In finding preempted California contract law holding unconscionable clauses in consumer adhesion contracts mandating bilateral arbitration, the Court’s 5-4 opinion by Justice Scalia breaks only that little bit of new ground. 

The opinion’s principal notable points are (1) to stress more intensively than ever that a primary purpose of federal arbitration law is to promote bilateral arbitration, to streamline dispute resolution, and celebrate the informality of bilateral arbitration against class arbitration and (2) [...]]]> Par for the Supreme Court course, its opinion in AT&T Mobility is rich with empty rhetoric about arbitration being a creature of contract while being more explicit than ever that what matters in these cases is the Court’s powerful national policy strongly favoring a particular form of arbitration over other ways to resolve disputes.

In finding preempted California contract law holding unconscionable clauses in consumer adhesion contracts mandating bilateral arbitration, the Court’s 5-4 opinion by Justice Scalia breaks only that little bit of new ground. 

The opinion’s principal notable points are (1) to stress more intensively than ever that a primary purpose of federal arbitration law is to promote bilateral arbitration, to streamline dispute resolution, and celebrate the informality of bilateral arbitration against class arbitration and (2) to elaborate the differences between bilateral and class arbitration that the Court assumed everyone knew in last term’s Stolt-Neilsen opinion.  And the Court continues to say that all of this is a matter of contract!

The Court stresses that its jurisprudence treats the federal arbitration statute as expressing both a liberal federal policy favoring arbitration and that arbitration is a matter of contract. Without showing awareness of the inherent conflict in this paired purpose, and parading its rhetorical feathers, the Court said the upshot is to put arbitration agreements on an equal footing with other contracts, including as to defenses.

The Court could not accept the validity of the California unconscionability defense, however, because it did not advance the national policy. Justice Scalia gave a new definition of that national policy, again combining two ideas that are in conflict while pretending they are in harmony: “to ensure enforcement of arbitration agreements according to their terms, so as to facilitate streamlined proceedings” (emphasis added).

The opinion fights tirelessly but unsuccessfully to prove that it has not made up this new version of the national policy. It struggles strenuously but unsuccessfully to persuade us that there is no conflict between its devotion to arbitration and basic principles of Anglo-American contract law.

The opinion gestures about how carefully crafted the contract law it finds preempted to be, but without appreciating contract law aspects of the stance. Instead, the Court commits contradictions that manifest a lack of understanding of contract law and even life. Most strikingly: on page 12 Justice Scalia observes that consumer contracts are totally “adhesive” today yet on page 13 strikes the California law because the aggregate actions it ordains are not “consensual.”

The passages are oblivious to how difficult it is to conceive of an adhesion contract as consensual. There may be ways to reconcile these propositions, but it would require much more honest confrontation with the fact that it is the national policy favoring arbitration alone that is driving things, not contract, not freedom, and not volition.

Perhaps recognizing that its Stolt-Nielsen opinion was facile, declaring differences between bilateral and aggregate arbitration so fundamental that you cannot read the word arbitration to mean the latter, the Court spends four pages explaining the differences. The upshot is that bilateral arbitration is faster, cheaper and more informal than aggregate arbitration and therefore advances the Court’s national policy.

Despite those exertions that rest entirely on the premise that there is a national policy favoring bilateral arbitration, the Court concludes this discussion with this non sequiter: “Arbitration is a matter of contract and the FAA requires courts to honor parties’ expectations.”  The expectations it has delineated and insists on honoring are its own, despite attributing them to contracting parties.

The only unusual thing I found in the opinion is a strange footnote (number 6). The Court tells us that states can find other ways to address concerns about contracts of adhesion, including, it says, “requiring class-action waiver provisions in adhesive arbitration agreements to be highlighted.” It does not cite its Doctor’s Associates opinion, which unanimously held preempted a Montana statute that required an arbitration clause to be highlighted.  Hmmm.

As expected, Justice Breyer’s dissenting opinion does not address or appreciate the gap between what the Court says and does about contracts in its arbitration jurisprudence. It instead fights the majority on the purpose of the statute concerning arbitration as a national  policy, the differences between arbitration and litigation, and the differences between bilateral and aggregate arbitration.

Only Justice Thomas, as usual, offers any serious effort to engage in contract law discussion and analysis. He struggles to map the statute onto the law of contracts. He takes the statutory text literally, though, treating the word “revocation” in its savings clause to recognize only those defenses to arbitration agreements that affect the making of a contract rather than its enforceability or validity. This enables him to concur.

It is a far better ground than the majority offers because it is faithful to contracts and contract law. It was a point made in an amicus brief by a group of contract law professors (including my colleague Greg Maggs), though I do not see that brief cited.  While I would disagree with that exercise in statutory interpretation, at least it is a legitimate discussion about contract law, not mere rhetoric. 

I can now conclude my article reviewing the Court’s jurisprudence in this area, though I don’t need to make many changes, with this disappointing opinion meeting my expectations.

 I doubt, however, the Court will seize the opportunity.  Instead, the Court likely will continue to tell us that its arbitration jurisprudence is merely applied contract law, while its applications will continue to coerce people into arbitration because the Court has established a national policy favoring arbitration. 

That is the lamentable assessment provided in my new article on the subject, Rhetoric versus Reality in Arbitration Jurisprudence: How the Supreme Court Flaunts and Flunks Contracts (and Why Contracts Teachers Need Not [...]]]> Lawyers keep telling clients that arbitration is a matter of contract, not coercion. That follows Supreme Court rhetoric that’s belied by Supreme Court practice.  The Court’s pending case in AT&T Mobility v. Concepcion gives the Court a final chance to resolve the gap between its talk and action concerning arbitration. 

 I doubt, however, the Court will seize the opportunity.  Instead, the Court likely will continue to tell us that its arbitration jurisprudence is merely applied contract law, while its applications will continue to coerce people into arbitration because the Court has established a national policy favoring arbitration. 

That is the lamentable assessment provided in my new article on the subject, Rhetoric versus Reality in Arbitration Jurisprudence: How the Supreme Court Flaunts and Flunks Contracts (and Why Contracts Teachers Need Not Teach the Cases).

As with practicing lawyers, legal scholars have generally ignored this rhetoric-reality gap too, many routinely repeating that arbitration is all about contract (a notable  exception is David Horton).  As a teacher of Contracts for 20 years, I began to hear this rhetoric last summer, beginning with my receipt of a reprint of an Illinois Law Review article by noted arbitration scholar Thomas Stipanowich. 

In a comprehensive review of the state of arbitration law and practice, the piece criticized editors of Contracts casebooks for paying too little attention to arbitration and especially to how the attention given was often extremely negative. With modest exceptions, including in Ian Ayres’ casebook, Contract law books and courses have not generally treated arbitration much and the treatment often is in the context of illustrating doctrines like unconscionability or lopsided terms not comporting with reasonable expectations of a community. 

I began following pending Supreme Court cases on the subject and scrutinizing those handed down in preceding terms. I found the talk about contracts and contract law intriguing because it made it sound as if arbitration was at the center of contract law and that contract law was at the center of arbitration law. That made it seem irresponsible for me, Contracts casebook editors, and other teachers, to leave arbitration at the margins of the Contracts course or outside it altogether.

Alas, the truth is that contract and contract law have so little to do with what happens in arbitration jurisprudence, particularly compared to Court rhetoric, that it would confuse or mislead students taking Contracts to provide it as an illustration. To that extent, arbitration warrants the glancing treatment in the Contracts course it gets, followed by an optional upper-level course.  

Among the many costs of the Court’s rhetoric-reality gap are those manifest in the AT&T case, on which the Court is now struggling to write an opinion.

In AT&T, the issue is whether California unconscionability law applies to “any contract,” within the meaning of the Federal Arbitration Act as the Court construes it. The case involved a form contract where a consumer claimed a fraud of $30 and sought to wage a class arbitration—which a contract clause barred. California precedents classify as unconscionable procedurally-adhesive clauses that can be used to prevent people from banding together to challenge crooked practices that involve stealing small sums from large numbers of people.

