UNIVERSITY OF HOUSTON LAW CENTER CENTER FOR CONSUMER LAW VOLUME 15, NUMBER 3, SUMMER 2012 Journal of Consumer Commercial Law & OFFICIAL PUBLICATION OF THE CONSUMER & COMMERCIAL LAW SECTION OF THE STATE BAR OF TEXAS FINANCIAL SERVICES Will Consumers and the Economy Benefit from the CFPB?

Professional Dishonesty: Do U.S. Law Schools that Report False or Misleading Employment Statistics Violate Consumer Protection Laws? Recent Developments

Journal of Consumer & Commercial Law 1 Journal of Consumer & Commerical Law Volume 15, Number 3 Summer 2012

State Bar of Texas Consumer & Commercial Law Section

University of Houston Law Center OFFICERS COUNCIL 2011-2012 Editorial Board CHAIRPERSON TERMS EXPIRE 2012 Student Editor-in-Chief Richard Tomlinson Jessica Lesser Lone Star Legal Aid Lesser & Jordan PLLC Nadia Barrow 1415 Fannin St, 3rd Floor 15443 Knoll Trail Dr. Ste. 100 Dallas, TX 75248 Houston, TX 77002-7632 214-855-9355 Chief Managing Editor 713-652-0077, ext. 1154 [email protected] Kelsey Stokes 713-652-3815 (Fax) [email protected] Rick McElvaney 100 Law Center Chief Articles Editor Houston, TX 77204-6060 JB Banzon CHAIR-ELECT 713-743-1236 Chad Baruch 713-743-2131 (Fax) [email protected] Chief Recent Developments Editor Law Office of Chad Baruch BreAnna Schwartz 3201 Main Street Michael O’Conner Rowlett, TX 75088 Law Offices of Dean Malone, P.C. 972-412-7192 900 Jackson St, Ste. 730 Associate Editors 972-412-4028 (Fax) Dallas, TX 75202 Ashley Spencer 214-670-9989 [email protected] 214-670-9904 (Fax) Cordelia Tullous [email protected] TREASURER Contributing Editors D. Esther Chavez TERMS EXPIRE 2013 Steve James Paige Cantrell Office of the Attorney General Attorney at Law Michaiah Chatman Consumer Protection Division 521 Texas Ave. Janese Golden-Dews P.O Box 12548 El Paso, TX 79901 Austin, TX 78711-2548 915-543-3234 Jennifer Park [email protected] 512-475-4628 Katelyn Richardson [email protected] Rebecca Knapik Farrah Usmani Davis & Wilkerson P.C. Demetrice Walker SECRETARY 1801 S. Mopac, Suite 300 Daphne Wang Austin, TX 78746 Melanie Phipps 512-482-0614 Kustoff & Phipps, LLP [email protected] Editor-in-Chief 4103 Parkdale St. San Antonio, TX 78229 Eliot Shavin Richard M. Alderman 4514 Cole Ave, Ste. 1015 Associate Dean for Academic Affairs 210-614-9444 Dallas, TX 75205 Dwight Olds Chair in Law 210-614-9464 (Fax) 214-522-2010 [email protected] 214-522-7944 (Fax) University of Houston Law Center [email protected] 713-743-2165 IMMEDIATE PAST-CHAIR 713-743-2131 (Fax) TERMS EXPIRE 2014 Andrew E. Sattler Mark Frenkel [email protected] John Dwyre & Associates Frenkel & Frenkel, L.L.P. 4207 Gardendale, Suite 104-B 12700 Park Central Drive, Ste. 1900 Dallas, TX 75251 San Antonio, Texas 78229 214-333-3333 (210) 736-1772 214-265-9360 (Fax) (210) 736-5299 (Fax) [email protected] [email protected] Chad Pinson Baker Botts, LLP EDITOR-IN-CHIEF OF THE 2001 Ross Ave, Ste. 600 JOURNAL OF CONSUMER Dallas, TX 75201-2980 & COMMERCIAL LAW 214-953-6621 214-661-4621(Fax) Professor Richard M. Alderman [email protected] Dwight Olds Chair in Law University of Houston Law Center Tina Torres 100 Law Center The Torres Law Firm, P.C. 110 Broadway St. Ste. 370 Houston, Texas 77204-6060 San Antonio, TX 78205 713-743-2165 210-737-2672 713-743-2131 (Fax) [email protected] [email protected]

2 Journal of Consumer & Commercial Law Journal of Consumer Commercial Law & VOLUME 15, NUMBER 3, SUMMER 2012 Articles

Financial Services–Will Consumers and the Economy Benefit from the Consumer Financial Protection Bureau? A discussion from The Federalist Society’s 2011 National Lawyers Convention 86

Professional Dishonesty-Do U.S. Law Schools that Report False or Misleading Employment Statistics Violate Consumer Protection Laws? By Joel F. Murray 97

Consumer News Alert-Recent Decisions 109

The editors welcome unsolicited lead articles written by practicing attorney, judges, professors, or other qualified individuals. Manu- Recent Developments script length should be approximately 15-30 typed, double-spaced pages. Endnotes should conform to the Sixteenth Edition of Deceptive Trade Practices and Warranties 113 A Uniform System of Citation, published by the Harvard Law Review Association. Consumer Credit 114

Manuscripts should be forwarded to: Debt Collection 116 Richard M. Alderman University of Houston Law Center Arbitration 119 100 Law Center Houston, Texas 77204-6060 Landlord-Tenant 124 [email protected] Miscellaneous 125

The Last Word 130

Journal of Consumer & Commercial Law 85 Financial Services

Will Consumers and the Economy Benefit from the Consumer Financial Protection Bureau? 86 Journal of Consumer & Commercial Law A discussion from The Federalist Society’s 2011 National Lawyers Convention.

PARTICIPANTS: George Mason University School of Law. Professor Zywicki • Mr. David Berenbaum, Chief Program Officer, National is the Foundation Professor of Law and has his JD from the Community Reinvestment Coalition University of Virginia, with an MA in economics from Clemson • Mr. Leonard J. Kennedy, General Counsel, Consumer University. He clerked for my colleague Judge Jerry Smith on the Financial Protection Bureau U.S. Court of Appeals for the Fifth Circuit from 2003 to 2004. • Mr. Alex J. Pollock, Resident Fellow, American Enterprise He also served as Director of the Office of Policy Planning at the Institute Federal Trade Commission. Professor Zywicki is the author of • Prof. Todd J. Zywicki, Foundation Professor of Law, more than 70 articles in leading law reviews and peer-reviewed George Mason University School of Law economic journals. He has testified before Congress on issues of • Moderator: Hon. Timothy M. Tymkovich, U.S. Court of consumer bankruptcy law and consumer credit and is a frequent Appeals, Tenth Circuit commentator on legal issues. I read him frequently on the Volokh Conspiracy. JUDGE TYMKOVICH: Let’s go ahead and get started with Our next speaker is David Berenbaum, who is the Chief our luncheon program today. I’m really pleased to have a chance Program Officer for the National Community Reinvestment to participate in this year’s Federalist Society annual convention, Coalition and a supporter of the Consumer Financial Protection and I’m looking forward to next year’s 30th anniversary for the Bureau. The NCRC is an association of more than 600 Society. I remember attending an early convention at Yale Law community-based organizations that promote access to basic School in 1982, so it seems like only yesterday, but the Society banking services, including credit and savings, to create and sustain has certainly done well and thrived. And the reason it’s done affordable housing, job development, and vibrant communities. well and thrived is because of its ability to put the other programs Mr. Berenbaum has achieved a national reputation for his fair like we’ve seen yesterday, today, and tomorrow in general, and housing and consumer protection advocacy and his involvement in particular, panels like today’s which really go to one of the in civil rights issues. He’s appeared as an expert on numerous important policy-legal-political issues of the day, and explore it national news magazine shows and has testified before Congress from various points of view. on foreclosure and subprime mortgage issues. The Dodd-Frank Wall Street Reform Act created a new Our third speaker is another Consumer Financial entity in the administrative apparatus. The Consumer Financial Protection Bureau skeptic; I guess I would say -- Alex Pollock Protection Bureau is a new federal agency that regulates financial from the American Enterprise Institute. Mr. Pollock joined AEI products from a consumer protection prospective. Supporters in 2004 after 35 years in banking. He was President and Chief argue that the Bureau will provide consumers with much Executive Officer of the federal Home Loan Bank of Chicago needed protection against fraud and overly complicated financial from 1991 to 2004. He is the author of numerous articles on instruments. Critics, however, are concerned about the Agency’s financial systems and recently published a book on the financial vast powers and lack of accountability and fear that it may only cycle, Boom and Bust. increase the cost of credit and limit financial options available to Lastly, we have the General Counsel of the ordinary people. As structured, it will be highly independent, Implementation team for the new Consumer Financial with a single director and a new guaranteed funding mechanism. Protection Bureau, Leonard “Len” Kennedy. Prior to coming Today, we’re going to explore these various aspects of the new into government, Mr. Kennedy served as General Counsel for Bureau both from a positive and from a critical perspective. As Sprint Nextel Corporation and handled $35-billion merger. He’s we sit here today, there’s not a confirmed director of the Bureau; a graduate of the Cornell Law School. there is a nominee pending, and I hope that we can talk about the Our last speaker, Tim Muris, the former Chair of the politics of that somewhat. FTC, was unable to participate today; he fell ill. We have a distinguished panel of reporters and With that, we’re going to start the program with brief researchers today to discuss the advantages and disadvantages remarks from each of our speakers. We will then have a bit of of the new agency and to give their thoughts about how it can a roundtable. And finally, I will open up to the audience for approach its new task so as to avoid the regulatory pitfalls that questions. plague many agencies. Our first speaker is Todd Zywicki of Our first speaker, Professor Zywicki.

