Six Scandals: Why We Need Consumer Protection Laws Instead of Just Markets

Markets are powerful mechanisms for serving consumers. Some critics of regulation have suggested that markets also provide consumer protection. For example, Nobel Prize-winning economist Milton Friedman said “Consumers don’t have to be hemmed in by rules and regulations. They’re protected by the market itself.” This Article’s first goal is to test the claim that the market provides consumer protection by examining several recent incidents in which companies mistreated consumers and then explores whether consumers stopped patronizing the companies, which would deter misconduct. The issue also has normative implications because if markets consistently protected consumers, society would need fewer regulations and regulators, as Friedman suggested. The Article’s second goal is to begin construction of a theory on when the market does or does not protect consumers. The Article finds that reality reflects a more nuanced situation than Friedman and other critics theorized. In some instances, businesses’ sales actually increased after their misconduct became public, despite the fact that, in at least two cases, consumers had told pollsters they would avoid patronizing the company. Even when companies suffered declines in sales after their misbehavior became public, the scandals became known only because of laws and those who enforce them, suggesting that it is the very rules that Friedman decried that led to a market response. Though it is impossible to know what would have happened if the problematic conduct had not occurred, the evidence suggests that markets alone are often not enough to protect consumers, or at least that markets are not a reliable consumer protection mechanism

Can Cost-Benefit Analysis Help Consumer Protection Laws? Or at Least Benefit Analysis?

Cost-benefit analysis is often troubling to consumer advocates. But this Article argues that in some circumstances it may help consumers. The Article gives several examples of supposed consumer protections that have protected consumers poorly, if at all. It also argues that before adopting consumer protections, lawmakers should first attempt to determine whether the protections will work. The Article suggests that because lawmakers are unlikely to adopt multiple solutions to the same problem, one cost of ineffective consumer protections is a kind of opportunity cost, in that ineffective consumer protections might appear to make adoption of effective ones unnecessary. Ironically, such an opportunity cost is unlikely to be taken account of in cost-benefit analysis. Among the protections that especially risk failing to benefit consumers are laws that require consumers to perform certain tasks, such as disclosure laws that presuppose consumers will pay attention to and act on the disclosures; if consumers instead generally ignore the disclosures, the consumer protection will be largely illusory. Accordingly, before adopting measures that depend on consumers to do something, lawmakers should try to verify that consumers would in fact undertake those actions. The Article also makes some suggestions for ascertaining whether consumer protections will work (i.e., benefit consumers) and concludes with a brief critique of the proposed Independent Agency Regulatory Analysis Act

Free-Market Failure: The Wells Fargo Arbitration Clause Example

In September 2016, regulators charged Wells Fargo with opening millions of unauthorized accounts on behalf of its customers. When some of those customers filed class actions against Wells, the bank initially responded by moving to compel arbitration on the ground that the consumers had agreed to arbitrate disputes and waive their class action rights. Because most customers with claims in small amounts would probably have foregone filing an arbitration claim, the effect would have been to leave their damages uncompensated except for the refunding of fees, which Wells agreed to in the consent order it entered into with regulators. The Consumer Financial Protection Bureau has proposed a regulation which, if it had been in effect at the relevant time, would have enabled the injured Wells customers to obtain class action relief. But the proposed rule is encountering objections in Congress, based partly on free-market economic theory. This Article argues that free-market economics is not sufficient to protect consumers from the type of problem present in the Wells Fargo case for two reasons. First, free-market economics assumes that consumers have complete information while empirical evidence shows that consumers do not understand arbitration clauses, much less that consumers realize that such clauses would bar class actions as to fraudulent accounts that the consumers did not know about. Second, the number of primary checking accounts at Wells consistently increased as the fraud became public, suggesting that the free market did not discipline Wells for its misconduct until regulators intervened, and did so only modestly at that point. It is even possible that by enforcing arbitration clauses as written, free-market economics prolonged the Wells fraud, thus enabling more consumers to be injured. In short, some device beyond the free market is necessary to prevent financial institutions from cheating many consumers out of small amounts. Class actions are one such device, but arbitration clauses as currently enforced enable financial institutions to prevent their use, thus reducing their incentive to comply with the law

Law Student Laptop Use During Class for Non-Class Purposes: Temptation v. Incentives