The case shows how the Court’s rhetoric is at war with itself: rhetoric from pure nineteenth century freedom of contract suggests upholding the bar because the clause is in the written agreement; rhetoric about state contract law suggests striking the bar because the written agreement is invalid. The Court’s challenge is thus to state a test of preemption: how to tell if a state’s judges comply with the FAA’s mandate to treat arbitration clauses like other contracts?

At oral argument, the company said it was simple: look at general unconscionability doctrine applied to all contracts and compare it to unconscionability doctrine applied to arbitration clauses. Taking the FAA literally, the company argued that the comparison must be between the unconscionability doctrine applied to arbitration clauses and general unconscionability doctrine applicable to “any contract”—not just other dispute resolution clauses.

This approach reflects how the Court’s jurisprudence induces thinking about the question. Under that jurisprudence, moreover, it is difficult to escape concluding that the doctrine does not apply to “any contract.” It applies to a species of contracts that enable cheating small sums from large numbers of people. But preempting the law and upholding the statute on such grounds would be a strange result. Such a stance suggests that contract law is monolithic and static when in reality it is rich and dynamic.

Beyond rhetoric, it’s not obvious how the Court’s national policy favoring arbitration applies. Simply to favor arbitration does not necessarily answer whether a clause banning class arbitration promotes or retards that policy. But a national policy favoring a particular kind of arbitration—the swift and cheap bilateral form, not the lengthy and costly class form—clearly calls for reversing the lower courts, preempting state contract law that holds such bans unconscionable. And the Court’s national policy favoring arbitration increasingly looks to favor that kind of arbitration, not class arbitration, and certainly not such arbitration as contracting parties may agree to.

 The Court would do well to find a more practical and legitimate approach to assessing the validity of state law under the FAA. It would be best to abandon the rhetoric and instead embrace contracts, contract law, and federalism. The first principle would be federal deference to state courts and state contract law. That could be subject to qualifying principles to catch subterfuge based on an objective determination about a state’s faithfulness to the FAA. States would be freer to develop contract law for application across settings, including to contracts with arbitration clauses.

Citizens could rely on venerable principles of freedom of contract (and freedom from contract) developed in the common law rather than the truncated versions of those doctrines applied underneath the Court’s rhetoric. Alas, the Court’s jurisprudence has not equipped it to reach such a result, which would require retreating significantly from its exuberance for the national policy favoring arbitration. It would be impressive to see the Court make a switch in the AT&T case. But it would also be surprising.

For years, the National Highway Traffic Safety Administration has declined to post on its Web site reports from automakers about problems with their cars and about specialized warranty extensions that could save consumers large sums on repairs. . . . The technical service bulletins . . . provide information on unusual problems with vehicles . . . . Special service campaigns are a form of technical service bulletin that often tell dealers of warranty extensions for particular repairs. “Many manufacturers have asserted that technical service bulletin information is copyrighted and will not waive those copyrights,” [said] an agency spokeswoman . . . [...]]]> Two items of note on this topic recently. First, the NYT reports on NHTSA’s lazy approach to IP overreach by automakers:

For years, the National Highway Traffic Safety Administration has declined to post on its Web site reports from automakers about problems with their cars and about specialized warranty extensions that could save consumers large sums on repairs. . . . The technical service bulletins . . . provide information on unusual problems with vehicles . . . . Special service campaigns are a form of technical service bulletin that often tell dealers of warranty extensions for particular repairs. “Many manufacturers have asserted that technical service bulletin information is copyrighted and will not waive those copyrights,” [said] an agency spokeswoman . . . . “N.H.T.S.A. has a legal obligation to abide by copyright law.”

NHTSA could easily excerpt the gist of bulletins as fair use. Or it could communicate facts in them without using any of the actual language or diagrams they contain. Anyone who has taken a week of copyright knows about the idea/expression or fact/expression dichotomy. But copyfraud obfuscates this obvious workaround.

Second, ongoing legal battles over Toyota’s sudden acceleration incidents may lead to “security measures typically reserved for classified government secrets:”

The fight centers on access to Toyota’s source code, the software that controls sophisticated engine management and other electronics in its vehicles. Plaintiffs’ attorneys believe the code might contain evidence that could bolster their cases. The Japanese auto maker has been fighting to restrict access to the software, saying it needs to protect what it calls the “crown jewel” of its global enterprise.

Toyota said the attorneys should only be allowed to view parts of the code in a highly secure room, the likes of which is used by members of Congress or in trials against terrorists and spies for viewing classified information.

As I note in the piece, this kind of “qualified transparency” will become more and more common in tech disputes. Debates about “channeling” innovation protection (to patent or trade secret law) will increasingly need to take into account how patent law’s disclosure function could help more people understand potentially dangerous products.

In a dozen lawsuits nationwide, champions of cell phone customers argued that ETFs penalize them by trapping them with a single provider. Most of the lawsuits settled before final resolution and few judicial opinions addressed the merits. The Sprint case is an exception.  Both sides agreed that Sprint’s damages would be difficult to determine with [...]]]> Earlier this month a California appellate court affirmed a lower court ruling invalidating early termination fees in cell phone service contracts.  The affirmance stressed different reasoning than the lower court (which I discussed here). To the appellate court, Sprint’s ETFs were invalid because it set them without regard for their relation to the company’s actual damages; the trial court rested its ruling in part on how the fees were vastly lower than Sprint’s actual damages.  

In a dozen lawsuits nationwide, champions of cell phone customers argued that ETFs penalize them by trapping them with a single provider. Most of the lawsuits settled before final resolution and few judicial opinions addressed the merits. The Sprint case is an exception.  Both sides agreed that Sprint’s damages would be difficult to determine with reasonable certainty, meeting prong one of the traditional test for the validity of liquidated damages clauses. 

Proponents of liquidated damages clauses, especially in consumer contracts, must show that they made a reasonable endeavor to set them with some relation to actual damages, however difficult they are to fix. Inquiry focuses on both what the party intended and the effects. In Sprint’s case, it couldn’t point to any intention to relate the ETFs to its losses. Rather, the entire ETF program was created and implemented by the company’s marketing department as a way to keep customers. Though Sprint may not have intended to set fees exceeding losses, as it contended, that argument gained it nothing because it showed no intention whatsoever concerning the relationship between the ETFs and its losses.

Its intention aside, Sprint stressed that the effect was clear: the clause undercompensated Sprint and that means it cannot possibly be a penalty to the customer. Here the two sides offered diametrically opposing expert testimony on how to estimate Sprint’s losses upon customer breach by early termination. Experts agreed that the best compensatory measure is the company’s lost profits from subscriber breach, which means estimating the company’s lost revenue less costs it avoided as a result of the breach. Lost revenues, based on factors like contract price, minutes charged, and usage, are relatively easy to estimate. In contrast, the cost side is more complex, requiring the perennial challenge of classifying costs as fixed or variable.

Fixed costs cannot be avoided after breach, so are included in compensatory damages; variable costs can be avoided, so are excluded from compensatory damages. Unsurprisingly, the customers’ expert witness testified that nearly all costs varied, and got per-customer lost profits down to below $10. According to the customers, the stipulated sums over-compensated, amounted to a penalty, were unenforceable, and breaching subscribers would owe at most about $10 for any breach. But the company proved that most costs were fixed, not variable, showing that lost profits per customer averaged $525 to $650, vastly more than the stipulated ETFs. Among costs unavoidable as a result of breach were costs companies incurred when subsidizing phones.

For the court, the trouble with Sprint’s argument is how it makes an ex post rationalization substitute for the ex ante focus of the “reasonable endeavor” test. The court said it is not enough that it turns out that a company makes no money from a stipulated remedy. Proponents of a liquidated damages clause must show they made some determination of that sort when they created the clause. Sprint didn’t do that and could not have, since the whole plan was a marketing device with “an entirely deterrent purpose and focus.”