Journal of Consumer & Commercial Law 87 PROFESSOR ZYWICKI: Thank you, Judge. We’re going to a two-thirds vote of the Financial Stability Oversight Commission, talk about the CFPB and, to some extent, whether it’s good for and only if it would seriously threaten the safety and soundness of consumers. So I’ll talk about what’s good and what’s bad. What’s the American financial system. good will only take me a second. Also, a perfect recipe for a disaster is that it’s set up with a I think it’s good that we consolidated consumer financial narrowly focused parochial mission purely to take care of consumer protection into one regulator. I think it’s also obvious that that protection, which virtually guarantees what most people think of one regulator should have been the Federal Trade Commission, a glitch, not a feature of sound regulation, which is tunnel-vision who knows how to do this, rather than creating a new regulator. focus on the narrow regulatory agenda that’s put before an agency, But I agree with the idea rather than broader perspective of the impact on the economy. of creating one regulator It has a guaranteed budget insulated from any oversight from for consumer financial Congress and basically has almost no oversight from anyone. So it’s protection. The second almost a perfect model of a dysfunctional bureaucratic structure: thing I think is good was a tunnel-vision focus on a narrow parochial regulatory mission, the proposal to create almost perfectly designed for agency overreach without any check one integrated mortgage from anybody else, and that sort of thing. form that would simplify So, from that sense, I think what we can expect to see is an disclosures for mortgag- agency that is expansionist; an agency that overzealously pursues es. And I think that the its own agenda at the expense of other goals. The fundamental impetus, the motivation question we want to be talking about in consumer protection is, behind CFPB is good how do we balance consumer protection with other goals that Professor Todd J. Zywicki as well, which is, there benefit consumers, such as lower prices, greater choice, and is a role for government greater innovation in the marketplace? And this agency simply is to promote consumer not set up to be able to make those fundamental distinctions and Everything else in protection competition fundamental choices on those margins. and consumer choice Another problem that has manifested itself, and the 450 pages of in the marketplace, and was, I think, kind of comical from the beginning, was the it would be great if this representation. This is going to be a nonpolitical expert agency, the CFPB is bad for new agency would do and so that’s the idea why it would be a single director without consumers, bad for that. Unfortunately, it’s any oversight. Well, I don’t think anybody seriously believed that not. to begin with; but then the first thing they did was end-run the the economy, and As a list of what appointment of a director by appointing Elizabeth Warren to set is bad, the list is pretty up the agency from the White House. The supposedly apolitical bad in general. much everything else. Elizabeth Warren is now running, of course, as a Democratic Everything else in the 450 candidate for a Senate from Massachusetts after having used pages of the CFPB is bad this nonpolitical job to catapult her political career. And now for consumers, bad for the economy, and bad in general; and it’s a the person they’ve actually appointed or nominated to do this real shame because, as I said, we could have simply given all this to is Richard Cordray, former Attorney General of Ohio, who has the FTC, who knows how to do this, rather than creating this new clear political aspirations in the future. Now, it’s commonplace monster bureau. What I think is a shame about the whole thing is to appoint politicians to run agencies in Washington. It is not that we did need reform of consumer financial protection. I’ll talk commonplace to appoint politicians to run agencies and then about what I think those reforms should have looked like. Instead, pretend like they’re nonpolitical agencies. we’ve got the exact opposite, which is, we got more of the same, Now, there have been a lot of arguments that have been more of exactly the problems that have interfered with consumer made, but if you want to why, I forget, just compare to it the protection, competition, and consumer choice. Federal Trade Commission. The Federal Trade Commission does So I’m going to talk about a couple of the things pri- exactly the same thing as CFPB does. It does consumer protection. marily focused on the structure and the powers of the CFPB as to It is used to doing consumer protection and financial services, why I feel so confident in my prediction that the CFPB is going to among other things. How is the FTC set up? A five-member end up being a very bad thing for consumers, competition, and the bipartisan commission, it is subject to internal competition, or economy. I’ll start off with the structure. If you were to sit down checks and balances. It’s got a bureau of competition, a bureau and try to design a government agency that embodied all of the pa- of economics, and a bureau of consumer protection so that these thologies of bureaucracies identified by scholars of regulation over competing policy goals are aired within an Agency of Consumer the past 30 years, it would look exactly like the CFPB. It’s as if they Protection, but also promoting competition and consumer choice. took the cookbook and reversed it. It’s as if this agency was frozen And basically, what they’re proposing with the CFPB is that you during the Nixon administration, missed the last 30 years, and then should take the Consumer Protection Bureau out of the FTC and was thought out again, and they basically learned nothing about the make it a stand-alone agency, allow it to write any regulation it regulatory experiences of the 1970s and deregulation in the 1980s. wants, to sue anybody it wants, under broadly delegated powers Now why do I say this? Well, first, it creates a one-person director, without any oversight from anybody. removable only for cause. It is housed inside the Federal Reserve, Now I worked at the FTC. I know a lot of work that but almost completely insulated from Federal Reserve oversight. worked at the FTC. If you propose that to anybody who’s ever Perhaps this has existed before; perhaps it’s been held constitutional worked at the FTC, they would think you had lost your mind before. But as far as I can tell, this is by far the most powerful because nobody thinks that consumers would be better off if we agency in the history of American politics that is an independent took the Bureau of Consumer Protection out of the FTC. So agency inside of another independent agency. It is an independent what is the lesson? Well, the FTC has been doing it one way for agency that is independent of the agency that is independent, and a hundred years, and now we’ve got this new bureau that’s going that supposedly supervises it. Its actions can only be overruled by to do the exact same thing in a completely different way without

