend or sell the information provided. Consumers were often enticed to reveal their names, addresses and financial data in exchange for free iPods and DVD movies.

Spitzer accused Datran of knowing of the companies’ pledges but nevertheless spamming those consumers with unsolicited e-mails advertising discount drugs, diet pills and other products. Spitzer’s staff said it believed this was the largest deliberate breach of Internet privacy discovered by U.S. authorities.

In other words, the theory of the case was that Datran engaged in “unfair and deceptive trade practices” when it acquired and used information which it knew was being improperly supplied. Datran settled with Spitzer for $1.1 million. The settlement agreement is here.

Obviously, the database industry is up in arms. In an article critical of the case, Kirk Nahra, a partner at the law firm of Wiley Rein & Fielding, LLP, describes it as an “Alice-in-Wonderland result.” He observes that “Spitzer is holding Datran liable for the list seller’s violation of its own policies.” He goes on to write:

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Three Interesting Things About The New Source Review Decision

The DC Circuit’s invalidation of EPA’s Clean Air Act regulations exempting certain equipment replacements from the new source review process led the Times last weekend, and one look at the number of lawyers who participated in the appeal tells you that a lot of parties thought the case was important. What happened and why should you care?

Very roughly, if you build a new source of air pollution, you have to get a permit to pollute – this is the so-called new source review process. However, if you’re replacing equipment on an old pollution source, you may be able to avoid new source review – or so thought EPA, which passed a rule providing that “the replacement of components with identical or functionally equivalent components that do not exceed 20% of the replacement value of the process unit and does not change its basic design parameters is not a change” triggering new source review. The court held that EPA’s reg was inconsistent with the plain language of the CAA, which, it held, requires new source review upon any modification of the old source that increases pollution. As the court held, “Congress defined ‘modification’ in terms of emission increases, but” EPA’s proposed reg “would allow equipment replacements resulting in non-de minimis emission increases to avoid” the permitting process.

1. This panel included Judge Janice Rogers Brown, the controversial and only recently confirmed libertarian. Perhaps Brown’s hostility to regulators in general explained her hostility to this business friendly interpretation of a congressional directive … but perhaps also this was an easy textual case, or she was persuaded by the brilliant judge who wrote the opinion, Judith Rogers (a judge who has, in the past, hired some law clerks I greatly admire).

2. As is often the case these days, the lineup was states + environmental groups v. federal regulators + industry. I’ve been impressed for a while by the number of legal foot soldiers that environmental groups have gotten out of state attorney general offices.

3. The Times notes that the arena of Clean Air Act combat has shifted from Congress, which wrote an incredibly detailed and quite constraining statute (a very different statute than those with New Deal era broad grants of regulatory authority) to EPA and the courts, who are interpreting that statute in a context where legislative review is unlikely – “there has been no real movement in that direction in recent years.”


An Update on Food Labels

I’ve gotten some on- and off-line comments about my federalism-in-food-labeling post from over the weekend. One reader points out that the market is already experimenting with food labeling, through chains like Whole Foods and Trader Joe’s, which negotiate with food manufacturers for certain production & labeling practices. Thus, if you want to do business with Whole Foods, you need to avoid a really long list of additives. Trader Joe’s, which acknowledges FDA preemption of food labeling here, is quite proud of its business of re-branding private label products so that consumers can be assured of quality and price guarantees. As the reader concluded, we can see the success of such stores as an expression of consumer demand for labeling. In reality, people don’t want to actually know what is in products, they want to know that food is safe, healthy, pro-environment, etc. When you buy at Whole Foods, you get the comfort of your convictions, without actually having to read the fine print: the store has done it for you. On this understanding, we don’t need states to experiment with label design or content: the market will sort out this problem nicely.

Another reader heatedly claims that I’ve underestimated the cost of labeling products for multiple states. So long as producers, and not distributors, do the labeling, it will be cost-prohibitive. My response to that argument is that current labeling practices are contingent on the FDA’s top-down command and control system. In a world with 50 different state practices, labeling would likely be done on-site through, say, the same type of sticker machine that currently set prices. The reader, in turn, maintains that the costs of labeling ought to considered in light of the negligible consumer benefits, and asserts that studies have found only 11% of supermarket consumers actually read labels before purchasing products. This number is debatable, of course. (A study here claims that 56% of subjects read labels some of the time). But the point that inconsistent labeling regimes would put severe burdens on smaller manufacturers obviously a good one, and would caution against allowing experimentation when the pro-consumer effects are as yet not quantified.