It did Sprint no good to stress that its ETFs benefited customers rather than penalized them. It didn’t matter that the arrangement enabled Sprint to subsidize handsets and reduce monthly rates. Nor did it matter that applying the usual tests—requiring the reasonable endeavor—would expose customers to greater liability for higher damages than under the ETF. The purpose of the rule isn’t necessarily to insulate people from paying higher damages. Its purpose is to demand reasonable estimates ahead of time, not enable shifting the focus toward a contest about the effects after the fact.

The rule would be meaningless otherwise, the court reasoned. Applying the test to this case, as in any other, promotes an important function of liquidated damages clauses: reducing uncertainty about damages determinations in litigation. True, Sprint may be right that the ETFs turn out to be a better deal for customers than paying actual damages. But, as the court summed up: “institutional intuition is not a substitute for analytical evaluation and retrospective rationalization does not excuse the objective assessment required at the inception of the contract.”

Though thus affirming the trial judge’s ruling, it is interesting to note that the trial court used slightly different reasoning. A principal reason the trial court held the clauses invalid wasn’t that they charged subscribers too much, but too little—the company’s losses from breach by early termination were greater. As many classic cases suggest, contract law’s primary concern with stipulated remedies concerns punishment. It invalidates clauses that spur rather than compensate. This doctrine flags terms fixing unreasonably large, rather than unreasonably small, sums.

There have been few cases invalidating clauses for under-compensating rather than over-compensating and they are usually accompanied by other factors, like a party acting negligently. But as courts in many of the classic opinions also noted, like porridge that shouldn’t be too hot or too cold, damages for breach of contract should compensate breach, neither more nor less. And recent trends show increased frequency of stated remedy clauses that are invalid because they pay too little rather than too much. The trial court’s stance is part of that trend, though the appellate court did not abide it.

Citation: In re Cellphone Fee Termination Cases, 193 Cal. App. 4th 298, — Cal.Rptr.3d —-, 2011 WL 743462 (Cal. App. 1 Dist. March 4, 2011).

The mortgage industry has been encouraging the Federal Reserve to address the rescission issue with a sense of urgency, perhaps fearing what might happen to the rule after July 21, 2011—the date that authority on such issues [...]]]> A Federal Reserve staffer suggested this week that the Fed will defer a key consumer decision to the newly-created Consumer Financial Protection Bureau (CFPB). That decision concerns homeowners’ rights of rescission. The rescission right gives a homeowner a certain period of time (in some cases up to three years) to challenge a mortgage on the grounds of misrepresentation or inadequate disclosure and requires the mortgagor to release its lien on the subject property. As you might guess, the rescission remedy has been invoked extensively in the recent economic downturn.

The mortgage industry has been encouraging the Federal Reserve to address the rescission issue with a sense of urgency, perhaps fearing what might happen to the rule after July 21, 2011—the date that authority on such issues is transferred to the CFPB. The Federal Reserve looked poised to make a move, having proposed a rule in September 2010 that would significantly restrict the circumstances under which a homeowner could seek to rescind a mortgage. The comment period for the proposed rule closed on December 23rd, and, despite opposition by consumer groups, many thought the Federal Reserve would continue to pursue the proposal. 

A decision by the Federal Reserve to defer this particular issue to the CFPB would be consistent with the CFPB’s objective to consolidate the oversight and implementation of consumer protection regulations in a single agency. It may not, however, produce a result consistent with the intent of the Federal Reserve’s proposed rule and the desires of many in the mortgage industry. One of the CFPB’s charges is to oversee the mortgage and credit card industries, including the language and substance of consumer disclosures. Given the CFPB’s preemption provisions (which favor enforcing state consumer protection laws), the CFPB’s proposed partnership with state attorneys general and the robo-signing and related concerns swirling around the mortgage industry, I doubt that weakening consumers’ rescission rights is high on the priority list.

I look forward to seeing how this and other pressing consumer issues play out, particularly after July 21st. The CFPB is starting to take shape (see here and here), and it appears that it will hit the ground running. (For interesting Q&A with Elizabeth Warren on the CFPB, see here and here.) In any event, the agency certainly has its work cut out for it.

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 [...]]]> 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.

Ex Ante Safety Regulation
First, safety regulations are minimum operating requirements or licensing restrictions, and are ideally enforced before some company (or product) comes to market and before any harm has occurred. They are also generally enforced by public entities like state or federal agencies, though, a good example in data security is the industry self-regulated Payment Card Industry Data Security Standard (PCI DSS). PCI imposes minimum security protections for IT systems that process payment card transactions. Other examples include drivers (or any other kind of operating) licenses, building safety codes, etc. A relevant characteristic is that sanctions can be imposed from simply violating the regulation, even though no harm has yet occurred. Think of how speeding tickets are issued.

Mandated standards are clearly desirable (even necessary) in order to prevent catastrophic accidents and injuries, such as nuclear disasters, or cyber-incidents affecting critical infrastructure. More specifically, ex ante safety regulations are useful when only the average level of harm is observable, when the true source of the harm is unknown, or when alleged victims can only estimate (not prove) an increased probability of harm. These conditions seem to describe data breaches identity theft fairly well, don’t they?

However, mandated standards face serious criticism because they may only be loosely correlated with the actual harm. For example, some suggest that mandating data encryption will reduce breaches, thereby reducing identity theft. Is the correlation between more encryption and less identity theft strong? Empirical evidence suggests that mandated encryption of consumer health data has resulted in more, not less, privacy breaches (Miller and Tucker, 2010).

Mandated standards may also create perverse consequences. For example, consider a manufacturing company that receives a safety violation. Rather than investing in a safety training program and hiring a formal safety manager, the company simply hires a lawyer to defeat the allegations. Safety regulations, like any compliance regime, also risk driving adherence to the compliance check lists, rather than actually improving a company’s security posture. This can also contribute to the ‘false sense of security’ that many security professionals describe.

In sum, ex ante safety regulations appear, at best, to be necessary in preventing catastrophic accidents, and at worst, only loosely correlated to the actual harmful events: they drive companies to compliance, rather than reduce the harm. Despite these criticisms, however, there is a very strong argument supporting this approach: it’s easier to monitor compliance before an accident (ex ante), than to measure the total harm afterwards (ex post).

 
Ex Post Liability
Ex post liability, of course, holds the injurer accountable for any damage suffered by the victim. As many readers likely know, a liability regime is very useful (or at least, imposes less social cost) when the number of injured parties is low and when the injurer is identifiable and within a court’s jurisdiction. Liability is also preferred when the harm is better known by the victim rather than the State, and when it is clearly quantifiable and legally recognized.

Do any of these sound like they describe data breaches and identity theft very well?

Moreover, as with safety standards, ex post liability serves to optimize the level of care taken (i.e. security precautions) by an injurer, not minimize the harm caused.

The difficulties in recovering losses are clear in data breach lawsuits, as has been discussed on this site before. Indeed, to my knowledge, there has been no judicial ruling favoring a plaintiff. Instead, most often these suits are resolved through motions to dismiss for lack of standing or summary judgment, mainly because plaintiffs can’t demonstrate actual harm. Only sometimes are suits settled out of court, in which cases plaintiffs may only receive 1-2 years of credit monitoring.

What I am keeping an eye on, however, are these set of new state laws that hold merchants strictly liable to banks for data breaches resulting in the replacement of payment cards (HB 1149 in Washintgon state and HF 1758 in Minnesota). Privacy and data security litigators reading this Blog would certainly be more informed (and please comment if you are), but it strikes me that a liability regime would be much more successful in this case because: the injurer is known, there is physical loss (cost of reissuing the payment card), and causation is clear.