88 Journal of Consumer & Commercial Law any oversight or anything else. There’s a proposition there, which incentives, in fact, there are multiple provisions that will actually is either we’ve been doing it wrong for a hundred years and we’ve create perverse incentives and moral hazards by borrowers. finally got it right, in which case we’ve got to abolish the FTC Thanks. and start over, or we have an agency that’s done pretty well for a hundred years and provides a pretty workable and functional JUDGE TYMKOVICH: Thank you, Professor. David model for how we want to do consumer protection, and we’ve Berenbaum. just basically overlooked that. I think there are good reasons why we would have these concerns. So that’s my biggest concern is the MR. BERENBAUM: That was a very powerful, powerful structure of the CFPB, which is guaranteed to run off the rails. presentation, but I want to deconstruct some of the issues that Let me spend a couple minutes talking about a couple you’ve just heard, and I think we’re going to have an extremely other big problems that I think are going to cause a problem for lively luncheon discussion today. consumers and the economy. First, among the powers of the With all due respect, it is extremely easy to define CFPB is to regulate products in terms that are unfair, deceptive, “abusive,” and we, the entire nation, are feeling the impact and abusive. “Unfair” and “deceptive” are broad terms, but of, frankly, a broad failure of consumer protection issues that they’ve been defined over decades of FTC rulemaking and the morphed and was a direct result of regulatory failure and a failure like. “Abusive” seems to be a completely new standard; nobody of part of government, industry, and to some extent, consumers knows what it means. Nobody knows even where it came from. alike to understand the complex changes that were happening in It doesn’t appear in any other statute in this form on the state, the financial services marketplace. federal, or local level that I’ve been able to find or that anybody’s Today, over 12 million more foreclosures are expected. ever identified to me. So it’s a completely broad creation of new What started as a subprime crisis moved into the middle-class liability for lenders about abuses. We don’t know what it means, quickly, as consumers took advantage of option ARMs, home but we do know that lenders are awfully concerned about what equity lines of credit, loan-to-value ratios approaching 100, 125 it means, and we know that when we have situations like this, percent loan to value, and no-income-documentation liar loans. these kind of terms almost invariably end up hurting the people And who was the first to point this out? Was it the federal regulators they’re supposed to help because it dramatically increases the who were charged with risk of innovation, making new loans and that sort of thing. So safety and soundness? In it’s going to exacerbate this problem of restricting loans. fact, it was the consumer A third area that I think is a problem is preemption and protection organizations, arbitration, which is it dramatically reduces preemption by the legal service attorneys, federal government of the states. The logic of that was that the and consumer advocates federal government was asleep at the switch, that we didn’t have who were working with an active enough federal regulator for customer protection, so consumers who were we needed to allow the states to do this. Well, now we have that falling into the trap federal regulator, right? So what’s the justification for a reduced of unsafe, unsound, preemption standard? There isn’t one. The whole justification predatory and often was, we didn’t have a federal regulator; we’ve now got that. So discriminatory loans. what we’ve got now instead is a federal regulator with the power We have a of the states to be able to pile on. What does that mean? If mortgage crisis, a credit David Berenbaum you take “abusive,” for example, it may not even be the CFPB crisis, in this nation now defines what “abusive” is. It may be the Attorney General of that is so perverse because New York or the Attorney General of California who creates the people didn’t understand Is there a need for de facto definition of “abusive.” the connection between There’s also a lot of provisions that people haven’t meaningful consumer a new consumer noticed in the CFPB that unleashes the trial lawyers. There’s protection and safety and a lot of restrictions on arbitration, for instance. Arbitration soundness. They walk protection board? clauses are banned in various sorts of things. There’s a lot hand in hand. Is there a Absolutely. of provisions in there that are basically just a sop to the trial need for a new consumer lawyers, for obvious political reasons, who are also going to help protection board? Ab- define what this means, and not in a way that’s going to help solutely, there is, and the real issue today is, how do we move consumers. ahead in the marketplace. Twelve million-plus more foreclosures I’ll say one last word, then, that I think is the biggest around the corner -- for every 100 jobs lost 40 more foreclosures problem, which is that the CFPB does nothing about the real take place. There’s been $5.6 trillion lost by families who have problems of the financial crisis that supposedly spawned it, and been foreclosed upon, impacting the tax base, our schools, all of it will do nothing to prevent that from happening again. Why our investment in our homes. Five hundred and two billion dol- is that? Well, when we looked at the loans that the financial lars has been lost overall in homes that are adjacent to foreclo- institutions made, they were incredibly stupid loans. But they sures. And if we all look at our own 401(k)s, in 2007 the na- weren’t stupid loans because consumers didn’t understand that tion’s value was $8.7 trillion. At the end of Fiscal Year 2009, it if they put nothing down and their house went down in value, had dropped to $5.9 trillion, and we expect lower numbers from it was a good investment for them to walk away and give their economists moving ahead. house back to the bank. They were stupid loans because of the This is a complex environment. The Supreme Court incentives they were creating. That’s a safety and soundness just approved cert. regarding a disparate impact case, an area very issue, and we should think about it as a safety and soundness close to home for NCRC, because we are fighting to ensure access issue and not pretend like it’s a consumer protection issue. When to responsible credit. In the Magma v. Gallagher case, I’m sure consumers rationally respond to incentives, that is not a consumer the amicus briefs are going to be flying in the very near future. protection issue. Not only does this do nothing about the To have an entity created to conduct rulemaking, to supervise,

Journal of Consumer & Commercial Law 89 and to enforce federal consumer protection laws is extremely -- not really the subject of today -- but the rating agencies knew. reasonable when we look at the failures over the past decade. To The reports were clear. Irresponsible lending, reported all over take consumer complaints which have not been reasonably acted the place, continuing to give AAA credit ratings to Ameriquest, upon because, frankly, states don’t have adequate resources to do New Century, Countrywide Loans, as they were defaulting, as that, to promote financial education so that the next generation they were being criticized. The system is broken, and the time has of homeowners, credit card users, folks looking for student loans, come for a fresh look. folks who unfortunately may need payday loans, will have better Thank you. information on how to make appropriate choices, and to monitor the financial markets for new consumer risks, is all very, very JUDGE TYMKOVICH: Thank you. Alex Pollock. important. And don’t think for a moment, because the market has MR. POLLOCK: The Dodd-Frank Act in general, and the changed, oh, there’s no more subprime lending, option ARMs Consumer Financial Protection Bureau in particular, are a highly are a thing of the past, that in fact there are not emerging issues. interesting case of clashing political philosophies, as we’ve heard The National Community Reinvestment Coalition is challenging today. It remains my opinion that the Dodd-Frank Act is best lenders who are not lending to the FHA loan program standards. characterized as the A GNMA-guarantee program, and yet consumers who desperately Faith in Bureaucracy need to refinance, particularly African-American and Latino Act. It’s also my opinion consumers, are not being given access to credit. The CFPB is that, given human charged to look at that data, to address the issues, to work with nature, we shouldn’t prudential regulators. have unadulterated faith Older Americans across the country are literally landlocked in anyone or anything. in their homes right now. Many of them could benefit from the Now, the Faith in reverse mortgage program. Many of you know program, home Bureaucracy Act is a equity conversion mortgage from HUD. But there’s a growing typical product in the trend of predatory lending because these are equity-rich seniors in aftermath of a financial our society, and in fact, we see a new breed of mortgage bankers crisis. These acts, and brokers targeting these consumers with high-cost loans. None which go back through of the prudential regulators are looking at this. The CFPB just history just as financial Alex J. Pollock announced they are closely looking at this issue. crises do, typically are We are in a very complex society right now, and it’s a accompanied by the The Dodd-Frank shame that the CFPB has gotten into an issue of politics between assertion that we’re going Republicans and Democrats. I’m very nonpartisan; the National to set up these new rules Act in general, Community Reinvestment Coalition is nonpartisan. Frankly, and these bureaucracies, we’ve seen mistakes on the part of both the Republicans and the and this will assure that and the Consumer Democrats. We’ve seen successes on both parties’ parts as well. our problems “never Financial Protection But this entire fight over whether it should be your director versus happen again.” But of commission -- the bottom line is, Congress voted, this Bureau course, they always do Bureau in particular, is being implemented, and in fact, many in industry as well as happen again, we get consumer groups alike are looking for standards, are celebrating into trouble anyway, are a highly transparency. And though there is a lot of rulemaking coming, and in addition, the and I understand that is a concern to many in this room, they reaction, the political interesting case of have been inviting groups in so that it will be intelligent and and regulatory reactions clashing political transparent. And whether it’s appraisal, whether it’s the disclosure to the crisis are typically documentation -- frankly, no other agency in years has been able pro-cyclical. That is philosophies. to really address TILA and RESPA revision. They are the first. to say, they come in We have an opportunity for a new coordinated level of prudential and clamp down at the oversight by the existing regulators, who hopefully will do a better bottom and they make it harder to recover from the bust, which job with the new regulator in town. is also what’s happening now. I’d like to close with a final thought, and that is, you Each time we have a boom and bust, a political know, we all operate from various perceptions or views of how the imperative is for politicians to do something. Well, what can marketplace should be. In an ideal world, freedom of choice, a you do if you’re a politician? Well, you can always set up a new competitive marketplace, is a wonderful thing. Our organization bureaucratic agency or expand the rules and the authorities of celebrates access to credit and wants to see responsible credit, and existing ones. The Consumer Financial Protection Bureau is a in fact, equal access to qualified consumers. The reality is that a result of this political imperative. It’s an extreme example of faith market without constraints created where we are today. Those in bureaucracy because it is consciously designed to be completely option ARMs, 90 percent of the files I’ve personally reviewed independent, as we say; that is, free of all checks and balances, as for consumers facing foreclosure, never should have been Todd also very pointedly discussed. originated. The idea of a product, a no-income verification loan Indeed, the political tactic of turning the CFPB into a for professionals such as you in this room is probably a very good bureau of the Federal Reserve, as we all know, in fact completely product. But the way it was originated across this country and freed it from that most basic democratic control, which is the ultimately incentivized and securitized -- to Wall Street -- was one power of the purse of the elected representatives of the people. of the downfalls of the mortgage process not only here but around Excess profits of the Federal Reserve, which is the funding source the globe. -- by excess profits, we mean profits in addition to statutory So, to have extra checks and balances, consumer dividend paid by the Fed -- are simply and completely taxpayers’ protections, coupled with more attention to the rating agencies money. The funding of the CFPB, by diverting these profits,

