Site Meter

Category: Consumer Protection Law

9

Lipson on The BS That Didn’t Bark: Why Didn’t (Doesn’t) Bear Stearns Go Into Bankruptcy

lipson.JPGMy colleague, Jonathan Lipson, is an incredibly astute observer of bankruptcy law and practice. I was talking with him the other day about Bear’s bailout, and he offered some characteristically interesting thoughts. I invited him to share them in written form with our audience, and will be posting his comments in two parts today and tomorrow.

What’s so bad about bankruptcy?

Today’s New York Times reports that both shareholders and lock-up acquiror JP Morgan-Chase have threatened to put the financial firm into bankruptcy if the other doesn’t blink.

But, if bankruptcy is the only thing both sides agree on, why doesn’t the board authorize a chapter 11 filing?

Two classes of arguments have been made against a BS bankruptcy, one about market disruption, the other about value maximization. The cost, delay and uncertainty of bankruptcy could bring the whole system down, the theory goes. In any case, it would wipe out shareholders’ entire interest.

These are, of course, possible outcomes. But they’re not as likely as people think. In any case, the important question is not whether bankruptcy would do this, but whether ex ante we think bankruptcy would be worse than the current deal.

There is some reason to think bankruptcy might actually be better. If so, then something else may explain why BS, JPM and the Fed would rather spend the next couple of years in Delaware Chancery Court than the U.S. Bankruptcy Court for the Southern District of New York.

Read More

19

Facebook Banishment and Due Process

facebook3.jpgRecently, I was talking with David Lat, author of the blog Above the Law, and he was complaining about being banished from Facebook. David was an active user of Facebook, and he suddenly and inexplicably found himself banned from the site. Facebook didn’t supply him with any reason.

I found the issue quite intriguing, and David said I could blog about it. In particular, what makes this issue of interest to me is how it applies more generally to Web 2.0 applications. With Web 2.0, people invest a lot of time creating profiles, uploading information, and so on. And they start to depend upon these applications in their lives.

lat-david-2.jpgDavid also said he has a lot of important information on his Facebook profile. He uses it as a way to communicate with people, and he uses it to help him gather information for use in his blogging. So being kicked off Facebook is a big deal to David. It can impact his job. It can also impact his friendships and professional relationships. For example, David told me he received emails from several friends who wondered where he had gone. They thought David might be ignoring them or might no longer be their “friend” on Facebook.

As more of our lives become dependent on Web 2.0 technologies, should we have some sort of rights or consumer protection? Is Facebook the digital equivalent to the company town?

David checked Facebook’s website, which has a FAQ about disabled accounts. Facebook states:

Your account was disabled because you violated Facebook’s Terms of Use, to which you agreed when you first registered for an account on the site. Accounts can either be disabled for repeat offenses or for one, particularly egregious violation.

Facebook does not allow users to register with fake names, to impersonate any person or entity, or to falsely state or otherwise misrepresent themselves or their affiliations.

Read More

1

Persuasion in the Virtual Shopping Mall

AC89-0437-20_a.jpegI just came across an interesting paper, Empirical analysis of consumer reaction to the virtual reality shopping mall , 24 Comp. Hum. Beh. 88, by Kun Chang Lee and Namho Chung. Here’s the abstract:

The Internet shopping mall has received wide attention from researchers and practitioners due to the fact that it is one of the most killing applications customers can find on the Internet. Though numerous studies have been performed on various issues of the Internet shopping mall, some research issues relating to the user interface of VR (virtual reality) shopping malls still await further empirical investigation. The objective of this study is to investigate whether the user interface of the VR shopping mall positively affects customer satisfaction in comparison with the ordinary shopping mall. For this purpose, we developed a prototype of the VR shopping mall for which the user interface consists of both 3D graphics and an avatar, using it as an experimental medium. 102 valid questionnaires were gathered from active student users of the ordinary shopping mall, and two research hypotheses were then tested to prove whether the three explanatory variables such as convenience, enjoyment, quality assurance improve in the VR shopping mall, and whether customer satisfaction is also significantly enhanced in the VR shopping mall in comparison with the ordinary shopping mall. Additionally, we conducted the PLS (partial least square) analysis to test whether the customer satisfaction is explained significantly by the three explanatory variables or not.