Information Disclosure
If ex ante regulation is a prevention device, and ex post liability is a recovery device, information disclosure could be described as a correction device. That is, an event has occurred (a data breach or toxic spill) which may — but has not yet – created actual harm (identity theft, illness). This is a wonderful type of intervention because it doesn’t force companies to do anything more than notify potential victims. For this reason, it’s considered a light-handed paternalistic approach.

The idea, of course, is that by notifying people, you empower them to take action and reduce their potential losses. The problem, however, is that rather than empowering people, notification could instead burden them. Perhaps some of you experienced this after reading a breach notification letter: compare your risk of suffering identity theft without taking any action to your risk of suffering identity theft by taking some action. Then consider the incremental effort required to take action. What should you do? Right, I don’t know either. It’s hard. Introduce other behavioral issues like optimism bias (consumers perceiving their chances of suffering identity theft to be very low), rational ignorance (consumers believing the cost of taking precautions outweighing any benefits they may receive), and status quo bias (consumers’ own inertia inhibiting them from anticipating the consequences of identity theft and responding) and things become very complicated.

Disclosure, it seems, becomes most useful for people who: lack information (or are misinformed), will understand the information being provided, who understand the consequences of both acting and not acting, and are willing (and able) to respond to the new information.

I’m curious: what kinds of disclosure notices can you think of, and were they helpful to you? (e.g. cigarette labels, web or flash cookie messages, nutrition labels posted in fast food restaurants).

 
(Alessandro Acquisti and I present a full analysis of these three interventions in the context of data breaches and privacy harms in this paper: http://ssrn.com/abstract=1522605.)

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 [...]]]> 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:

The banks that feature in this report are hiding behind a series of convenient excuses – of being prevented by bank secrecy laws from disclosing the name of a customer; . . . of dealing with a commercial entity, when in fact it was a state owned company in a corrupt state; of dealing with state funds, when actually the state has been captured by a human rights-abusing dictator; of dealing with a correspondent bank, when the customers behind it were pillaging the state to pay for conflict.

In an industry where repressive rulers in Equatorial Guinea, Republic of Congo, Gabon, Liberia, Angola and Turkmenistan have been acceptable clients, why not “play ball” with subprime lenders churning out thousands of dubious loans? As Hudson quotes one top Lehman official in London, “the prevailing atmosphere was for fast growth and special fast-track treatment for what we now know were toxic deals” (256).

Moreover, why try too hard to be sure that complex securitizations are actually completed correctly? And finally, when it all goes south, why try to carefully reconstruct what actually went on, when you can hire “Foreclosure Department Supervisors” (or, as JP Morgan Chase put it, “Burger King Kids”) for $10-12 an hour to try to rush into more fee-generating sales?

In the case of foreclosure fraud, the convenient excuses are strikingly double: we needed expedients like MERS to speed securitization and get more people into homes; now we need LPS and the Interstate Recognition of Notarizations Act of 2010 to get them out. As Hudson reports, high-speed lending has been as much about legal immunity as it is about efficiency:

The flow of money from Wall Street allowed lenders and brokers to open up shop, make thousands of loans, and then shut down if lawsuits or regulatory investigations became a problem. Then they could move to another state or reopen under another name. As law professor Chris Peterson observed. . . .”As thinly capitalized originators make more and more loans, claims against the lender accumulate, while the lender’s assets do not. [They] . . . are used like a disposable filter: absorbing and deflecting claims and defenses until those claims and defenses render the business structure unusable.” (174)

Many are concerned that the “Foreclosure Fraud Task Force” set up to investigate these practices has little chance of succeeding. In his book, Hudson concluded that the Bush-era “OCC and OTS considered their role to be not watchdogs but partners and defenders of the very institutions they were supposed to police” (166). While there are some energetic regulators in Washington now, it’s unclear how influential they are. Most regulators’ incentives aren’t great; as Levitin said in another context, a “concern here is that the bank regulators so badly don’t want for there to be a problem that they won’t look at the notes in the hopes that this issue goes away.” Perhaps only the judicial system can get to the bottom of the mess.

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 [...]]]> 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.

In California, Pincus sees the general doctrine to ask whether: (1) at the time of contract formation, (2) based on how it affects parties to the contract, it (3) shocks the conscience. He says California courts use a special version applied to arbitration contracts looking at whether: (1) at the time dispute arises, (2) based on effects on third parties too, it (3) deviates too much from recognized litigation practice and its deterrent effects. Pincus called this an easy case.

The Justices did not appear to agree. All six who questioned him—Scalia, Sotomayor, Kagan, Ginsburg, Kennedy, and Breyer—pressed on versions of what test to apply. Pincus kept repeating variations of: compare the three prongs of California’s general doctrine to the three prongs as applied to arbitration clauses. But many problems appear and went unanswered.

Ginsburg suggested that the cases equally support the thesis that California is expanding unconscionability doctrine generally; she also hinted what everyone knew, that “shock the conscience” isn’t a test but a slogan and is not an element of today’s general unconscionability law. Kagan pointed out how law changes over time. Scalia and Kennedy stressed how contract law itself contains many principles that only apply to certain kinds of contracts and how general principles applied in particular settings look different.

(This raises a wonderful and long-vexing question: is there a single law of contracts or many different laws of contract?)

Pincus never gave a good answer about what test the Court should apply, other than reading and comparing cases. He also kept insisting that the comparison must be between the unconscionability doctrine applied to arbitration clauses and general unconscionability doctrine applicable to any contract—not just other dispute resolution clauses. He noted that the FAA endorses contract law principles that apply to “any contract” not sub-categories of contracts like “any dispute resolution contract.”

That did not seem to persuade Breyer, Ginsburg or Kagan though, who stressed that the FAA addresses hostility to arbitration compared to litigation and the California cases treat both the same. Though not offering much of a test, Pincus did toward the end hint at a test: whether the state law can be justified as valid under some “independent and adequate” ground showing that the state is not really being hostile to arbitration. That could prove to be quite a concession.

The consumer’s lawyer (Deepak Gupta) contended California law obeys the FAA’s equal footing mandate. Gupta disagrees that California applies its unconscionability doctrine in an impermissibly different way to arbitration clauses compared to any other contract. Roberts pressed on differences on when to test and whose interests to consider.

Gupta said the test is ex ante and addresses the parties to this contract, asking: when these customers signed, was the clause obnoxious, given that they would not know whether they would have a claim capable of economic enforcement only via collective action. The cases also focus on the parties to the contract, though certainly also considering the interests of non-parties. But that happens in other unconscionability cases too, such as those addressing whether exculpation provisions affect the “public interest.”

Alito probed the substance of the test, how fairness is evaluated (nicely eschewing talk of “shocking the conscience”). Why are these people better off with class rights than not, he asked. Gupta explained that, ex ante, they don’t know whether they’ll have claims to bring whose small-stakes requires collective action to warrant pursuing and for which the class action device and attorneys are essential.

But that, Alito challenged, is what makes this test of unconscionability different from general tests. What is unfair is the absence of this device to get private attorneys to take the case. Gupta countered that the ultimate problem with the clauses is how they functionally insulate companies from liability and cited kindred cases finding unconscionable clauses truncating statutes of limitation.

Sotomayor then returned to the theme of the day: what test the Court should use to distinguish legitimate from preempted state contract law approaches to arbitration clauses. Gupta stated a clear test, drawing on the Court’s approach to state law in general. The first principle is federal deference to state courts. That is subject to qualifying principles to catch obvious subterfuge based on an objective determination about the state’s faithfulness to the federal statute.

A relatively crude qualifying principle asks whether the state law is tantamount to a rule of non-enforceability of arbitration agreements. An example is a rule prohibiting jury trial waivers. That would be preempted. But that population of obvious subterfuge is extremely small. So the Court often will want to ask whether the state law is an obstacle to the federal statute (obstacle preemption).