90 Journal of Consumer & Commercial Law is transparent and, so far, successful attempt or to create a expectations, market efficiencies, and the techniques of modern permanent appropriation of the taxpayers’ money and to take finance. That faith was stoked in part by the huge financial away the ability of future congresses to control the bureaucracy rewards that enabled the extremes of borrowing, the economic through the power of the purse. imbalances, and the pretenses and assurances of the credit rating The Dodd-Frank Act was enacted in July 2010, and by agencies to persist so long. A relaxed approach by regulators and July 2010, the party of Senator Dodd and Congressman Frank legislators reflected the new financial zeitgeist.” could see that they were going to suffer very large losses in the Over the past few years, these excesses caused boom and next election. The funding device of the CFPB passed while they a subsequent bust that Warren Buffett’s partner Charlie Munger still had large majorities and made sure that the will of the people characterized as dangerous and whose recurrence Munger no in the next election couldn’t take away this funding, which the longer thought should be prevented. We came close to the collapse people are providing through their taxes, remembering that the of the financial and economic system. If you were a keen observer Fed’s profits are simply taxpayers’ money. of the scene, as I was, in the private sector at the time, it was not Now, setting up bureaucracies free of the nuisance difficult to imagine a world where ATMs ceased working, checks of checks and balances and congressional appropriations is a stopped clearing, credit cards were refused, and commerce ground philosophical position. It is a Platonic claim that rests on the slowly to a halt. And it is surely too soon to say that we have put assertion of the existence of experts, in other words, of people with all our troubles behind us. The very recent collapse of MF Global superior knowledge and superior virtue in the Platonic fashion. Holdings and a tottering Euro zone demonstrate that the powerful And the people who have this superior knowledge and virtue are undertow of the forces at work in 2008 are still with us. the employees of the bureaucratic agency. The opposite position, Given the close call we had, it should be no surprise that of the believers in democracy as opposed to Platonists, sees that the voters, acting through their representatives, decided no evidence of such superior knowledge or superior virtue on the that the animal spirits needed taming. That’s what led to the part of government employees or anybody else, for that matter. Dodd-Frank Act and the creation of the Consumer Financial Instead, it observes that all men are sinners, all have fallen short, Protection Bureau. In many ways, though, there is nothing new all make mistakes, and all are hungry for power. Therefore, in a under the sun, for Hamilton faced similar issues. Remember, it democracy, no one should be completely independent. No one. was Hamilton who, more than 200 years ago, brought stability And all should be subject to checks and balances. to the chaotic financial affairs of the new federal government. In my view, for the CFPB, these checks and balances He persuaded Congress to have the new federal government should include appropriations by Congress in the normal assume the debt of the states, combine it with pre-existing debt democratic fashion, the need to have the CFPB’s agenda balanced of the national government, and issue bonds which had to be by safety and soundness considerations in the rulemakings, and repaid. Hamilton triumphed over Jefferson and Madison by by explicit cost-benefit analysis which takes account of economic, wheeling and dealing on a grand scale and agreeing to support the competitive, and market efficiency aspects, as Todd also said. establishment of the new capital on the Potomac in exchange for Let me come, speaking of philosophy, to a Hegelian the support of Hamilton’s assumption plan. conclusion. Thesis: Backers of the CFPB are prone to worry In order to generate the revenue needed to pay the about so-called unfettered markets. Antithesis: Believers in bondholders, Hamilton persuaded Congress to adopt a national democracy worry about the unfettered state, and in particular, excise tax on the sale of distilled products (whiskey), which was the unfettered bureaucracies. Synthesis: Everybody should be first tax imposed on the new national government on a domestic subject to checks and balances, and this obviously includes the product. Western Pennsylvania farmers resented the new tax CFPB. and vigorously resisted it, occasionally tarring and feathering the tax collectors. Hamilton, for his part, published essays in the JUDGE TYMKOVICH: Thank you. Our last speaker for the newspaper under a pseudonym, urging military action against the first round, Len Kennedy. tax protesters, and also accompanied President Washington when the latter led a large federal militia to put down the insurrection. MR. KENNEDY: Thank you. This has been quite interesting. It was Hamilton who, as the first Secretary of Treasury, enabled The views I express are my own, and I’d like to start with the establishment of the First National Bank who had earlier something that I wrote before I joined the CFPB in 2010. “The founded the Bank of New York, which only ceased independent financial crisis of 2008 was a catastrophic failure of business existence in 2007 when it merged with Mellon Financial Corp. judgment, corporate governance and regulatory oversight.” Now It was Hamilton who established the US Mint, who established CFPB was created to address some of the causes, with supervision an extensive system of tariffs, who founded the Revenue Cutter of financial institutions, regulations of the products and services, Service, the predecessor to the US Coast Guard, and from whence enforcement matters to be taken when rules were broken, and, I the term “Coast Guard Cutter” originated. think most significantly perhaps, robust services to be provided As we will see, a financial infrastructure of the federal on behalf of consumers so that they are in fact better consumers of government as we know it probably owes more to Hamilton than financial services. The question on the floor is, will the economy to any other individual. He was an enthusiastic supporter of what and consumers benefit from the existence of the Bureau? I think must surely have seemed then like big government because that’s we should look back, as well as forward, as we think of what we what he thought the times demanded. Hamilton’s handiwork all, industry, consumers, and regulators, should do differently. was not perfect, and if he were alive today, I’m sure he would be Alexander Hamilton, Federalist, lawyer, financier, and amazed at the complexity, size, breadth, and imperfections of the political philosopher, was once asked why government existed federal government. at all. He responded that it was because “the passions of man Yet, I also believe that with his sure eye and keen feel will not conform to the dictates of reason and justice without for finance, he would see problems that warranted close oversight constraint.” What Hamilton said over 200 years ago remains and possibly strong action. Hamilton would, I suspect, be true today. As former Federal Reserve Board Chairman Paul wary of large financial institutions that cross many borders, that Volker recently put it, “It should be clear that among the causes employ a high degree of leverage, that total assets exceeding the of the recent financial crisis was an unjustified faith in rational gross domestic product of many countries, that are not subject to

