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Category: Consumer Protection Law

9

Should You Buy Divorce Insurance?

brokenheart1.jpgDivorce is catastrophic: it increases the rates of suicide and heart disease; can decrease overall well-being for both parents and children; and it significantly hurts the financial position of the parties, especially women.

But unlike almost all other catastrophic risks that we face, the costs of divorce can not be fully insured. Because of statutory requirements that limit insurance coverage to “fortuitous events”, and the perception that divorce is elected (at least by one of the parties to the marriage), you can’t buy a policy that will pay you for breach of the marriage contract. Such is the law.

I’m interested in this topic, and so I was quite intrigued to read about a new product being developed by an entrepreneur named John Logan, of the SafeGuard Guaranty Corporation: divorce insurance.

There has been significant enthusiasm for the concept. As some noted, you could imagine such insurance having a collateral-benefit: “risk matching” your perspective spouse (or even a first date) based on their premiums. But when you think about the concept a little bit, obvious objections present themselves:

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2

Pomegranate Juice and the War on Terror

purely juice.jpgThe blogs are abuzz this morning talking about the Times’ profile of Stephen Abraham, an Army reserve officer who filed a crucial affidavit in the latest Guantanamo litigation. The article explains Abraham’s unique role:

As an intelligence officer responsible for running the central computer depository of evidence for the hearings, he said, he saw many of the documents in hundreds of the 558 cases. He also worked as a liaison with intelligence agencies and served on one three-member hearing panel.

All of which has left Colonel Abraham, 46, a civilian business lawyer who has lately been busy with a lawsuit between makers of pomegranate juice, with a central role in the public debate over Guantánamo. His account has been widely discussed in Congress, the administration and the press. On Friday, a federal appeals court judge took note of it in describing what she said were problems with the Pentagon’s hearing process.

I thought I’d do some digging into that aspect of this story that will interest our non-constitutional readers: why are pomegranate juice sellers suing each other?

PACER searches disposed of the mystery quickly. POM Wonderful LLC v. Purely Juice, Inc. et al., CV 07-2633 (C.D. Ca.) was filed on April 20, 2007. POM lawsuit against Purely Juice alleges that Purely Juice violated the federal Lanham Act (and its state analogue) by falsely marketing its product as “all natural, consist[ing] of 100% pomegranate juice” with “NO added sugar or sweeteners.”

Abraham represents Purely Juice. Just a few days ago, his client won an important victory in the case. On July 11, 2007, Judge Christina Snyder denied POM’s TRO. The order itself (download the PDF here) is notable for its length and careful attention to the law. POM had independently tested Purely Juice’s product, and allegedly found that “it is clear that consumers of ‘Purely Juice . . .’ are not receiving the nutrients and antioxidant polyphenol health benefits that one would expect from 100% authentic pomegranate juice.” [Editorial comment: anytime you are asking a judge to make a claim about “antioxidant polyphenol health benefits” on a TRO, you seem likely to be in for a tough fight.] But, Abraham argued that, basically, the FDA hasn’t yet made clear what constitutes 100% pomegranate juice, and it was otherwise compliant with 21 CFR 101.30, regulating percent juice claims. The Court agreed with Abraham. As for the plaintiff’s claim that the “NO added sugar” was misleading, the Court found that there was insufficient evidence to find that defendant had added sugar, accepting Abraham’s defense that “the laboratory results could have been caused by the natural variation in the pomegranate fruit, growing conditions, harvesting, storage conditions or processing conditions.” (Notably, this seems like a non-denial denial to me.)

Abraham’s good lawyering saved his client a significant chunk of change. According to a declaration filed in the case, Purely Juice has 800,000 bottles in its inventory, each of which retails for $3.79. ($3.79! For juice!)

So what’s the moral here? You can be a busy commercial lawyer and a participant in the great issues of constitutional moment at the same time? Or, perhaps, as various players seek to control the last lucrative, non-commodity, juice market, the great Pomegranate Wars have begun.

6

Consumer Time Travel

romecampodefiori.jpg(This is another in my series of dispatches from Rome. If you are getting tired of the concept, don’t worry: I’m coming home in a week.)

Two aspects of life here offer a nice comparative story about the way life in the United States used to be, and might become.

The first is the specialization of food shopping in Rome. Small shops for seemingly every type of food – cheese, meat, fruit, wine, cereals – line the streets in Rome’s old city center. In each shop, one (or two) employees dispenses food from behind a counter – it is not a self-service experience. It seems like these tiny shops, rather than the occasional small supermarket – are the primary way that citizens get their food. In a way, shopping here is like stepping back in time in the states to around 1940 or so. And there is something charming about the experience: the interactions (me in pantomime) are personal; the food is fresh and delicious; and you are less likely to slip and fall on a banana peel left on the ground. But the food is expensive, especially fruit, and if I were a busy citizen instead of a less-busy tourist, I’d find going to five different stores to complete my shopping to be a daily irritant.