Alito pressed on how that test enables drawing the line between, say, laws requiring using the rules of evidence in all cases from laws banning class action waivers. Alito discerned the difference as whether a law is consistent with the concept of arbitration or not: requiring evidence rules is not consistent with the idea of arbitration but insisting on the class mechanism is consistent with arbitration.

Gupta suggested that a better reconciliation uses obstacle preemption analysis to probe the state’s credibility: no state can credibly say using the rules of evidence is essential to fairness in the way all can say banning class waivers is essential to avoid allowing functional exculpation. Though both may be obstacles to arbitration in some sense, the two differ because evidence rules don’t systemically advantage either side but the class waiver clearly does. Any state claim that evidence rules are necessary for fairness in dispute resolution is not credible. The FAA protects contracts that choose a forum; it does not protect contracts that exculpate.

Many Justices seemed persuaded. Kagan probed whether the test would concentrate on a state’s purpose or its law’s effect and Gupta said both. Breyer wondered what evidence you use to apply the test about obstacles and Gupta said evidence about the state’s objective. Kennedy pushed on what the obstacle obstructs—what kind of arbitration does the federal statute envision that a state law could obstruct. Scalia said he was having trouble seeing how the class action waiver was tantamount to exculpation. Gupta stressed that the law’s prohibition applies only when the effect is to gut consumer protection that is functionally equivalent to exculpation.

In rebuttal, Pincus repeated what he said all morning about comparing the two batches of cases to see if they apply the same test. In doing so, he promised that you’ll see the test on class action waivers is not done ex ante because if you did it then you would say it is entirely fair (most claims expected then are individual, not class, and arbitration is better than court for them) and it looks to third parties who could be members of the class and that’s different from looking at the “public interest.”

The case is a close call and the outcome hard to predict. A dozen amicus briefs were filed on each side. Notably, five such briefs came from groups of law professors (in the fields of arbitration, contracts, class actions, and federal jurisdiction). Four of those briefs supported the consumers, states and class actions; only one, by a contracts group, supported the company. Yesterday’s argument touched on points raised by all groups.

Though hard to predict, the edge in yesterday’s oral argument went to Gupta. Based on what was said during the argument, I predict a 8-1 or 7-2 vote for the consumers and California, with Alito dissenting and Roberts a toss up. Thomas, who never speaks at oral argument, will vote for the consumers and state on federalism grounds, as he always does in FAA cases.

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 [...]]]> 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.

From Cage’s Complaint

Nicolas Cage is one of the most sought after and highly paid actors in the world. . . . [He] is a world renowned Academy Award winning actor, and is one of the most highly respected and sought after actors in Hollywood, having appeared in excess of fifty (50) motion pictures during the past two decades.

[Cage has paid Levin] millions of dollars. Cage has been forced to dispose of significant assets. [Cage] owes millions of dollars in back taxes, interest and penalties . . . .

Levin recommended and facilitated numerous highly risky and speculative real estate investments; failed to properly diversify Cage’s investment portfolio; failed to obtain proper and adequate insurance on behalf of Cage . . . ; and misrepresented and concealed Cage’s true financial status at the time that [Cage] acquired assets and investments.
 
From Levin’s Answer and/or Counterclaim

Cage’s allegations of misconduct . . . are entirely false. . . . [Cage ignored Levin's advice to] a) limit extravagant and arguably irresponsible spending; b) acknowledge and act on the advice from Levin that sufficient money would not be available to pay his income taxes if he did not significantly curtail his spending; and c) take responsibility for monitoring his own financial affairs.

[Cage] spen[t] millions of dollars annually to support a lavish lifestyle . . . which was above even his considerable means as a successful Hollywood actor.

Between 2001 and 2008, Mr. Cage purchased numerous personal residences in places such as New York, Rhode Island, New Orleans (Louisiana), Newport Beach (California), San Francisco (California), Las Vegas (Nevada), Bavaria (Germany), Bath (England), the Bahamas, and many other places.

By 2001 Cage had already squandered tens of millions of dollars he had earned as a movie star, he was deeply in debt, and he owed millions of dollars in . . . income taxes, with no funds available to pay the tax debt. . . . Levin warned Cage that he needed to earn $30,000,000 a year just to maintain his lavish lifestyle.

Levin advised, and Cage agreed, that [he must] accumulate, over a period of years, a cash “cushion” of at least $10,000,000 and preferably as much as $20,000,000. . . [To that end] with Cage’s consent, Levin sold off Cage’s $1.6 million comic book collection and sold more than a dozen of his automobiles.

[In the next few years,] Cage had a string of hit films, his earnings soared, and Cage abandoned the economic conservatism he had agreed to with Levin. . . . As Levin sold off automobiles, Cage bought new ones.

[Cage] set off on a spending binge of epic proportions, and by July, 2008, Cage owned 15 palatial homes around the world; four yachts (one for the Caribbean, one for the Mediterranean, one for Newport Beach and one for Rhode Island); an island in the Bahamas; a Gulfstream jet; and millions of dollars in jewelry and art.

[W]ith increasing urgency in 2006-2007, Levin implored Cage to stop buying real estate and urged him to reduce his real estate holdings, warning Cage that the financial press was filled with references to a “real estate bubble.”

Cage rejected this advice and continued his compulsive spending. As a result, in 2007 Cage’s shopping spree entailed the purchase of three additional residences at a total cost of more than $33,000,000; the purchase of 22 automobiles (including 9 Rolls Royces); 12 purchases of expensive jewelry; and 47 purchases of artwork and exotic items.

Cage also spent huge sums taking his sizeable entourage on costly vacations and threw enormous, Gatsby-scale parties at his residences.

The pinnacle of Cage’s spending spree came with his quixotic acquisitions of Midford Castle in England and Schloss Neidstein Castle in Bavaria.

[Cage] continued to spend uncontrollably. Levin described the folly of several other well-known entertainers who compulsively overspent their way into bankruptcy, and warned Cage “it could happen to you.”

[Cage didn’t listen] and was even motivated to continue it (and disregard Levin’s advice), because Cage made millions of dollars in capital gains from buying and selling his residences. However, when real estate values plunged in 2008, most of Cage’s residences turned “upside down,” just as the global credit crunch made it impossible to cover Cage’s endless cash calls by borrowing more money. Since he had never accumulated any cash reserves (as Levin had urged), even with his considerable earnings as a movie star, Cage fell further and further behind on his personal debts, mortgages, and income taxes. . . .

Co-Op Note: Levin’s Counterclaim notes that Cage’s real name is Nicolas Coppola and uses that name throughout; I’ve changed all such references from Coppola to Cage.

Hat Tip: Christa Laser

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 [...]]]> 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.

Why does this matter? It matters because courts and policymakers are unlikely to continue to treat software this way when it shows up in machines that can physically act on the world.  In an essay entitled “A Robot In Every Home,” Bill Gates opines that we are at the point today with robotics that we were with personal computers in the mid-1970s. If he’s right, and I think he is, will robots have the qualities that together comprise generativity?

So far, so good. The most sophisticated robots under development operate as open platforms, running a variety of software. The leading robot operating systems (ROSs)—for instance, that under development by Willow Garage—are open source. Hardware, too, is generative. There are numerous robot kits and tinkerer discussion fora. So many people hacked the Roomba vacuum cleaner that iRobot ended up creating a separate product, the Create, just so people could experiment with it.

It’s possible that robots will be locked down because of security fears. Researchers at University of Washington have already documented attacks on commercially available robots that connect to the Internet. (For more on this topic, see my forthcoming book chapter from MIT Press.) But before we even get there, we need to confront the issue of liability.

In a forthcoming law review article, I argue that although liability will be just as difficult to parse, robots will not be treated by litigants or courts the same way we treat software and computers. When software can result directly in physical harm to your person or property, when Word can touch you, it will prove very hard to argue losses are limited to the price of the software. Indeed, multiple lawsuits involving physical consequences from software (e.g., glitches in radiation, navigation, and acceleration) have gotten serious traction in recent years.