Not surprisingly, products in the VR malls were seen as better, and customers enjoyed shopping more. As the authors point out later in the paper, “VR is a medium capable of yielding immersion,” which should increase customers’ ability to evaluate brand quality, and thus increase sales. Indeed, the effect becomes more robust the more time you spend at the VR mall! Lee and Chung claim that their approach has “immediate managerial applications”: to me, it gives a sense of why and how we’d move toward an omni-persuasive consumer experience.

The Home Finance Arms Race

A growing consensus seems to be emerging that we can borrow and spend our way out of the current subprime mess. The “stimulus package,” the Fed’s interest rate cuts, and new moves to increase the limit on “jumbo loans” all seem based on this assumption. Given that the U.S. is already racked with debt, I can’t quite see the logic here. Moreover, as Harold Meyerson noted recently in Congressional testimony, there’s a much simpler explanation for the current housing woes:

The subprime mortgage crisis is fundamentally a crisis of the rising cost of housing while the income of many Americans has flat-lined. As home-building executive Michael Hill pointed out in a Washington Post op-ed column just this Monday, “forty years ago, the median national price of a house was about twice the median household income. In some parts of the country, this ratio was closer to 1 to 1. Twenty years ago, the median home price was about three times income. In the past 10 years, it jumped to four times income.” And in most thriving metropolitan areas, Hill adds, the ratio is far higher than that.

Conclusion: If median income in America had continued to increase as it did in the years from 1947 to 1973, when it doubled, we would not be facing the mortgage-market meltdown we are experiencing today. So, too, with credit cards, where default rates are also increasing sharply, reflecting the growing desperation of Americans struggling to pay their bills, and further destabilizing many of our already shaky financial institutions.

If economic policies focus solely on allowing the middle class to borrow more, they may well be setting us up for yet another arms race of housing finance that we can ill afford. Consider, for instance, the effects of inequality in New York City, a bellwether for trends likely to affect more of America:

Read More

Are Debtors’ Prisons Next?

Ah, the perils of unintended consequences. The federal government in the 1990s made direct deposit a default method of paying Social Security and some other benefits. Now “Social Security recipients could now more easily pledge their future checks as collateral for small short-term loans.” And the “payday loan” industry has found a lucrative new niche–”volume has climbed to about $48 billion a year from about $13.8 billion in 1999.”

Responding to the manifest failures of under-regulated consumer finance markets, many are now claiming that predatory borrowing was a bigger problem than predatory lending. I wonder if they’d find predatory “Ms. [Jennifer] Rumph, whose medical problems include severe asthma and two hip replacements,” and who appears to support herself and her children with disability benefits:

After Ms. Rumph fell behind on her payments, Miracle Finance sued her in small-claims court in Abbeville, Ala. Although federal law says creditors can’t seize Social Security, disability and veteran’s benefits to pay a debt, enforcement of the law is scant, and many Social Security recipients are unaware of their legal rights. Lenders and their debt collectors routinely sue Social Security recipients who fall behind in their payments, and threaten them with criminal prosecution, senior advocates say.

Debtors must go to court to prove their case. Ms. Rumph says she didn’t know any of this and was afraid to go to court. Miracle Finance won a $1,500 default judgment in July, and four days later sought a court order requiring Ms. Rumph to appear in person to detail her income and assets.

I suppose some analogue to the “fugitive disentitlement” doctrine might leave hard-liners unmoved by Ms. Rumph’s plight. Nevertheless, the payday borrowing boom in general should lead to reconsideration of exactly what the purportedly narrowing “consumption gap” between rich and poor is actually based on.