Why does this specialization persist? I know less than I should about the risk of supermarkets in the United States, but I’ve a few preliminary thoughts. The first explanation denies that Italians shop at small stores outside of the cramped confines of City Centers. That is, just in the States, it is difficult for supermarkets to obtain purchase and economies of size in expensive urban cores. So, maybe, most Italian citizens do go to supermarkets, just not in places that tourists spend their time.

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Black Boxes Bite Back

blackbox.jpgAs interest rates jump, piggybacking has become all the rage in “credit repair” circles. For a fee, groups like Instant Credit Builders will let you “borrow” (part of) another person’s credit score by becoming an “authorized borrower” on his cards. Here is ICB’s overheated defense of the practice:

ICB has developed a system to counter the harmful societal impacts of an emerging market called “subprime lending”. Mob-like blood suckers under the umbrella of legitimate lending institutions are targeting those who have poor credit scores but fall short of being beyond credit risk acceptance.

To explain why subprime lenders are in such an opportunistic industry, take this example: The commission payable to a financial adviser or mortgage broker from an actual prime lender on a $100,000 deal yields a broker about $250. Yet the same $100,000 deal using a subprime lender yields them $2,000 to $2,500. This niche market banking industry is getting paid well to enslave most minorities, low-income borrowers, even victims of identity theft with interest rates that can be up to 3.5% higher than average.

Needless to say, mortgage lenders are hoppin’ mad. The godfather of credit scores, FICO, has claimed that “piggy-backing will soon come to an end on its watch.” One irony here is that, as lenders crack down, “they may actually increase demand for some of the services that these Web sites offer.”

A lot of the commentary on these sites has been harsh, but let me offer something like an “unclean hands” defense. Credit scores have long come under attack for having a “a disparate impact on poor and minority populations.” Moreover, the scoring is opaque; scorers claim that transparency would undermine their “trade secrets.” So consumers are navigating a world where they can have only a vague idea of the rules. Lenders shouldn’t be surprised when entrepreneurs reverse-engineer the ratings system and the technology bites back.

Moreover, these rules themselves may be self-fulfilling prophecies: if you decree that one missed $10 payment for a family of 4 earning $30,000 per year lowers their credit score by 200 points, they probably are going to end up being more likely to default because they are going to be paying much more in interest for any financing they get. Again, because the scores are black boxes, we have no assurance that the companies that offer them try to eliminate such endogenicity or whether they actually try to profit from such self-fulfilling prophecies.

As long as credit ratings are so shrouded in secrecy, the lenders who rely on them should expect gaming of the system. Watch for a debate over “black hat” vs. “white hat” credit repair builders as controversial (and interminable) as that now occurring in the world of search engine optimization.

0

Why Watters Matters: An Early Lesson from the First Circuit

Even in a quieter Term, the Supreme Court’s 5-3 decision in Watters v. Wachovia Bank, N.A. would hardly go down as one of the more significant, noteworthy, or even interesting rulings handed down, and that will certainly prove to be the case as the present Term races toward its (increasingly controversial) end. That’s not to say, though, that Watters won’t turn out to have a substantial impact on federal and state commercial regulation in a large class of cases, and we have a First Circuit decision from yesterday as proof of that. [Hat tip to How Appealing.]

First, Watters. I’ve blogged extensively about the issue and the decision before (see, e.g., here, here, and here), but the short of it is that the Office of the Comptroller of the Currency is entitled to preempt state consumer regulation of “national banking activities” even when those activities are conducted by entities other than “national” banks. In Watters itself, the issue was whether the OCC could preempt state regulation of national banks’ operating subsidiaries, and the Court affirmed decisions of the Second, Fourth, Sixth, and Ninth Circuits, all answering that question in the affirmative (although, as I noted at the time, the Court adopted the Ninth Circuit’s Chevron-free analysis, rather than the Chevron-laden views of the other three circuits).

The problem is that by focusing on the activity rather than the actor, the Court endorsed a broad understanding of the OCC’s preemptive authority, and one that could possibly extend to oust state regulation of all kinds of commercial actors, none of whom are actually “national banks,” and none of whom are therefore expressly protected by federal statute. Justice Stevens, in his eloquent dissent, raised the specter of such a possibility, and the First Circuit, yesterday, proved Justice Stevens prophetic. More about the decision below the fold…

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4

Politics, Private Space, and Total Persuasion

persuasion.jpg

A lunch today with a colleague at another school, coupled with an article in the Wall Street Journal, has brought me to back to a topic I blogged about back in January: Total Persuasion. As I suggested, there are analogies to be drawn between the government’s defunct secret possibly ongoing program to gather reams of information about its citizens and corporations’ desire to grab consumer mind-share by every persuasive avenue possible. Indeed, we’re rapidly approaching a time when it will be exceedingly difficult for the law to draw lines between advertising and not-advertising; between fraud and persuasion; and between censorship and consumer protection.

