Category: Consumer Protection Law


Three Policy Interventions for Reducing Privacy Harms

Thanks so much to Danielle and Concurring Opinions for inviting me to blog. This is an exciting opportunity and I look forward to sharing my thoughts with you. Hopefully you will find these posts interesting.

There are many policy interventions that legislators can impose to reduce harms caused by one party to another. Two that are very often compared are safety regulations (mandated standards) and liability. They lend themselves well to comparison because they’re generally employed on either side of some harmful event (e.g. data breach or toxic spill): ex ante regulations are applied before the harm, and ex post liability is applied after the harm.

A third approach, one that we might consider ‘sitting between’ regulation and liability, is information disclosure (e.g. data breach disclosure (security breach notification) laws). I’d like to take a few paragraphs to compare these alternatives in regards to data breaches and privacy harms.

Three Interventions


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Gambling? In Casablanca?

With each passing week, there are more embarrassing revelations about foreclosure practices. Here’s a mind-boggling chart, limning failures to follow “obligations . . . from secured credit and trust law.” Adam Levitin argues that most legal observers are slow to recognize how bad things have gotten, because they believe “there’s no way there were massive screw-ups because thousands of top Wall Street legal minds were working on securitization deals.” Levitin responds: “the best legal minds in the country weren’t doing diligence on endorsements on securitization deals.”

After reading Levitin’s testimony, and much of Michael Hudson’s book The Monster, I was reminded of a Global Witness report called Undue Diligence: How Banks Do Business with Corrupt Regimes. The report shows how major financial institutions have enhanced their profits by not looking too carefully into the details of transactions they engage in. As Global Witness concludes:
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Argument in Class Waiver Case Favors Consumers, States

Power between enterprises and individuals hangs in the balance as the U.S. Supreme Court considers whether organizations can prevent people from banding together to challenge crooked practices that involve stealing small sums from large numbers of people. The judges and lawyers engaged in a riveting oral argument on the hot topic in a case pitting the mighty AT&T against a couple of California citizens. The case also pits the federal government against the states.

At issue are the clauses that companies now routinely include in standard form consumer contracts requiring disputes to be resolved in one-on-one arbitration. People give up the right to mount class claims in arbitration or court. Some unscrupulous companies use this as a way to cheat large numbers of people out of small amounts of money.

Companies following this route benefit from a strict federal law (the Federal Arbitration Act, or FAA) saying states cannot treat arbitration clauses differently than they treat other contracts. Courts nationally have struggled to evaluate whether these clauses pass standard contract tests of unconscionability. Yesterday’s case will determine whether those states are taking the right approach.

The principal theme of questioning probed how the Justices could tell if a state’s judges comply with the FAA’s mandate to treat arbitration clauses like other contracts. The company’s lawyer (Andrew Pincus) said it was simple: look at the general unconscionability doctrine applied to all contracts and compare it to the unconscionability doctrine applied to arbitration clauses.

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Nicolas Cage Broke on $20 Million A Year

Include the Hollywood-based actor Nicolas Cage on the list of victims amid the real estate crisis and ensuing foreclosure flood. A California court last week ordered him to honor the judgment of a Nevada court by paying $2.4 million to a lender who foreclosed on the actor’s Las Vegas resort home. As with many other borrowers, though, Cage doesn’t have the money to pay.

That may sound astonishing for an actor whose 50 roles in big films over 20 years make him among the highest paid people in the world. Cage’s problem apparently is that, despite the massive cash, he still lives beyond its means.

Besides an apparent spending compulsion, during the real estate boom of the 2000s, he acquired dozens of properties whose prices seem to have risen catastrophically just before he bought them, and fell to the depths in the last three years. Not having any savings to buffer the losses, he’s in default not only on housing bills but owes millions in back taxes.

Financial embarrassment is compounded by bad publicity about his lifestyle. Some he brought on himself. By filing a $20 million lawsuit blaming his straits on his manager, Samuel Levin, Cage provoked a counterclaim with mortifying allegations of a life out of control, even by Hollywood standards.

The allegations in Cage’s complaint sound far-fetched; Levin’s counterclaim sought a mere $120,000 for unpaid fees, small under a contract that paid Levin 5% of Cage’s income since 2001 (running to many millions). That may explain reports saying the suit and countersuit have been dismissed. But some of the pleadings are salacious–with lessons for everyone.

NOTE: For more stories like this about celebrities and their dealings, see the author’s new book CONTRACTS IN THE REAL WORLD: STORIES OF POPULAR CONTRACTS AND WHY THE MATTER.
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Future of the Internet Symposium: Will Robotics Be Generative?

I don’t know that generativity is a theory, strictly speaking. It’s more of a quality. (Specifically, five qualities.) The attendant theory, as I read it, is that technology exhibits these particular, highly desirable qualities as a function of specific incentives. These incentives are themselves susceptible to various forces—including, it turns out, consumer demand and citizen fear.