2

Kosher Food, Social Justice, and Shaming (Blumenthal Guest)

The last year or so has seen a fascinating movement in the kosher food world-the development of the “hekhsher tzedek” -variously translated as a “righteous seal” or “Justice certification.” Initiated largely by the Conservative Jewish movement, the certification is seen as a complement to the traditional kosher certification, which attests that the food in question has been prepared according to Jewish ritual law. According to the United Synagogue of Conservative Judaism, the seal would certify that “food and meat processors have met a set of standards that determine the social responsibility of kosher food producers, particularly in the area of workers’ rights.” Thus, kosher food could receive two certifications-one showing that it is ritually kosher, one showing that the workers in a particular plant were treated ethically, fairly, and legally. The USCJ was to consider a resolution establishing the certification at its December conference last week. It was expected to pass easily, though I have not seen follow-up reports.

The idea is controversial, for a number of reasons legal and otherwise. One is motive-some see the move as motivated by antipathy toward one of the larger kosher facilities, AgriProcessors, in Iowa, where worker mistreatment and unsafe conditions were alleged in the spring of 2006.

Another set of issues concerns the proper purviews of government, religious, and lay groups: objections have been raised that responding to such worker treatment is the role of government agencies and the justice system. There are interesting echoes here of the kosher fraud statute cases of the last several years, in which constitutional challenges to state definitions of “kosher” were upheld. These cases essentially led to more informal, social regulation of kosher food sellers, reflecting the sort of “shaming” and social norms issued often discussed here at CO. See Shayna M. Sigman, Kosher Without Law: The Role of Nonlegal Sanctions in Overcoming Fraud Within the Kosher Food Industry, 31 FLA. ST. U. L. REV. 509 (2004). (My own opinion is that those cases may be wrong, and the statutes not unconstitutional, but that’s another discussion.)

But other questions have been raised, too-for instance, what effect, if any, would such certification have on the value of the ritual certification (i.e., would the religious aspect of it be devalued)? Is there potential liability for a certifying group if there is an accident or mistreatment at a plant that has been certified? What standards would the certifying group use?

All of these notions, I think, raise good issues for legal scholars (and students looking for note topics!).

2

Predatory Lending: Meet Jonathan Swift

plalogo.gifAt the new website of the Predatory Lending Association, aspiring lenders can find concentrations of “working poor” customers in their neighborhood, calculate effectively usurious loans, not blacklist crusaders against payday lending, including Liz Warren, and learn all the arguments that goo-goos will make against high-interest borrowing. One Q&A in particular should be familiar to contracts professors (or maybe just those, like me, who use Randy Barnett’s Perspectives book):

Myth: Payday lending is comparable to selling yourself into slavery.

Reality: Although there is a market need for slavery, people do not choose to sell themselves into slavery. Free choice is the difference between payday lending and slavery.

(There is even a neat chart to make the connection more clear.) On the discussion boards, you can share your thoughts with other predatory lenders. Sure, it all seems a little too cute, but it’s worth checking out anyway.

Food Fraud & the First Amendment

The Pennsylvania Dep’t of Agriculture has decided to keep consumers from knowing whether the milk they buy is free of certain hormones:

Dennis Wolff, Pennsylvania’s agriculture secretary [has] announced a crackdown on “absence labeling” on milk, meaning labels that tell consumers what isn’t in a product rather than what is. He argues that “hormone free” labels are misleading because cows produce hormones naturally. Even labels that are more carefully worded, such as “contains no artificial hormones” will soon be verboten in Pennsylvania because Mr. Wolff said that there were no scientific tests to prove the truth of such a claim.

On first glance, this might seem like a classic case for First Amendment intervention. A reporter asks ” as long as the claim is accurate, isn’t the point of labels to differentiate one product from another?” He warns that “using Mr. Wolff’s reasoning, you could argue that organic labels on milk are unfair because they suggest that non-organic food is inferior. The same goes for labels for “natural,” “from grass-fed cows” and “locally produced.””