These claims are easy to overdraw, so let me give you an example and a theory to help set the stage for the discussion. In today’s Journal, John McKinnon has a interesting article about Sara Taylor’s decision to leave her job as the White House’s political director to join the private sector. Taylor is an expert in microtargeting, a marketing technique developed by corporations to segment their consumer markets by mining data to learn more about the structure of consumer’s preferences. According to McKinnon, microtargeting was “honed” by political operations to “more effectively zero in on voters’ emotion triggers,” and uncover groups of voters that are susceptible to future efforts. Taylor sees a “big future” for taking such political lessons back to the corporate world by “helping corporations focus on potential customers’ . . . feelings about buying a product or service.”

There are some roadblocks in this prosperous path, as the article points out. Most salient, businesses are “more constrained in the claims they can make” than politicians, presumably by the law of fraud (in its various guises). But there is a solution to this problem: encourage consumers to make their own persuasive advertising by creating “social networks around products and brands . . .” In the future, we should anticipate that such social persuasion will become an increasingly prevalent aspect of corporate marketing efforts, just as politicians have worked to co-opt social networking sites for their own ends.

Why? Because consumers have fewer defenses to social persuasion, and aren’t cynical about it yet. Moreover, social persuasion is probably less subject to legal sanction in the general case (indeed, it may be immune under circumstances where the same language if spoken by the corporation would be actionable). It is also, obviously, cheaper to produce. The downside (loss of control over message) is probably something that corporations will learn to live with. (I thank my lunch companion for pointing this problem out to me!)

What’s wrong with a society in which most speech that you hear is designed to persuade you to consume? When framed that way, some might immediately respond: nothing! After all, no one is being compelled to any particular purchase. If the consumer market is efficient, and consumers had a taste not to consume, wouldn’t savvy marketers satisfy the taste with a unpersuasive campaign? (The idea is silly on its face, but isn’t it sort of what Saturn and Berkshire Hathaway were/are up to?) Even assuming that the consumer product market is somehow irrational, marketers would presumably compete to satisfy whatever inefficient desires are extant.

But I doubt that market rhetoric is going to provide satisfying answers to whether the law should work to hinder a total persuasion society. I haven’t fully thought this issue through, but my starting point is an essay by Jonathan Franzen called Imperial Bedroom, in his book How to Be Alone. Franzen attacks privacy advocates for focusing on privacy as just problem of being from free from others’ (corporations, the government, space aliens, the U.N., etc.) prying eyes and grasping hands.

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Milking The Secret

It looks like pressure from the Physicians Committee for Responsible Medicine (via the Federal Trade Commission) has gotten the Dairy Industry to stop touting milk as a diet food. They need to provide more substantiation of the link between “dairy consumption and weight loss.”

So what about The Secret? For those unfamiliar with this self-help phenomenon, here’s a nice summary from Emily Yoffe:

There are now 5.3 million copies of the book in print in the United States. . . .[i]t is a No. 1 best seller in Australia, England, and Ireland, and it is scheduled to be translated into 30 languages. . . There’s no secret to The Secret. The book and movie simply state that your thoughts control the universe. Through this “law of attraction” you “manifest” your desires. “It is exactly like placing an order from a catalogue. . . . You must know that what you want is yours the moment you ask.” “See yourself living in abundance and you will attract it. It works every time, with every person.”

Even Oprah is buying it . . . despite the fact the book contains such extraordinarily irresponsible claims as “You cannot ‘catch’ anything unless you think you can, and thinking you can is inviting it to you with your thought.”

Could the FTC do anything to stop the marketing of The Secret? At first this case reminded me of the not-so-clairvoyant Miss Cleo, but it turns out her transgressions were mainly of rules regarding 1-900 numbers. A quick perusal of Rebecca Tushnet’s fantastic blog led me to this post about a big fine against makers of the Q-Ray bracelet for “infomercials . . . falsely representing that (1) the bracelet provides immediate, significant or complete pain relief and (2) scientific tests prove the pain-relief claims.”

Perhaps The Secret lacks the “immediacy” prong of that accusation. But it does rely pretty heavily on both scientific and religious rhetoric. Consider this little tidbit from Yoffe, describing its author:

She asserts that “the discoveries of quantum physics … are in total harmony with the teachings of The Secret.” To prove this, she explains, “I never studied science or physics at school, and yet when I read complex books on quantum physics I understood them perfectly because I wanted to understand them.”