The law is in a position to influence this dynamic. Thus, for instance, Comcast might have a business incentive to slow down peer-to-peer traffic and only refrain due to FCC policy. Or, as Barbara van Schewick demonstrates inter alia in Internet Architecture and Innovation, a potential investor may lack the incentive to fund a start up if there is a risk that the product will be blocked.

Similarly, online platforms like Facebook or Yahoo! might not facilitate communication to the same degree in the absence of Section 230 immunity for fear that they will be held responsible for the thousand flowers they let bloom. I agree with Eric Goldman’s recent essay in this regard: it is no coincidence that the big Internet players generally hail from these United States.

As van Schewick notes in her post, Zittrain is concerned primarily with yet another incentive, one perhaps less amenable to legal intervention. After all, the incentive to tether and lock down is shaped by a set of activities that are already illegal.

One issue that does not come up in The Future of the Internet (correct me if I’m wrong, Professor Zittrain) or in Internet Architecture and Innovation (correct me if I’m wrong, Professor van Schewick) is that of legal liability for that volatile thing you actually run on these generative platforms: software. That’s likely because this problem looks like it’s “solved.” A number of legal trends—aggressive interpretation of warranties, steady invocation of the economic loss doctrine, treatment of data loss as “intangible”—mean you cannot recover from Microsoft (or Dell or Intel) because Word ate your term paper. Talk about a blow to generativity if you could.

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Future of the Internet Symposium: Preserving Open Space for User Innovation

First off, thanks to Concurring Opinions and Danielle Citron for hosting this online symposium on Jonathan Zittrain’s The Future of the Internet – and How to Stop it.  Before I launch into my own thoughts, I want to add my own version of the praise that the book has already won.  It is an immensely readable work that succeeds in showing us where we’ve been, how we got to where we are, and the steps to take to avoid going where we’d rather not be.

I have three brief points, involving a comparison with Japan, some thoughts about competition, consumer protection and innovation, and finally, a somewhat different take on the lessons of Wikipedia.

This symposium is incredibly timely, particularly given the concern in recent weeks about the Google/Verizon agreement.  In TFOTI, Zittrain highlights the risks that threaten the Internet’s future, and explains how the net neutrality debate is in some ways a mismatch for those risks.  For example, he points out that the migration from the Internet to, in his words, tethered appliances like the iPhone and TiVo, ultimately provide an end-run around net neutrality on the Internet (pp. 177-185).  Accordingly, he argues that preserving generativity is a better-tailored principle.

The lead in The Economist this week also takes on the Google/Verizon agreement, and critiques net neutrality from a different angle calling America’s “vitriolic net-neutrality debate” “a reflection of the lack of competition in broadband access.”  If you’re reading this symposium, you probably already know, possibly because you read this, that in many other industrialized countries incumbent telcos were forced years ago – and not just in a superficial way – to open up wholesale broadband to competitors.

I’m in Tokyo this academic year thanks to Temple’s long reach across the globe and to my gracious hosts at Keio University Law School.  I’ve been travelling to Japan repeatedly since the late 1980s, and one of the changes I’ve been  struck by is how a country that in the 1990s was generally held to be well behind the U.S. in telecommunications now seems ahead in broadband and mobile Internet.  Read More


Privacy Policy Lessons from Handbook Cases

Just as the hottest practical topic in contract law during the 1990s was whether corporate employee handbooks could be enforced as contracts, among today’s hot practical contract law topics is whether corporate policy statements, especially on the internet, can be enforced as contracts.  We’re in the beginning of a struggle on that point, whose dynamic echoes that of the handbook cases of two decades ago—and we might learn something from them.

Before the 1980s, the common law of contracts was clear that employee handbooks weren’t offers to form contracts and wouldn’t be binding anyway for lack of consideration. Policy statements about employee retention, even those promising not to discharge employees except for cause, weren’t enforceable.

As human resources departments spruced up those handbooks through the late 1980s and early 1990s, to express firmer commitments in seductive language, and the documents proliferated nationally, the doctrine shifted. The handbooks could, if reasonably manifesting such a signal, be offers to form unilateral contracts with employees. By reporting for work every day, employees could be seen to take the action necessary to form a unilateral contract on the handbook’s terms, supplying requisite consideration.

From this shifting legal landscape, employers got the message and took care in handbooks to say what they meant and to mean what they said. The glossy boastful brochures returned to the form of practical utilitarian guides, not dangling inducements of job security that might, for example, discourage unionization.

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Flynn v. Holder, Markets for Bone Marrow, and Abigal Alliance

Over the summer at the annual health law professors’ conference organized by ASLME, I saw a wonderful presentation on Flynn v. Holder from John Robertson, which I think John will be publishing soon. The case is a challenge to the National Organ Transplant Act (NOTA) of 1984’s ban on selling bone marrow filed in the U.S. District Court, Central District of California, and you can view the complaint here.