(Excerpt) When the creators of the children’s television show Sesame Street wished to know whether preschoolers would actually watch it, their head of research, Ed Palmer, set up a room with a television monitor showing segments from the show. On a nearby screen, Palmer projected slides of various images; the slides changed every seven-and-a-half seconds. Then he brought small children in and waited to see if the children focused on the Sesame Street segments or the still pictures. Only segments that elicited attention from many preschoolers ended up on the air. As a result, the producers discarded segments that they had intended to run and created new characters to hold children’s attention. After three or four sessions, nearly every segment held the attention of at least 85% of the children. Law students in class also face distractions. In the fall of 2009, while waiting for a professor to vacate a classroom, I peeked into the class and noticed a student simultaneously texting on her cell phone and surfing the web on her computer. Consequently, in the fall of 2010, I stationed observers at the back of six law school classes in an attempt to determine, among other things, the extent to which laptops distract students, and whether student use of laptops for non-class purposes is affected by what is happening inside the classroom—for example, whether students are more likely to visit Facebook when the professor is lecturing or another student asks a question. Ultimately, the observers recorded detailed observations in sixty class sessions of a collective 1,072 laptop users (though there was considerable overlap among those 1,072 users)

Written Notice of Cooling-Off Periods: A Forty-Year Natural Experiment in Illusory Consumer Protection and the Relative Effectiveness of Oral and Written Disclosures

For more than forty years, a standard tool in the consumer protection toolbox has been the cooling-off period. Federal statutes, state statutes, and federal regulations all oblige merchants to give consumers three days to rescind certain contracts. This paper reports on a survey of businesses subject to such cooling-off periods. The study has two principal findings. First, the respondents indicated that few consumers rescind their purchases. Thus, the study raises doubts about whether cooling-off periods benefit consumers or whether they provide only illusory consumer protection. The article also offers speculations about why cooling-off periods have been of such little value to consumers. Second, the study found that consumers who receive both oral and written notice of their rights are more likely to avail themselves of those rights than those who receive only written notices, and that the differences are statistically significant. Fifty-three percent of the sellers who gave only a written notice and did not speak of the buyer’s right to cancel said buyers never cancelled, nearly double the percentage for sellers who did tell buyers (27%). Businesses that provided both oral in-person and written notices of the right to rescind were more than twice as likely to report that more than 1% of their customers cancelled contracts as those that provided only written notices. The article also explores why oral and written notices combined were more effective than written notice alone. Finally, the survey asked respondents about the cost of cooling-off periods. More than four-fifths of the respondents who answered the question reported that the right to cancel had cost them either nothing or very little. This contrasts with the vehement opposition of opponents of such rules when they were first adopted in the 1960s and 1970

Opting in, Outing out, or No Options at All: The Fight for Control of Personal Information

Businesses routinely buy and sell personal information about consumers. Many consumers find this objectionable, but relatively few of them opt out of that trade. This Article argues that businesses have both the incentive and the ability to increase consumers\u27 transaction costs in protecting their privacy and that some marketers do in fact inflate those costs. Faced with this and other constraints, many consumers ultimately decide not to protect their privacy. This Article proposes several ways by which consumers\u27 transaction costs can be reduced or eliminated

The Content of Consumer Law Classes III

This paper reports on a 2018 survey of law professors teaching consumer protection, and follows up on similar 2010 and 2008 surveys, which appeared in Jeff Sovern, The Content of Consumer Law Classes II, 14 J. Consumer & Commercial L. 16 (No. 1 2010), at https://papers.ssrn.com/sol3/papers.cfm?abstract_id=1657624 and Jeff Sovern, The Content of Consumer Law Classes, 12 J. Consumer & Commercial L. 48 (No. 1 2008), at http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1139894, respectively. As reported in previous surveys, professors teaching consumer law report considerable variation in coverage. Professors want to cover relatively current subjects within their courses, such as FinTech, credit invisibles, and mortgage servicing. They also continue to cover topics traditionally explored in consumer law courses, such as common law fraud and the Magnuson-Moss Warranty Act. The 2018 survey also found considerable interest in some topics that did not generate any interest in the 2010 survey, including the Consumer Product Safety Commission and student loan servicing. The survey also asked professors whether they read contracts before agreeing to them and read required disclosures before entering into consumer transactions. Not one professor reported always doing so, while 57% said they rarely or never read contracts and 48% said they rarely or never read required disclosures. It thus appears that not even consumer law professors routinely read consumer contracts and disclosures