Journal of Consumer & Commercial Law 91 overall control by any entity, and that can move capital around should be humble and pragmatic about what they can hope to the world with the click of a button so that the problems in one accomplish, aware of what hasn’t worked before and mindful of country can quickly become the problems in another. He would the importance of credit in a modern economy. Lenders generally likely be troubled by financial institutions that are too big to fail don’t have to extend credit, and making it too difficult or costly and that, therefore, have the public as their implicit partner. He to do so will simply result in the withdrawal of credit to those would probably wonder how an insurance company managed to who need it and can afford it. After all, most people in modern take on so much exposure that its failure risked tanking the entire America need loans to buy cars, buy homes, and educate their financial system, requiring a bailout by the federal government. children. Regulation should therefore be no more intrusive than In short, Hamilton would probably conclude that necessary, yet strong enough to get the job done. the size, complexity, and opacity of our modern-day financial There undoubtedly will be bumps in the road and errors institutions require vigilance, attention, and competence on the along the way, and the task is likely to be nerve-wracking, but I part of the national government, the operators of those businesses, take heart from Hamilton, who was well aware that we humans and as well, the consumers who take advantage of their products are imperfect. He also said, “A well-adjusted person is one who and services. On the consumer side, I believe that Hamilton would makes the same mistake twice without getting nervous.” find that modern-day institutions of many stripes are difficult or Thank you very much. almost impossible for even savvy consumers to navigate. During the housing bubble, for example, the fastest growing mortgage JUDGE TYMKOVICH: Thank you, Mr. Kennedy. products were some of the most complicated: hybrid adjustable- I think the panel can stay seated for the next round, and rate mortgages, interest-only loans, and payment option ARMs. we’d very much appreciate your preliminary remarks. To calculate the costs and risks, borrowers needed sophisticated Let’s go back to Todd. You’ve heard some pros and knowledge of things like rate caps and rate spreads. cons of this new entity, which I think is fascinating because we’re The potential costs and risks of these mortgages were really seeing the creation of some of a new type of administrative unclear to many consumers, and the lack of transparency saddled structure that is somewhat unique. What are your comments on too many people with mortgages they couldn’t afford. And as what you’ve heard from its supporters? well, apparently, many of these products were not understood by their issuers. For those who purchased real estate requiring a PROFESSOR ZYWICKI: I’ll just say two things real quick so mortgage recently, you that we can get to questions and that sort of things. The first may recall you received thing I want to say is that I do want to stress that I agree with Attempts at a set of materials in the the central proposition that David and Leonard both said, which regulation must be process of your closing. is that there was a need for a unified, streamlined, coherent In my own experience, consumer protection system on the federal level. To try to get carefully weighed those documents were, TILA reform and that sort of thing was like the United Nations, shall we say, difficult if with all the different regulators who had to come together around and considered, for not impenetrable, and a table and that sort of thing. So I don’t disagree with that. that’s even if you have I also don’t disagree with David’s proposition that the law of unintended a law school degree many of these loans should not have been made. I disagree with consequences and you’re working at the proposition that, say, a nothing-down loan is a consumer it pretty hard. protection problem. It’s a safety and soundness problem of applies particularly In short, I think because the incentives they set when the house goes down in value that Hamilton would because then the people don’t have skin in the game. I agree, strongly in this area. acknowledge that the loans shouldn’t have been made, but we’ve misdiagnosed the our modern-day problem if we think of that as a consumer protection problem. financial industry Now don’t get me wrong; I’m an economist, so I’m not needs oversight in a number of areas to curb its inclination to going to criticize consumers for responding to incentives. But profit from market failures, like a lack of transparency, misaligned that’s what consumers are doing is responding to incentives, and incentives, and an unlevel playing field, as well as its propensity the whole rationale of CFPB seems to be set up on this idea that to blow up from time to time, often causing extensive collateral consumers are these hapless victims, and they’re not. That was damage to innocent bystanders. And he would readily agree that certainly part of the problem. There was consumer fraud. But leadership and policy competence by the putative overseers is very that’s not that’s not the main problem here. There was a huge important. safety and soundness problem. Having said all that, agreeing with That said, I also think Hamilton would be skeptical of all that, we don’t need a new agency. We don’t need a new super- the government the only solution to these problems and would bureaucracy. We could have solved that. be willing to hold people accountable for their actions when they The second thing I just want to say is I think that my had the ability to make choices but then chose unwisely. For biggest concern, taken away from this consumer issue, the sad example, when home prices were levitating unnaturally in many irony of all this is that, if you look at the history of consumer communities in the last decade, many saw this as an opportunity to credit regulation, most likely, an unfortunate result of the CFPB get rich quick by flipping houses, at least until the music stopped. is, if it does its job the way it thinks it’s going to, it’s probably No one forced these speculators to do what they did. Attempts at going to be to increase consumer fraud and increase abuse of regulation must be carefully weighed and considered, for the law consumers in the American economy. Now why is that? Well, of unintended consequences applies particularly strongly in this I’ve not heard any supporters of the CFPB say that they think area. A rush to regulate a particular type of undesirable activity the CFPB is going to increase access to credit or decrease the engaged in by an entity that has a certain name (think of the word cost of credit. We’ve seen this story before when we’ve regulated “bank”) can easily result in regulatory arbitrage when the same consumer credit, and this is why we deregulated consumer credit activity is conducted by entities not subject to such regulation. beginning in the 1980s. I think Hamilton would agree that a would-be regulator What happens is, if you reduce the ability of people to

92 Journal of Consumer & Commercial Law get credit, you don’t reduce the need for credit. If you still need issues, as well as your own associations. Maybe that’s a role for $500 to fix your transmission to get to work on Monday, you the Federalist Society, for the private sector to engage on these still need $500 regardless of whether you can get a credit card issues as well. because the government has said, we don’t believe you should Back to the question, though, which I think is a very be allowed to have a credit card. We’ve seen this since the onset fair question, ultimately, while we want to see the CFPB up of financial crisis, with things like the Card Act, which make it and running, we support the appointment of the director of the more difficult to price risk on credit cards and reduced access to CFPB immediately. We think it works against the government credit cards. Well, yeah, people are getting fewer credit cards, but as a whole, regardless of appointments, to have any administrative payday lenders have been experiencing double-digit growth since appointments held up. I speak with attorneys; I speak with the onset of financial crisis because people still need credit. And I compliance officers from finance and real estate all the time. And think that’s the sad irony of not learning the lessons of history. in this particular case, the entire industry wants clarity, they want We’ve been down this road before. We know how the to understand the rules, and they want to be able to lend again. story ends, and we know why we abandoned the regulatory models We have to get beyond the smoke and mirrors. during the Nixon administration that the CFPB stands for, which is that once you get into this one to see the impact is it’s going JUDGE TYMKOVICH: Alex, the political processes is in some to reduce access to credit and increase the cost of good credit; state of limbo. Maybe Len can comment on this also. But I’d be what you’re doing is you’re taking the most vulnerable people, curious on your take of where the next 12 to 14 months will lead. pushing them down the ladder from credit cards to payday loans There is some debate about the funding mechanism and the lack to Internet payday loans to pawn shops. You’re pushing those of an oversight commission and the like. What’s your take on the vulnerable people down the ladder to precisely the forms of credit politics of the day and where that’s going to go as we enter into that we’re most concerned about. The most likely effect of all this an election cycle? is going to be, I suspect, that a lot more people are going to be victims of fraud. That’s unfortunate, but I think that’s how this MR. POLLOCK: Well, Judge, needless to say, election cycles story ends. tend to make politics in Washington move toward stalemate, and I don’t think this is any different. It makes one remember that JUDGE TYMKOVICH: David, in a previous life, I was in a the democracy, with all its faults, is still the best thing we’ve got. state Attorney General’s office. I was the Solicitor General in If I could make a couple more comments with your Colorado. And my boss Gale Norton, who I think I saw in the permission? audience, was the Attorney General. And her office had a very strong and committed consumer protection division. But she was JUDGE TYMKOVICH: Please. an elected official, and although she had a lot of power to exercise the consumer protection statute, she was subject to election. This MR. POLLOCK: I was very interested to hear Len tell us how structure doesn’t have the traditional pieces of accountability. the Western Pennsylvania farmers tarred and feathered the tax What would be your response to those concerns? collectors.