My main interest in the case is how it will compare to Abigail Alliance v. Eschenbach, a case I helped litigate at the D.C. Circuit en banc stage when I was at the DOJ. Abigail Alliance involved a challenge by terminally ill patients to have access to drugs that had cleared Phase 1 Clinical Testing but had not gone further in the testing process.  There, the plaintiffs succeeded in getting a panel of the D.C. Circuit to to hold that a fundamental right of theirs was being violated by the FDA policy, with a remand for consideration of whether the government could make its showing on strict scrutiny. On rehearing en banc, however, the full D.C. Circuit reversed gears finding no fundamental right (there was no serious argument in the case that the government would not prevail on rational basis review).

In many ways, Flynn is a beautifully set up test case. The primary plaintiff is very sympathetic — a “single mother of five with three daughters who suffer from a deadly bone marrow disease.” Because bone marrow is renewable, and many other renewable “organs” (think sperm and egg) explicitly fall outside of NOTA’s prohibition, there is an air of arbitrariness here. The plaintiffs do not want to buy bone marrow in crass commercial terms, but instead to “create a pilot program that would encourage more bone marrow donations by offering nominal compensation—such as a scholarship or housing allowance.” While I do not think this fact actually allows us to avoid the the corruption form of the anti-commodificationist argument (I may blog more on that topic soon), on a superficial level it does seem to reduce the strength of at least one talking point. The fact that we already tolerate altruistic bone marrow donation suggests that the risk-prevention rationale that was central in Abigail Alliance faces some problems here. Indeed as I , Lori Andrews, and others have argued in the context of reproductive services, in some ways the “coercion” or “exploitation” concerns that are sometimes raised in anti-commodificationist arguments may be more worrisome in the altruistic and familial setting than in arm’s length market arrangements. The case also seems to compare favorably on crowding-out concerns. Although the Abigail Alliance court did not reach the issue (because whether a fundamental right was present dominated the analysis) the government offered a somewhat attenuated crowding out argument: that the availability of experimental drugs outside of clinical trials would reduce the enrollment in clinical trials, and therefore slow either approval of these drugs (and widespread availability) or a demonstration that they were unsafe or ineffective. Though attenuated, this was a concern that many took quite seriously in the run-up and aftermath of the case.  Here, by contrast, I think the crowding out argument is more straightforward and is similar to one that people associate with Richard Titmuss’ work as to blood sale, that adding commercial elements will drive altruistic donation out of the market. To be sure that is an empirical claim, but one that seems less plausible to me than the parallel claim in Abigail Alliance, and I think here again the charitable/foundation approach may blunt some concerns about the transformation of the social meaning of bone marrow donation.

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A Gummy Lawsuit

A man has bad teeth.  He chews Trident Xtra Care gum, which promises that it “Strengthens and Rebuilds Teeth” by “fill[ing] in the tiny crevices where cavities can form and leav[ing] teeth more resistant to plaque acids.”  His teeth remain rotten.  It’s America.  So he sues for deceptive business practices, and seeks to represent a class of gum purchasers.   You name the defenses.


Victory for Justice in Fensterstock

In a victory for access to justice, the Second Circuit held Monday that a student loan agreement forbidding a borrower to make claims on a class-wide basis in arbitration or litigation was unconscionable under California law and that California’s law was not preempted by the Federal Arbitration Act. It also said the agreement’s severability clause didn’t open the way to compellling class arbitration because, once the other clauses were out, the agreement was silent on dispute resolution, so it couldn’t order class  arbitration.

This is a big case as the first point addresses the issue SCOTUS will hear next term in AT&T v. Concepcion, where AT&T claims the FAA preempts California law because it discriminates against arbitration clauses compared to other kinds of contracts. The second point, on severability, takes up lessons SCOTUS articulated in last term’s Stolt-Nielsen case. It’s important as a broad and convincing contribution to intense national disputes over dispute resolution.

 The substantive objection in the case, Fensterstock v. Education Finance Partners, concerns how the lender allocated monthly loan repayments between interest and principal, using a squirrely provision allocating to interest all payments except those received exactly on the monthly payment due date. The borrower says that’s a hidden fee, stretching out loan amortization, and makes substantive claims for breach of contract and unfair trade practices. The agreement also contained a dispute resolution clause, limiting both sides to individual arbitration—not class arbitration or class litigation or any kind of litigation. It named California as governing law.

The lender wanted to compel arbitration, citing the FAA, requiring courts to do that for any arbitration clause in a contract involving interstate commerce, except those found invalid under general contract law principles. The borrower, a lawyer three years out of law school when he consolidated $52,000 in student loans, claimed the clause was unconscionable under California law and the court agreed, throwing out the clause and opening up a class action lawsuit.

The opinion is meticulous in extracting extensive block quotations from dozens of California cases on point, including the pivotal Discover Bank case. Drawing on a state statute making void contracts exculpating one from fraud, that case finds that some dispute resolution clauses in consumer contracts trip over it, being against law, public policy, and unconscionable. The statute and policy target enterprises who overcharge large numbers of ordinary people small amounts, then insulate themselves from liability using non-negotiable contracts preventing the small stakes from being accumulated to make a case worth pursuing.

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