However, Rebecca Tushnet counsels caution, especially given consumers’ limited opportunities to process information. Commenting on controversy over “genetically modified organism” labeling, she writes:

Establishing that some consumers wish to avoid GMO foods on non-safety grounds does nothing to refute either of the FDA’s major premises: GMO foods are safe, and labeling will mislead some significant number of consumers about safety.

Tushnet’s position makes sense to me, but I am afraid that captured regulators may provoke courts to impose sweeping First Amendment limits on advertising regulation. Instead of picking on consumers with preferences for less chemical cow enhancement, why aren’t they taking on real “food frauds?” For example, here’s the CSPI on Smucker’s:

All varieties of Smucker’s Simply Fruit contain more fruit syrup than actual fruit. And the syrup doesn’t even come from the fruit in the products’ names, but from (cheaper) apple, pineapple, or pear juice concentrate.

This strikes me as much worse for consumers than the “absence labeling” in the milk context. But perhaps we should be willing to accept some questionable priorities now in exchange for First Amendment flexibility that permits future action on real food fraud.

The Fear Economy

missingclass.jpgMany commentators worried that the 2005 bankruptcy law would discourage entrepreneurs from taking risks. Now it appears to be accelerating the housing downturn:

A new bankruptcy law, approved by Congress in 2005 after years of debate, makes it much harder for households to get out from under their consumer debt. The result: More people being forced to walk away from their homes, leaving lenders holding the bag. Perversely, a law intended to help the financial industry may be damaging the housing sector, creditors and borrowers alike.

Another recent BusinessWeek article shows just how weak bankruptcy protections may be becoming in the wake of a voracious debt-collection business and slow-footed credit bureaus.

In the 1990s, businesses adept at tracking and trading consumer debt expanded their reach to dabble in accounts enmeshed in bankruptcy. That dabbling has grown into a robust market. Some of the trade in so-called bankruptcy paper involves debts that remain collectible. What’s troubling is that the market now also includes billions in discharged debts, which ought to have no dollar value. Owners of canceled liabilities can revive their value in two main ways: by directly pressuring consumers to cough up cash or by gaming the credit system. . . .

After Chapter 7 cases, “debtors expect their credit is going to become pristine,” [one commentator] notes. “But now you have people who buy the debts, even bankruptcy debts, and all of a sudden, new people are supplying information to the credit bureaus.” She adds: “The way the system is working now, it doesn’t give [debtors] that fresh start.”

Read More

0

Why There’s No First Amendment Right to Sell Personal Data

There are a number of really interesting cases pending in the First Circuit and its lower federal courts that raise questions of confidentiality and free speech in the context of the commercial trade in prescription drug information. In New Hampshire, Maine, and Vermont, data mining companies have raised First Amendment challenges to state laws that restrict the ability of pharmacists to sell information about which doctors prescribed which drugs. More information about these cases from the AP can be found here. I’ve written about this phenomenon here, arguing that there are sound doctrinal, jurisprudential, and policy reasons to reject any idea that regulation of the commercial data trade raises any serious First Amendment problems.

These cases all involve laws passed by states concerned about the sale of prescription information to data mining companies, who buy information about which doctors prescribe which drugs from pharmacies and then massage the data for use in marketing and other industry purposes. The laws vary in their particulars, but basically forbid or regulate the ability of pharmacies to sell the information. In April, a federal district court in the New Hampshire case struck down New Hampshire’s law under the Central Hudson test as violating the companies’ free speech rights. The First Amendment argument can be boiled down as follows: because the laws stop pharmacies from telling other people about their customers, they violate the pharmacy companies’ free speech rights and are therefore unconstitutional.

I think this is a silly argument, as I explain after the jump.

Read More