I believe that, as in the case of firearms, general aviation, and the web, we should consider immunizing robotics manufacturers up front for what users run on their platforms. In the absence of such immunity, I worry that roboticists will limit the functionality of robots and investors will look outside of the United States to Japan, South Korea, Italy, and other countries with a higher bar to litigation (and a head start). Robots will be in every home, but they won’t be generative.

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 [...]]]> 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. 

Indeed, this is more striking given that the Japan’s lagging telcos used to fit a pattern, still observable in Japan, in which non-tradeable domestic sectors generally seem relatively inefficient.  However, the Japanese government not only required NTT, the monopoly domestic telephone company, to sell wholesale broadband to ISPs, but also prevented NTT from competing with the ISPs by prohibiting NTT from bundling in services with broadband Internet and thus becoming both supplier and competitor.  The result was an explosion in activity by new entrants, with significant consumer benefit.  I’ve always wondered how this policy came about, and the best account I’ve found, suggesting that it was parts happy accident and parts good intention, is this one by Takanori Ida.  As Ida observes, network economics is not yet so well understood that you can accurately predict the result of policy, though you may be able to design a better policy if you assume you cannot predict the future (p.78).

This brings me to my second point, about competition policy and innovation.  If you’ve followed the Supreme Court’s antitrust opinions over the past decade, after Trinko and LinkLine, you would be forgiven for laughing at the idea that antitrust could have a role in opening up access to rivals to the incumbent telcos.  (Although you could read Trinko as suggesting that if you want an Aspen Highlands-like forced access for rivals to network incumbents, you should get it from the FCC, not the Sherman Act.)   Similar to Nicholas Nassim Taleb’s point about taking steps to benefit from unanticipated positive “black swan” events, Zittrain makes the point that generativity allows disruptive innovation to benefit us in ways we cannot anticipate.  As a result, policies oriented at the future of the Internet should focus on how to preserve our opportunity to benefit from, particularly, user-generated innovation.

One of Zittrain’s biggest fears is the ability of manufacturers of tethered devices or providers of “walled garden” services on the Internet to make their products less generative after the fact.  In short, instead of planned obsolescence, there is remote-controlled sterilization.  Consumer protection may have a role to play here, though it may not be a panacea.  Disclosure regimes, rules giving users the opportunity to opt out and “de-tether” at a future point in time, and rules requiring portability of user-generated content may provide comfort, albeit imperfect, to users.   Platform operators and users have come to see the value in generativity – witness how the “tethered appliance” iPhone now sells itself based on the compatible work of others in the App Store.  However, the potential for exploitation after the fact will continue to exist.  And opportunism and its potential can impose costs by deterring user generated innovation.  This is important, since if users become leery of participating on dominant platforms for fear of having the rug pulled out from them, they may participate less, or not at all, and we won’t know what we will have lost as a society in terms of innovation.

Finally, Zittrain points to Wikipedia and how it gets its users to work well together in generating content as a model for how to solve some of the Internet dilemma of security versus generativity..  My colleague David Hoffman and I did a study in which we looked at the decisions of Wikipedia’s arbitration committee.  We found that their dispute resolution system did not actually resolve disputes about “correct” content on Wikipedia.  Rather, the focus of their dispute resolution system was to create and highlight norms of behavior and good faith for the community to follow – and to ban those who could not or would not at least try to be part of the community.  As George Costanza would say, “you know, we’re living in a society.”  A Wikipedia-like solution for problems that Zittrain sees would have to involve greater mass recognition that there ought to be civic virtue and social responsibility on the Internet.  In addition to providing us with useful insights, The Future of the Internet exhorts us all to take a constructive role in maintaining our power to take a constructive role.

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 [...]]]> 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.

Courts struggled during this process of changing the landscape with traditional doctrines used to evaluate whether to enforce promises as contracts. That meant new encounters with old contract law tools of offer, acceptance, consideration, mutual assent, definiteness, consideration, even questions about whether employees incurred cognizable damages by staying employed. Contract law’s tools worked because the employee manuals common before the 1980s didn’t warrant enforcement as contracts, but many of the 1990s did.

An eerily similar shift is afoot concerning corporate policies about privacy, especially on-line. The same tools are in play: statements that don’t look like offers law’s seen before; trouble evaluating how they’d be accepted or relied on; difficulty finding sufficient definiteness or requisite consideration; and doubt about whether damages result. Thus courts have classified corporate policies as lacking manifestations of willingness to enter into a bargain (so they’re not offers); not signaling by reading them an intention to form a bargain (so acceptance doesn’t occur); terms too vague for a bargain (lacking mutual assent and insufficiently definite); terms not bargained for (lack of consideration) or relied upon (people don’t read them); and damages are elusive or conjectural (what’s the economic value of lost privacy, anyway?)

As courts struggle with this, they are forging pathways to recognize policies as part of contracts, appreciating that reliance can exist even without reading the fine print, and, perhaps unwittingly, exposing vividly the relation between the old handbook battles and today’s privacy disputation.  As the stakes rise, and damages become more obvious, and it becomes easier to see that policy-posters do intend to induce particular and valuable behavior, you’ll see contract law’s grand tools come to the rescue.   But courts will need a nudge, and I think they’re getting it.

A harbinger of the path forward appears in Meyer v. Christie, No. 07-2230, 2007 WL 3120695 (D.Kan.  2007) (including distinguishing leading 1976 handbook case, followed in the mid-1990s struggle).  Other cases supporting various assertions in this post are: Smith v. Trusted Universal Standards in Electronics Transactions Inc., 2010 WL 1799456 (D. N.J. 2010) (policies part of contract but no breach occurred); Cherny v. Emigrant Bank, 604 F.Supp.2d 605 (S.D.N.Y. 2009) (a contract maybe, but no damages); In re Jetblue Airways Corp. Privacy Litig., 379 F.Supp.2d 299, 325 (E.D.N.Y. 2005) (reliance possible without insisting on literacy); Dyer v. Northwest Airlines Corp., 334 F.Supp.2d 1196 (D.N.D. 2004) (old-fashioned myopia of the possibility).

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 [...]]]> 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.

While many of these points are not directly relevant to the substantive due process classification as a fundamental right, they are certainly relevant to the system design/policy question, they will make it easier for the court to side with the plaintiffs, and they may become to the analysis under strict scrutiny if the court determines that standard applies. Perhaps cutting the other way is that unlike in Abigail Alliance here allowing the ‘purchase’ introduces risk to a new person (the bone marrow donor who would not have donated but for the new incentive), so it is not merely a right to do what one wants with one’s body, but instead involves the bodies of others, although that distinction does not strike me as particularly important.

On a more doctrinal level, I think this will be a much harder case for the government to win than Abigail Alliance. While in Abigail Alliance we successfully argued that the history of regulating drugs to protect the patient went back to colonial America and thus the opposite right was hard to establish under the Glucksberg framework, here NOTA is of fairly recent vintage and (also unlike Glucskberg) there is no deeply entrenched negation of the right. For most of the levels of briefings all sides in Abigail Alliance as well as the court treated the case as though the Glucksberg’s “Due Process Traditionalist” approach governed, rather than a more intimacy-based view associated with the “mysteries-of-life” passage from Casey. It will be interesting whether the Flynn court also focuses exclusively on Glucksberg, considers both approaches, or (though unlikely) focuses on the intimacy approach.

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, [...]]]> 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.

Clauses doing that can be unconscionable both procedurally, because adhesive, prolix and peddled by one in a stronger bargaining position, and substantively, for facilitating such a scam. California statutory and common law unconscionabilty doctrine apply equally to clauses waiving rights to pursue class actions in litigation or class arbitration. They can be void whether part of an arbitration clause or otherwise. That equal application is important because the Federal Arbitration Act preempts any state law, statutory or judicial, that discriminates against arbitration clauses. The Second Circuit finds California law immune from preemptive attack under the FAA. That’s the broad issue facing SCOTUS in AT&T next term.