MR. BERENBAUM: I think you’re raising a good point about JUDGE TYMKOVICH: After judicial process. accountability. I actually believe there is accountability to the Financial Oversight Council on critical issues. It’s not that hard MR. POLLOCK: All of my colleagues on the panel mentioned to get consensus among prudential regulators, and in fact, we simplified and clear and straightforward mortgage information for were trying to really foster independence. We felt that those, borrowers, or financial information generally. That’s something in fact, being regulated by this institution should, through fees, I think everybody agrees on. That’s an omni-partisan perspective through the Fed, be supporting the institution, not the taxpayers. and it’s one that I’ve worked on, I guess now, four and a half I think there’s a tension at work here, though. It’s very years. I proposed a one-page mortgage form the spring of 2007. easy to say that the new CFPB or other Dodd-Frank provisions It’s surprising how hard it is to actually do it, even though are going to inhibit credit or promote the cost of it in this country. everybody agrees on it. One of the things, in my view, that’s And there’s a real rub there because, frankly, it’s the failures of most important in such a key information form is to repeat to our financial system that have brought the entire marketplace to the borrower what we say their household income is, and then to a freeze. The point about low-income consumers, consumers who express the debt service as a percent of that income for people to have less resources, frankly, all of middle-class America is struggling really think about. to gain access to credit today; small businesses are struggling. But I bet you agree with that, David. for the role of the government -- Freddie, Fannie, FHA, and VA -- there would be no lending right now. Ninety percent of the MR. BERENBAUM: You know I do. loans being originated are not in the private sector, folks. It is the government. That’s how serious our market failure was. MR. POLLOCK: That item, which was in my form, tends to I wanted to make another point relative to what was said have been left out in all of the official proposals, which I think is earlier as well, and that is, there is some accountability at the Bar, a huge mistake. and we have approached the American Bar Association. We’re also Finally, both David and Len mentioned credit rating very concerned about the role of service, and you know what I’m agencies. There is no question that they are an important part about to say. In the robo-signature issue, there is accountability of the story of the last boom and bust and crisis. But it is to be at the Bar, and we have to face that fact. The CFPB is looking remembered that the rating agencies had so much power because at these issues. We’ve asked the Bar to voluntarily look at these they were given it by government regulation, which made them issues, and I believe a subcommittee is being created to do so. into a government-sponsored oligopoly, which required the use But it raises very serious ethical as well as practice performance of their ratings. In my judgment, one of the two good things in issues for attorneys as a group. Again, who has the strength to call the Dodd-Frank Act is the mandate, to American regulators at out these issues? Our hope is a new era of protecting consumer least, to take reliance on credit ratings out of their regulations. I

Journal of Consumer & Commercial Law 93 think it’s a really good idea. Such reliance is unfortunately still decisions that will affect people’s lives, their investments, and in the international standards, promulgated at Basel, and we need their well-being. to move the point up to the Basel standards. It ought to be easy I take the point that Alex made: I haven’t met anyone because the Germans in particular always looked at credit rating at the bureau or any other place I’ve been up to this point in life agencies as a part of American financial imperialism in these who’s perfect. So there is a need for a certain amount of skepti- international standards. They’re in there,and they need to be cism and there’s a huge need to be an informed regulator. So taken out. that’s kind of what I dedicated myself to, and we have an agency Thank you. -- how to find the people, how to create the processes, how to build the systems to make things a little bit better and more JUDGE TYMKOVICH: Thank you. stable. To me, it’s a particularly difficult challenge because of Len, you’re the General Counsel to a brand-new entity the nature of the financial services industry. A professor said to in the federal government. It’s a rare opportunity for a lawyer to me in the course of the last two years, well, one problem with come in and have that chance to develop both the policy and the the financial services industry is that the business you’re in is administrative structure from the ground up. the business of risk, and when you take the risk and you lever it I’m curious about how the agency has put itself together up, you’re exploding the risk, and things turn again to the con- over the last year or so, how you have recruited and employed sequences, obviously, the consequences obviously can be quite people, and whether you are engaging in rulemaking even though devastating. So we’ve talked to people in other agencies and the director has yet to be confirmed, and given that fact, whether governments for their best ideas, the things that have worked for it has slowed down the process or will it continue to go forward. them and the things that haven’t. MR. KENNEDY: Thank you, Judge. There are a whole host of We’ve talked I haven’t met any- questions that, for obvious reason, I will not answer or discuss. to people in the financial one at the bureau But some of the things that have been touched on, I’d like to services industries, large address. As the General Counsel of this Agency, I consider it my banks, small banks, non- or any other place job to make sure that everything we do is totally consonant with regulated entities as well. the rule of law and how we engage in regulation in this country. What are the problems I’ve been up to I’ve spent something like 35 years of my life as a professional they’ve encountered, in- working in one part or another, either in industry, in a law firm, cluding the problems of this point in life or in a regulatory body. I spent most of my time in college and regulation? TILA and who’s perfect. So law school very interested in regulated industries, and actually RESPA -- you know, a deregulation, having been influenced by Dean Kahn, Alfred form that people liter- there is a need for Kahn, of Cornell, who passed away recently. I’m a huge believer ally have been trying to in markets and I’m a huge believer in the law. improve for 15 years, and a certain amount So, to my mind, the notion that we are somehow we can’t get there some- unaccountable, you know, I have a hard time squaring it how. So that’s a huge of skepticism and because we start our conversations about everything we’ve done, mission. We have a stat- there’s a huge need what does the statute say? What do other laws say? What has utory deadline to get it the Supreme Court said? And I recognize that this law has done. We’ll see. So part to be an informed embedded in it a huge number of policy questions. But I think of what we’ve worked when you take the oath of office to represent your country, it’s with, a little bit unusual regulator. your duty and your responsibility to have loyalty to what others -- and I’ll stop here; I feel have created and what we have inherited. And the notion that like I’m filibustering or anyone would think that I or my colleagues would take that something -- but we created a form, we’ve done some testing, lightly I find abhorrent. we’ve had lots of people in the industry, we’ve put it on our web- Now, with respect to this agency, I came to this role site. ‘Can you understand this form?’ We’ve had 24,000 com- and this job because I thought it would be an opportunity ments from the public on it. That’s a lot, and that doesn’t mean for me personally to give something back to a country that’s it’s perfect by any means, but it’s two pages, three pages. That’s a given me more than I deserve, probably: the opportunity to start. So we’ll see where we go from there. fulfill whatever promise and talent I had, and it’s been quite an But I guess I would simply say we start not believing interesting experience. People have come from all directions that we are the inheritors of some received wisdom about how all and all corners and all sectors of our economy, financial services this should work and will work. We’re in the process of working industry, law firms, academia, you name it. They’ve given up with the public and the regulated entities to do our best job. lots of prestigious titles and lots of money. Happy to do it. Thank you. Happy to be able to contribute in some way. Taking as the mission how to create an institution that JUDGE TYMKOVICH: We’re in a room of mostly lawyers. cannot just be better than the institutions that existed prior And not a few of you will likely be concerned about litigating in to the time the Bureau was created, let’s think about it. Let’s the future over some of these issues, representing clients on these think about this industry, the financial services industry, with issues. which we deal with only one small piece, people. If this industry I want to go back to Todd and really ask your take on doesn’t work well for our country, we’re going to have a very the current political context -- where we are, and also perhaps challenging time here, not just like we have now. It could be some of the legal or constitutional issues that may be lurking out worse. So, as we’ve tackled the job, we’ve looked for people there as the agency comes up and running. who understand various parts of the industry, who understand regulation, who understand the law, and who are committed PROFESSOR ZYWICKI: Great. Thanks. First, I thought it to doing our best to make wise decisions, pragmatic decisions, might be helpful just for those who haven’t followed the nuts and