Experimenting With Food Labels

label.jpgSteve Bainbridge highlights pending federal legislation to preempt state food label rules that are inconsistent with the FDA’s standards. He comments that the law would be a “perfectly plausible exercise of Congress’ power under the Commerce Clause.” I agree, even though there are non-frivolous arguments to the contrary (federalism concerns for states’ police powers; locally grown foods; etc.) But putting aside constitutional shibboleths, I think that just because Congress has the ability to preempt state legislation doesn’t mean it should.

The argument against allowing states to add new disclosure requirements to food labels goes like this. The great competitive strength of the American economy is its internal free trade network. Inconsistent regulation internally is to be avoided where possible, because it results in inefficiencies as producers are forced to retool their products for different states. Moreover, producers must increase their legal compliance costs, hiring lawyers to keep track of regulations in the several states, capture regulators lobby in 50 state legislatures, etc.

But such arguments discount the benefits of permitting experimentation in dealing with cognitive problems. The science of information processing is still relatively young: we haven’t gotten a handle on what disclosures trigger what types of consumption activity. As Larry Ribstein argues in a very different context here allowing states free reign to try different regulations will – as Brandeis long ago argued – create a natural laboratory allowing experimentation in reducing cognitive error. States that require disclosure of facts that consumers find unimportant will soon receive feedback to that effect. Similarly, if producers (as expected) increase prices in markets requiring more disclosure, we could obtain some evidence as to how much consumers actually value labeling. [This could get complicated given cross-border purchasing and free-rider problems, I suppose]. But most importantly, states could try different approaches to the problem of the method of regulation itself. Is the best way to encourage the right disclosure a rule (you must state the number of milligrams of sodium) or a standard (you must disclose information that consumers find valuable)? Should this process be run by regulators (as it is in the federal system) or the common-law jury?

We could start getting answers to such questions, but only if the feds back off.


Netflix and “Throttling”

netflix1.jpgNetflix allows customers to rent movies online — as many as they want. According to the company’s website:

With Netflix you can rent as many DVDs as you want from the comfort of your home and have them delivered to your door in about 1 business day! There are no late fees and no due dates, and shipping is free both ways. Plans start at $9.99 plus any applicable tax. With our most popular plan, 3 at-a-time (Unlimited), you can rent as many DVDs as you want for just $17.99 a month plus any applicable tax. You keep a revolving library of up to 3 DVDs at a time and can exchange them for new available DVDs as often as you like.

Sounds like a great deal, right? Well, if you use it really well to your advantage, Netflix will penalize you. According to the AP:

Manuel Villanueva realizes he has been getting a pretty good deal since he signed up for Netflix Inc.’s online DVD rental service 2 1/2 years ago, but he still feels shortchanged. That’s because the $17.99 monthly fee that he pays to rent up to three DVDs at a time would amount to an even bigger bargain if the company didn’t penalize him for returning his movies so quickly.

Netflix typically sends about 13 movies per month to Villanueva’s home in Warren, Mich. — down from the 18 to 22 DVDs he once received before the company’s automated system identified him as a heavy renter and began delaying his shipments to protect its profits.

The same Netflix formula also shoves Villanueva to the back of the line for the most-wanted DVDs, so the service can send those popular flicks to new subscribers and infrequent renters.

The little-known practice, called “throttling” by critics, means Netflix customers who pay the same price for the same service are often treated differently, depending on their rental patterns.

“I wouldn’t have a problem with it if they didn’t advertise ‘unlimited rentals,'” Villanueva said. “The fact is that they go out of their way to make sure you don’t go over whatever secret limit they have set up for your account.”

Originally, Netflix kept its differential treatment of customers a secret, but after a class-action lawsuit, Netflix now warns about this in the fine print:

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