California law is also clear that not all class action waivers or class arbitration waivers are unconscionable, as not all are offered adhesively nor designed to insulate fraudulent conduct from proper review. But this clause was unconscionable, striking out in California’s three-part test: (1) a standardized consumer contract of adhesion drafted by a party with superior bargaining power; (2) the disputes about allocating payments between principal and interest involve small amounts of damages; and (3) the borrower alleged that the lender’s plan is to cheat large numbers of people out of small sums of money.

The lender thought the contract’s severability clause would enable compelling  class arbitration, but the court disagreed.  The clause claims to rescue all provisions not stricken when others are stricken as unconscionable. But after striking the clauses forbidding class actions in courts or arbitration, there was nothing valid on dispute resolution to enforce.  Striking a clause prohibiting class arbitration doesn’t authorize compelling it.  As the Supreme Court recently held in Stolt-Nielsen, the court’s job under the FAA is to enforce valid arbitration clauses, not promote arbitration. 

PS:  An annoying thing I’ve found amid proliferation of boilerplate in adhesion contracts lately is how they put vital clauses in ALL CAPITAL LETTERS. Drafters must think that will lead people, including judges after the fact, to think they were conspicuous and attracted requisite attention and understanding. In fact, PRINT WRITTEN IN ALL CAPITAL LETTERS IS MUCH MORE DIFFICULT FOR PEOPLE TO READ OR UNDERSTAND than words written in regular case, though putting them in bold may help. Just a thought.

Hat Tip: Ed Labaton

1. From Deloitte’s 12-page summary:

Because the new U.S. law is complex, it can be helpful to remind ourselves that its underlying purpose is relatively simple and has two powerful strands: 1. ‘De-risk’ the financial system by constraining individual organizations’ risk-taking activities and capturing a broader set of organizations’, including the so-called “shadow” banking system, in the regulatory net 2. Enhance consumer protections. . . .For example, the need for “arm’s-length” swap desk affiliates combined with the move from over- the-counter to exchange trading for derivatives, tighter constraints on leverage and risk-taking, and higher liquidity requirements imply lower profit margins in future from those [...]]]> Via Ezra Klein’s Wonkbook (definitely one of my favorite morning emails), a variety of takes on what’s in the financial reform bill:

1. From Deloitte’s 12-page summary:

Because the new U.S. law is complex, it can be helpful to remind ourselves that its underlying purpose is relatively simple and has two powerful strands: 1. ‘De-risk’ the financial system by constraining individual organizations’ risk-taking activities and capturing a broader set of organizations’, including the so-called “shadow” banking system, in the regulatory net 2. Enhance consumer protections. . . .For example, the need for “arm’s-length” swap desk affiliates combined with the move from over- the-counter to exchange trading for derivatives, tighter constraints on leverage and risk-taking, and higher liquidity requirements imply lower profit margins in future from those activities.

Some estimates I’ve seen have estimated the profit margins might be around 15% lower.

2. Simon Johnson on the Kanjorski Amendment as a “new kind of antitrust:”

Effective size caps on banks were imposed by the banking reforms of the 1930’s, and there was an effort to maintain such restrictions in the Riegle-Neal Act of 1994. But all of these limitations fell by the wayside during the wholesale deregulation of the past 15 years. Now, however, a new form of antitrust arrives – in the form of the Kanjorski Amendment, whose language was embedded in the Dodd-Frank bill. Once the bill becomes law, federal regulators will have the right and the responsibility to limit the scope of big banks and, as necessary, break them up when they pose a “grave risk” to financial stability.

I wish I could say I was as optimistic as Johnson about the prospects for effective enforcement here, but he certainly knows the lay of the land far better than I do. As Barry Lynn shows, in a variety of industries, we need a new form of antitrust, or at least better competition advocacy.

3. The Roosevelt Institute publishes a variety of takes; William K. Black is the most pessimistic:

The fundamental problem with the financial reform bill is that it would not have prevented the current crisis and it will not prevent future crises because it does not address the reason the world is suffering recurrent, intensifying crises. A witches’ brew of deregulation, desupervision, regulatory black holes and perverse executive and professional compensation has created an intensely criminogenic environment that produces epidemics of accounting control fraud that hyper-inflate financial bubbles and cause economic crises. . . .

The financial industry, with Bernanke’s support, already got Congress to extort FASB to gimmick the accounting rules so that insolvent banks could hide their losses and continue to pay the executives (already made rich by destroying “their” firms — that’s the meaning of Akerlof & Romer’s classic article: “Looting: Bankruptcy for Profit”) massive bonuses. All of this is made possible by huge, off budget subsidies to [systemically dangerous institutions] via the Fed and Fannie and Freddie.

4. Daniel Indiviglio on the uncertainty at the heart of the legislation (does it end or encourage TBTF?):

The prevailing debate between Republicans and Democrats on financial reform is whether the new bill institutionalizes the too big to fail problem. Democrats swear it doesn’t, since the legislation also includes a new non-bank resolution authority which will make quite certain that all firms can, and will, fail if they run into trouble. Republicans haven’t developed a very sensible criticism to this, but they could. While the resolution authority ensures that big firms fail, it would also almost certainly provide them some advantage.

A lot will depend on regulators’ interpretation and enforcement here.

5. James K. Galbraith provides some background:

The financial crisis in America isn’t over. It’s ongoing, it remains unresolved, and it stands in the way of full economic recovery. The cause, at the deepest level, was a breakdown in the rule of law. And it follows that the first step toward prosperity is to restore the rule of law in the financial sector.

[What went wrong?] First, there was a stand-down of the financial police. The legal framework for this was laid with the repeal of Glass-Steagall in 1999 and the Commodities Futures Modernization Act of 2000. Meanwhile the Basel II process relaxed international bank supervision, especially permitting the use of proprietary models to value complex assets—an open invitation to biased valuations and accounting frauds.

Key acts of de-supervision came under Bush. After 9/11 500 FBI agents assigned to financial fraud were reassigned to counter–terrorism and (what is not understandable) they were never replaced. The Director of the Office of Thrift Supervision appeared at a press conference with a stack of copies of the Code of Federal Regulations and a chainsaw—the message was not subtle. The SEC relaxed limits on leverage for investment banks and abolished the uptick rule limiting short sales to moments following a rise in price. The new order was clear: anything goes.

Second, the response to desupervision was a criminal takeover of the home mortgage industry. Millions of subprime mortgages were made to borrowers with undocumented incomes and bad or non-existent credit records. Appraisers were selected who were willing to inflate the value of the home being sold. This last element was not incidental: surveys showed that practically all appraisers came under pressure to inflate valuations in order to make deals happen. There is no honest reason why a lender would deliberately seek to make an inflated loan. . . . Third, the counterfeit mortgages were laundered so they would look to investors like the real thing. . . .Fourth, the laundered goods were taken to market. . . . Upon taking office, President Obama had a chance to change course and didn’t take it.

The question now is whether FinReg will provide a “second chance” for an Administration that so far has not distinguished itself on the financial reform front.

Image Credit: 1901 image of J.P. Morgan.

Standard form agreements in these settings contain dense boilerplate no one reads and no one could negotiate if they did. Common clauses say all employee or consumer disputes must be submitted solely to binding arbitration, barring access to the courthouse. They often spell out how the arbitration will work, usually putting limits on how much information you can discover during the process and splitting the costs evenly at 50-50, despite resources usually of uneven proportions.

Another frequently appearing clause caps the amount of [...]]]> If you think you’ll have your day in court when disgruntled by employer mistreatment, think instead that you’re likely to be headed for dispute resolution by a professional arbitrator, not a jury or judge. Ditto consumers of cell phone service and credit card users.