94 Journal of Consumer & Commercial Law

bolts of the details to give you a sense of what the current political The second thing is there’s a peek-a-boo issue if you’re posture is because we’ve all alluded to this. familiar with that. There’s a certain issue in the CFPB involving Basically, what has happened is, as you know, Elizabeth the Deputy Director that is blatantly unconstitutional under Warren was originally appointed. She set up and staffed the agency the PCAOB case from the Supreme Court, which is the Deputy as a special assistant to the White House or Treasury or something Director is appointed by the Director and has the authority to like that. They were supposed to nominate a director within a act as the Director when the Director can’t act. That’s a clear year or something like that. In the end, they nominated Richard PCAOB violation, so I’m sure there’s going to be litigation on Cordray, who I mentioned earlier. As things stand right now, the this. That seems clearly unconstitutional and at least provides a Republicans in the Senate filibustered his nomination until they jumping-off point for the litigation. say they get certain structural forms which they want, which are along the lines that I JUDGE TYMKOVICH: David, a comment? And also, if you described. They want have a question for another panelist, go for it. a commission rather than a single director. MR. BERENBAUM: Sure. Well, just a quick reaction. I mean, They want to budget there is a lot of rulemaking going on. One of the other areas, oversight by Congress though, with regard to defining what is responsible versus an rather than it just being abusive loan that is going on right now is rulemaking in what’s -- basically, what they called qualified mortgage (QM) space right now by the CFPB, and get now is a guaranteed that is an ongoing process. But literally, “QM”, just to go back a budget from the few years ago, is how the Federal Reserve; no various Republican or questions asked. The Democratic proposals Federal Reserve has to in Congress with give them 12 percent of regard to predatory its revenues, and they lending ultimately were can do anything they want to with it. And they want to change incorporated into the the veto by the Federal Stability Oversight Council from two- responsibilities of the thirds to one-half. CFPB. Legally, there is a The Republicans so far have hung together on that. very big debate going on The 44 Senate Republicans have all said they’re in alignment to right now with regard to QM about whether, if a lender originates filibuster any nominee until that actually happens. If you believe a loan to the standards of these QM provisions, you will have a that at the end of the day Republicans are to hold together, then safe harbor, which of course industry is seeking, or there will be a you’ve got more faith in the Republican Party than I do as we go rebuttable presumption that it was an appropriate loan. Many of into an election year. But they seem to be confident that they the QM parameters deal with what is a reasonable responsible loan could be able to hold onto this. So that’s where things stand right -- prepayment penalty issues, down-payment, and other issues. now. [Ed. Note: On January 4, 2012, Barack Obama issued a There’s also a broader issue that all the regulators are recess appointment to install Cordray as director through the end involved in that actually has prompted a universal industry civil of 2013.] rights and consumer protection consensus, and that’s called The legal status of the Bureau, then, the way it’s set up “qualified residential mortgage.” That is a rule, as issued by is that immediately -- I think it was after a year -- everything that the prudential regulators, not the CFPB, that would require 20 was done by the other federal agencies on consumer protection percent down from all consumers. Now, regardless of your beliefs went over to the Bureau. So they basically took all the things about skin in the game, one of Todd’s colleagues from Moodys. that the Fed and the FTC and the OTS and FDIC and these com has actually done a wonderful study that shows, whether a guys were doing. New authority was given to the Bureau, such as loan is five percent, 10 percent, or even 20 percent down, they the ability to regulate payday lenders in state-based entities. That all perform pretty closely to each other. It’s the quality of the authority doesn’t go to the Bureau until a director is confirmed. origination that really counts; is it a fixed rate, a 30-year loan or So what you have right now is that all those who used to be more? These are the issues that matter. And this is another issue regulated by the federal government are now regulated by the for us to be looking at regardless of our persuasion. CFPB. Those who will eventually be regulated by the CFPB, like As to a question, since there’s been a lot of good payday lenders and that sort of thing, are not currently under the debate, you know, part of our panel discussion was the future of CFPB’s oversight, and some people have complained about that. credit and financial markets. The White House, in their recent There is one ad hoc exception, which is the auto dealers for car Treasury paper, has recommended the elimination of Fannie Mae loans. They’re not subject to the CFPB at all basically because and Freddie Mac. As I noted earlier, the reality is the nation is they already have their lobbyists in town fighting over Chrysler dependent upon those GSEs right now -- FHA as well as VA. and GM, so they said, why don’t you give this to us too? There’s So we need to jumpstart the private sector. We need to ensure no reason why they shouldn’t be under the boot of the CFPB, but that product of choice, in fact, that celebrates entrepreneurial, they managed to wiggle out. They’re regulated by FTC. So that’s responsible lending, a good economy. the politics of it. So, Todd, what would you recommend to the White I’ll just say one or two words about the legality. One, House today to get through this log-jam that we’re facing right seeing what happens with “abusive” is the big question. What now? I mean, what in the financial sector markets will get us to a does “abusive” mean? My guess is that’s going to be defined by point where lending will occur? litigation over time. As I said, it’s going to be defined by litigation by the CFPB and the state AGs. I don’t know what that’s going PROFESSOR ZYWICKI: Well, I think what we have seen is to do, but it’s very broad. It’s really a very capacious grant of completely counterproductive. I mean, the Credit Card Act is a power, which we can talk about. good example in a microcosm. Basically, what the Credit Card

Journal of Consumer & Commercial Law 95 Act did was make it more difficult to adjust interest rates when a make, Judge -- things that seem very simple like, in America, we person’s risk profile changes. When that happens, lenders have surround the 30-year fixed-rate loan with a religious aura, like a two options. Either they can do what they did, which is raise saint in a Byzantine painting, the 30-year fixed-rate mortgage. interest rates ahead of time, you know, because they can’t adjust And even in the original versions of the Treasury proposals, when them after the fact, so they can try to price the risk effectively. Or they were talking about plain-vanilla, “We’re only going to let they can try to reduce their risk exposure; and the way they do you do plain-vanilla mortgages,” what is plain vanilla? A 30-year that is to lend less and to lend to fewer people. Everything we’ve fixed-rate. What is one of the most important reasons that the seen over the past couple of years have had that same effect, which American real estate and mortgage situation is so bad right now? is that they increase the risk and cost of lending, and therefore, Answer: The 30-year fixed-rate mortgage. people lend less. The Durbin Amendment is going to have the The 30-year fixed-rate mortgage is a mortgage built for same sort of effect. The Durbin Amendment, by putting price inflation. I’ll use some economic jargon here. In an unexpected controls on the debit card interchange fees, they’re going to drive inflation, the entire inflationary gain goes to the borrowers. But in consumers out of the mainstream banking system. a housing deflation, if you are stuck with your 30-year fixed-rate So the obvious thing is to stop doing all the dumb mortgage, as millions of Americans are now, that’s one of their stuff that we’ve been doing in response to the crisis. And so the biggest problems, that they have a 30-year fixed-rate mortgage. question is, then, what’s left after you take out the chilling effect In a housing deflation, the entire inflationary loss is imposed on of direct regulations on credit, after you layer on all the other the fixed-rate borrower. So even things that seem really easy, like, regulations you’ve seen in the past few years, from health care oh, well, we know what’s the best kind of mortgage, turn out not to all the regulations being generated out of different agencies. I to be the case, at least not to be universally the case. mean, how do you price the risk of lending to a small business that might be affected by greenhouse gas regulation? How do you PROFESSOR ZYWICKI: Could I just add, and to flesh out do that? How do you price the risk of somebody who might be what Alex was saying, the problem is housing prices fall, the -- what happens with new regulations on this, that, and the other Federal Reserve drives down interest rates, but the only way you thing? If you can’t price the risk, you can’t make the loan. And so can get a lower interest rate is if you can refinance. If your house is this concern about greater instability and that sort of thing, that’s under water, you can’t refinance; you can’t take advantage of the the whole game. That’s why the rule of law has always been the lower interest rates. So people are trapped in 30-year fixed-rate essence of lending. And what we’ve seen is basically the opposite mortgages for higher interest rates than they would be if they were of the rule of law. able to refinance. Whereas, in countries that have adjustable-rate So it still seems to me that we’ve got to get the mortgages, when their central banks decrease their interest rates, fundamentals right first, and then it takes care of itself. So that’s everybody’s mortgage payments automatically fell, people here my impression of it. can only do it if they can refinance, and they can’t refinance if they’re under water. JUDGE TYMKOVICH: Alex, do you want to take that one on also? JUDGE TYMKOVICH: David?