And I want to devise a perpetual motion machine! I’ll just envision it working and it’ll come true, right?

A few more thoughts beneath the fold….

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6

Fiduciary Duty and Financial Aid

loan.jpg

The financial aid scandal, sparked by NY Attorney General Andrew Cuomo’s investigation (and possibly a shut-out competitor) has already led to some settlements with lenders and universities. The basic thrust of Cuomo’s investigation is that if lenders pay administrators referral fees (whether direct or indirect) to steer students to take certain loans, that conduct is a deceptive trade practice, “in violation of New York Executive Law ‘ 63(12) and General Business Law 349 and 350 and other relevant state law.”

Universities are falling over themselves to settle with NY, as is the lending industry, in light of some bad facts: the companies have sought to influence financial aid administrators with stock, Broadway tickets, and other goodies. So this question is, literally, academic: is the alleged conduct by the university employees a violation of a fiduciary duty (loyalty) owed to students?

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2

The Free Credit Reports That Aren’t Free

freecreditreport1.jpg

You’ve probably seen the commericals, which run incessantly on CNN and other cable channels. A happy young man says: “I’m thinking of a number . . . ” That number is a credit score, which you can obtain at a website called FreeCreditReport.com. You probably have heard that under a new federal law, credit reporting agencies are required to provide each person with a free credit report once a year. That website, however, has the much more obscure name AnnualCreditReport.com. I previously blogged about my experiences using AnnualCreditReport.com. One of the problems is that if you don’t know that the correct website is AnnualCreditReport.com, then it is very easy to go to the FreeCreditReport.com website. After all, it is featured quite prominently in a Google search for “free credit report.”

But there’s one catch — it ain’t free. Far from it. From the fine print:

When you order your free report here, you will begin your free trial membership in Triple AdvantageSM Credit Monitoring. If you don’t cancel your membership within the 30-day trial period, you will be billed $12.95 for each month that you continue your membership.

ConsumerInfo.com and Freecreditreport.com are not affiliated with the annual free credit report program. Under a new Federal law, you have the right to receive a free copy of your credit report once every 12 months from each of the three nationwide consumer reporting companies. To request your free annual report under that law, you must go to www.annualcreditreport.com.

FreeCreditReport.com is run by Experian, one of the credit reporting agencies. Experian also has another website offering free credit reports: ConsumerInfo.com. Recently, the FTC settled a case against ConsumerInfo.com website. According to an FTC news release:

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15

The Rise of Customer Blacklists

hotel1a.jpgBlacklists appear to be the rage these days. With the ease of storing and sharing personal information — coupled with lax privacy law restrictions on such activities — companies can increasingly create blacklists of bad customers. In this article from the Ottawa Citizen, hotels in Australia and Canada (and soon the United States) are signing up for a service that compiles a blacklist against “bad” hotel guests:

Blacklisting everyone from the whisky-swilling scoundrels whose partying sabotaged your last vacation to the louts who channel Pink Floyd by dismantling their rooms, the new Australian database — which is expected to expand to Canada and the U.S. by year’s end — helps prevent unsavoury individuals from obtaining short-term accommodations.

“People are becoming less considerate of the space they’re staying in,” says Josh Ginty, project manager of the Guests Behaving Badly registry.

“What we hope to do is proactively advertise to those people … that their details will be recorded if they breach house rules. That in itself is often a strong enough deterrent.”

Accessible only to operators of hotels, motels and vacation homes, the membership-based registry tracks five levels of guest misconduct. These range from “lower-level blatant disregard” for regulations, such as smoking in non-smoking rooms or swimming in the pool after hours (several staff warnings must be ignored before the activity is reported on the registry) to higher-level infractions such as non-payment of the hotel bill, assault or vandalism.

“If you steal a couple of towels, we’re interested in tracking that,” says Mr. Ginty. “But it doesn’t compare to someone who has verbally or physically abused the night manager.”

More than 1,000 properties have signed up for the service since it launched in December 2006. Expansion to other continents is planned to begin in six months, depending on how easily the database can be adapted to each country’s privacy laws.

Customers have the ability to rate hotels with websites such as TripAdvisor.com. So why shouldn’t hotels be able to rate customers?

I don’t view the situations as symmetrical. Customers have long been spreading their opinions about hotels and other businesses — this is how the market produces good products and services. Word about bad hotels gets out and it leads to less business, thus creating an incentive for hotels to improve their service. But what happens when a similar process works against customers? True, some hotel guests are obnoxious and destructive, but do we really want to live in a country where people find themselves routinely blacklisted from various hotels and other businesses (stores, etc.)? In a Seinfeld episode, Elaine once found herself on a blacklist by doctors for being a bad patient. Perhaps this is the trend of the future. I sure hope not.