Standard form agreements in these settings contain dense boilerplate no one reads and no one could negotiate if they did. Common clauses say all employee or consumer disputes must be submitted solely to binding arbitration, barring access to the courthouse. They often spell out how the arbitration will work, usually putting limits on how much information you can discover during the process and splitting the costs evenly at 50-50, despite resources usually of uneven proportions.

Another frequently appearing clause caps the amount of damages you may get in the proceeding, invariably much lower than might be obtained in traditional court proceedings. For instance, a cell phone contract may say any damages can’t exceed $500 or some amount related to annual billings. Yet a claim for breach of the confidentiality provisions of such a contract, whether they are express or implied terms, can result in damages vastly exceeding that.

You may be tempted to think you’d at least have a day in court to consider the validity of the contract dictating mandatory arbitration on lopsided terms and capping damages at nominal levels, but you’d be wrong about that too. Most such agreements also have a capstone clause saying questions like that are also for the arbitrator to decide. You might then think at least that kind of clause could first be tested for validity in a court, and though you’d be right, that means precious little.

Law so favors arbitration of disputes these days that federal statutes and the Supreme Court have gone to the ultimate extreme in channeling essentially every dispute consumers or employees may have into that route, with essentially no chance for a judicial look. That’s because of a legal notion called severability, which enables isolating particular clauses in contracts and classifying them as valid even if other parts or the rest of the contract as a whole are patently invalid. So long as there is a single clause saying the issue is for an arbitrator, and that clause is not patently obnoxious, you get no day in court, with everything decided by an arbitrator.

The only way you can get a day in court is to challenge as invalid the particular clause saying disputes, including disputes about that particular clause, are delegated to an arbitrator. There are not many ways to win that challenge, once you sever that clause from everything else. The rest of the contract can be outrageous—saying the company owes zero damages even for illegal behavior. So long as there is nothing obnoxious about the narrow line directing disputes to arbitration, that’s where you have to fight your claim.

That, at least, is what the Supreme Court, in a 5-4 split vote, said earlier this week, in Rent-A-Center v. Jackson. An employee signed a stand-alone document when starting work saying that any claims he may ever make against the company are delegated to an arbitrator, using limited discovery and splitting fees, even claims that the delegation clause is invalid.

Seeking a preliminary day in court challenging both that clause and the whole contract as invalid, the Ninth Circuit and the Court’s dissenting judges saw merit. They thought that before an arbitration provision in such a stand-alone arbitration contract can be enforced, a claim that the bargain is invalid should be for a court to decide. In Jackson, that would mean a traditional day in court to test the validity of the lopsided terms, in light of the take-it-or-leave feature of the employment form.

The Court majority held otherwise. It says the only way to give a court a chance to look at the case is for the employee to pinpoint as invalid the particular clause delegating disputes to the arbitrator, as opposed to a challenge to the entire contract as a whole. In dicta, the Court signaled doubt this employee could have succeeded on that claim, considering a fight over that issue wouldn’t require much discovery or involve much cost, so those rules in the agreement wouldn’t be all that obnoxious. The employee made the mistake of objecting to the entire contract, said the majority, and that objection is for arbitration, not for a day in court.

There’s more to come. On the Supreme Court calendar is AT&T v. Concepcion, about standard form cell service contracts channeling all disputes to arbitration, preventing customers from forming groups to pursue class actions for breaches of contract, privacy and other alleged wrongs. Most commentators on this week’s Jackson opinion see it as a harbinger for the AT&T case, showing a pro-arbitration stance likely to be extended there.

Meanwhile, bills pending in Congress would change some of these results. A draft Arbitration Fairness Act would amend the existing federal statute, on which the Court has based such decisions as Jackson, to make such arbitration agreements between employees and consumers invalid and unenforceable. It would also vest exclusive jurisdiction in courts, not arbitrators, to determine an arbitration agreement’s validity, regardless of whether the party challenged the clause specifically or the entire contract generally.

Of course, there can be much to value about arbitration, especially to resolve disputes between businesses in ways more expeditious and less expensive than traditional litigation. There is also nothing inherently bad about arbitration of consumer and employee disputes, though critics say the route tends to disfavor the little guy in favor of employers and enterprises.

Even so, receptions to Jackson have been interesting. A few offer a simple sober report, but many criticize it as ho-hum nit-picking while others rebuke it in alarmist terms. All agree, on the other hand, that media coverage was surprisingly sparse, for a case that means much to many ordinary people.

That break up would eliminate the continuing threat to the US economic and political system posed by banks deemed so big that government lavishes trillions in aid to avoid letting them fail—at enormous cost to ordinary citizens and the real economy. It is by far the cleanest and most reliable solution to the manifest havoc massive banks wreak, not addressable by any [...]]]> Thanks to banking industry mistakes and government’s orchestration of its rescue, the country now has ten banks that together command some $10 trillion in assets, roughly equal to nearly 70% of the country’s gross domestic product. Pending legislation would break those up into a total of about 36, each still commanding about $285 billion in assets apiece—larger than the next largest bank is now.

That break up would eliminate the continuing threat to the US economic and political system posed by banks deemed so big that government lavishes trillions in aid to avoid letting them fail—at enormous cost to ordinary citizens and the real economy. It is by far the cleanest and most reliable solution to the manifest havoc massive banks wreak, not addressable by any pending technocratic tinkering like better regulation or capital requirements.

The break-up idea is not as radical as it is controversial, due to foes of ex ante legal constraints on private power.  All passage of the legislation would mean is substantially a return to the scale and distribution of the US banking system as of the mid-1990s, when no bank commanded assets exceeding more than a few percent of GDP. In important part, as the lists below suggest, the conglomerate mergers of the past two decades that caused this massive concentration of economic and political power would be reversed.

If so, expect greater competition, with benefits to consumers, savers and investors; more careful risk management by banks and their lenders, given that they’d no longer enjoy a government guarantee against failure; and generally a less unbalanced economic and political environment in the country that massive bank scale has consolidated.

But don’t count on this legislation to pass. As the bailout showed, the forces at the country’s largest banks are far too powerful for Congress and the President to resist easily.  They’ll need support from ordinary citizens to fight the megabanks seriously.

Listed below are the largest banks in the country, measured by assets, noting which would have to break up under the legislation—and, for the largest four, some of the old brand names that would be revived in the newly-competitive field.

A. The Largest Four (to be divided into a total of about 21)

1. Bank of America ($2.2 trillion; 16% GDP) [Barnett Bank, Boatmen’s Bancshares, FleetBoston, Montgomery Securities, NationsBank, Robertson Stephens, Security Pacific (plus Merrill Lynch from this period’s bailouts)]

2. JP Morgan Chase ($2 trillion; 14% GDP) [Bank One, Chase Manhattan, Chemical Bank, First Chicago, Hambrecht & Quist, Manufacturer’s Hanover (plus Bear Stearns and Washington Mutual from this period’s bailouts)]

3. Citigroup ($1.85 trillion; 13% GDP) [Commercial Credit, Primerica, Travelers, Salomon Brothers]

4. Wells Fargo ($1.24 trillion; 9% GDP)) [CoreStates, First Interstate, First Union, Norwest (plus Wachovia from this period’s bailouts)]

B. Tier Two: The Next Largest (to be divided into a total of about 9)

5. Goldman Sachs ($850 billion; 6% GDP)

6. Morgan Stanley ($771 billion; 5% GDP)

7. MetLife ($771 billion; 5% GDP)

C. Tier Three (to be divided into a total of about 6)

8. HSBC ($391 billion)

9. Tannus ($369 billion)

10.  Barclays ($365 billion)

D. The Next Ten Massive Banks (not needing to be divided)

11. US Bancorp ($281 billion)

12. PNC ($269 billion)

13. BONY/Mellon ($212 billion)

14. Suntrust ($174 billion)

15. GMAC ($172 billion)

16. Capital One ($169 billion)

17. BB&T ($165 billion)

18. State Street ($156 billion)

19. Citizens ($148 billion)

20. TD Bank ($145 billion)

Data: Federal Reserve