MR. POLLOCK: When you look backwards at a financial MR. BERENBAUM: Well, I’m going to respond to that because boom and bust and then panic and crisis, you can find plenty of I understand, in recent congressional testimony, the 30-year mistakes made by everybody you can think of. I think about my fixed-rate mortgage has been coming under question. The data own career, and I can think of all these amazing mistakes that overall, the performance of a 30-year fixed, is very strong. The I made. And then I try to take myself back to the state I was real issue today is how, in fact, the refinance marketplace was when I made the mistake. The only thing I can come up with operating. My organization funds about 80 groups, HUD- an explanation was, it seemed like a good idea at the time. That certified counseling groups around the nation as a national characterizes what happens in financial markets and regulation housing counseling intermediary. The consumers who we are and legislation. seeing right now who are facing foreclosure either have reduced Kierkegaard says someplace, “Life can only be income or they’ve lost their jobs or, almost universally, they have understood backwards, but it must be moved forwards.” And an 80/20 percent situation or higher, where they have a prime loan what we’re always doing is taking the experience, especially with the HELOC or they’ve been refinanced into an adjustable- recent experience, drawing the lessons from it and trying to rate product or an option ARM. And of course, those payments control the future. But of course, as we all know, we often get are going up, the so-called toxic loans, and values, as noted, have surprised when that happens. Arnold Kling wrote a wonderful been dropping, and they are trapped. paper a year or so ago, I guess, on how the regulators who The administration has, in an overdue way, just dealt with the mortgage market drew three really important proposed changes to the HARP program, the refinance program, lessons from careful and intelligent study of the collapse of the at Fannie and Freddie. As taxpayers, we should support this 1980s. May I just remind us, because memories fade, we had because if we can get people into a lower interest rate who are an incredible crisis or series of simultaneous crises in the 1980s, facing foreclosure, rather than seeing a total loss, we will only see which, among other things, saw the failure of more than 2,000 a partial loss in long-term profits for Fannie and Freddie. But highly regulated financial institutions? They drew, as in Kling’s this is a very complex equation. Again, the numbers that are story, three lessons from the 1980s. You have to promote out there support the use of responsible 30-year or even 40-year securitization, you have to have mark-to-market accounting, fixed-rate loans. Now, that said, do we need to be doing more to and you have to have risk-based capital. Those were all applied sustain affordable tenancy for Americans? You bet. There’s been and were all promoted, and all of them were major contributors an overemphasis on homeownership at the expense of providing to the collapse 20 years later. quality tenancy as well. I was really glad to hear Len talk about skepticism. We need to have a lot of skepticism, including about our own ideas. AT THIS POINT THE PANEL ANSWERED QUESTIONS Even things that seem very simple -- this will be the last point I FROM THE AUDIENCE

96 Journal of Consumer & Commercial Law Professional Dishonesty

Do U.S. Law Schools That Report False or Misleading Employment Statistics Violate Consumer Protection Laws?

By Joel F. Murray*

Journal of Consumer & Commercial Law 97

Abstract schools violate the FTC Act’s prohibition of deceptive trade prac- This article examines the potential legal application of tices and false advertising. Prospective law students reasonably the Federal Trade Commission Act1 (“FTC Act”) to American rely upon a law school’s employment statistics to choose whether Bar Association (“ABA”) accredited law schools. In recent years, to attend a law school, and consequently, the reporting of false or evidence has emerged indicating that many law schools are mis- misleading employment statistics materially affects law students. reporting or falsifying employment statistics in marketing materi- The FTC should investigate law schools, and enforce the FTC als, and to the U.S. News and World Report law school rankings, Act to force law schools to be honest about the employment pros- the preeminent rankings for United States (U.S.) law schools. pects of the school’s graduates. Application of the FTC Act to The reporting of false or misleading employment statistics to pro- law schools would improve the U.S. legal education system and spective students may violate provisions of the FTC Act that pro- benefit society as a whole. hibit deceptive trade practices and false advertising. This article reviews evidence that U.S. law schools are misreporting employ- I. Reporting False Employment Statistics ment statistics, examines how the FTC Act applies to U.S. law The U.S. News and World Report rankings were first pub- schools, and argues that U.S. law schools that misreport or falsify lished in 1987.12 U.S. News and World Report uses a variety of employment statistics violate multiple provisions of the FTC Act. different statistics voluntarily submitted to the magazine13 by law schools, and a national survey of academics, attorneys, and Introduction law firm recruiters to determine a school’s reputation.14 Statistics During the 2009-2010 school year, U.S. law schools en- considered include a law school’s reputation, LSAT scores and rolled over 51,000 students.2 Over the next three years, most of GPAs of admitted students, admission offer and acceptance yield, the students will spend well over $100,000 on educational ex- employment at graduation,15 the size of the school’s law library, penses and living costs,3 incurring significant student loan debt student-faculty ratio, square footage of the law school building, primarily in the form of federal Title IV student loans.4 In return per student spending, bar passage rates, and additional factors.16 for this investment, most students believe that they will signifi- The weight of each statistic in computing the ranking varies year- cantly improve their career prospects, allowing them to pursue by-year,17 nonetheless, a school’s LSAT and GPA statistics, repu- financially lucrative and rewarding careers.5 tation and employment statistics generally play the largest role in A law school’s location, size, reputation, and employ- determining a school’s ranking.18 ment statistics play Though often critical of the rankings, law school admin- significant roles in a istrations routinely take a variety of actions to maintain and/ Over the past decade, student’s decision to or increase their school’s ranking.19 Hiring additional professors evidence has emerged attend. Increasingly, to reduce student-faculty ratios, expanding law school facili- many students are ties, providing scholarships to students with high LSAT scores that many law schools consulting, and often or GPAs, and employing graduates part-time for up to nine relying upon, the an- months have become common practice.20 Increasing pressure also are reporting nual law school rank- from alumni, current students and prospective students to max- false or misleading ings and employment imize a school’s ranking has exacerbated this trend, coinciding statistics published with a significant increase in the cost of a law degree. Engaging employment statistics by U.S. News and in the practices necessary to inflate a school’s ranking requires World Report in mak- additional revenue, which provides an incentive for administra- in order to attract stu- ing their decision.6 tor’s to increase the price of tuition. At public law schools, de- While there are other creased state funding for higher education has contributed to dents and improve the rankings of U.S. law the increased cost to students. school’s ranking. schools, most mem- bers of the legal com- munity believe that the U.S. News and World Report rankings are the authoritative law school rankings.7 This emphasis on a law school’s rank has increased competition between law schools for top students, quality facilities and fac- ulty, driving the substantial increase in law school tuition over the past two decades.8 Over the past decade, evidence has emerged that many law schools also are reporting false or misleading em- ployment statistics in order to attract students and improve the school’s ranking.9 This has created a legal education culture in which reported employment statistics are at best incomplete, and at worst, false or misleading.10 Law schools that report false or misleading employment statistics violate the FTC Act’s prohibitions on deceptive prac- tices and false advertising.11 Law schools are professional schools intended to prepare students for a very specific career, a career Graph 1. Increasing Law School Debt and Tuition.21 that schools advertise provides substantial economic benefits. Consequently, law schools are similar to a business that advertises Over past 25 years, law school tuition has increased expo- a service for sale or not-for-profit organizations that provide pe- nentially. In 1985, average resident tuition at a public law school cuniary benefits to members and fall under the jurisdiction of the was $2,006 and average private school tuition was $7,526.22 By FTC Act. By reporting false or misleading employment statistics 2009, average public law school resident tuition had increased in marketing materials and to U.S. News and World Report, law to $18,472 and average private law school tuition had increased

98 Journal of Consumer & Commercial Law to $35,743.23 Between 2002 and 2009, the average amount borrowed at public law schools increased from $46,499 to $66,045, and at private law schools, from $70,147 to $100,000, respectively by 42% and 43%.24 In 2009, the U.S. Government Accountability Office (GAO) investigated the causes behind the exponential increase in the cost of a law degree.25 The GAO concluded that an increasing emphasis in legal education on clinical and resource-intensive “hands- on” educational programs, and competition for higher rank- ings were the primary reasons behind the increase:26

[T]he move to a more hands-on, resource intensive approach to legal education and competition among schools for higher rankings appears to be the main fac- tors driving the cost of law school, while ABA accredita- Graph 3. Increasing Tuition Cost, Less Graduates at Major Law tion requirements appear to play a minor role. Firms.35

Most students accept the higher tuition rates with the ex- Despite the less than stellar employment prospects for pectation that upon graduation they will have no difficulty secur- many law school graduates, law school enrollment continued to ing employment that allows them to pay off their student loans grow through 2009.36 Between 1971 and 2009, law school enroll- with ease.27 ment increased by 59.2%.37 In 1971, there were 147 ABA-accred- ited law schools with a total enrollment of 91,225.38 By 1990, the number of law schools had increased to 171 with total enroll- ment of 119,501.39 By 2000, 183 law schools with total enroll- ment of 125,173.40 As of 2009, there were 200 law schools with total enrollment of 145,239.41 While the population size of the U.S. increased over the same period, many attribute this growth to universities’ financial interest in opening law schools and enroll- ing additional students. Public and private law schools commonly provide net revenue to their parent university; universities have used law school “profits” to fund other university departments and programs, and in one case, the state government.42 This has led many in the legal community to conclude that law schools are often used as “cash cows” for universities. Despite the fact that more than 80% of law school grad- uates are not landing six-figure salary positions with major law firms, many law schools continue to report average or median private-sector salaries near or over $100,000 in marketing materi- als and to U.S. News and World Report.43 Schools that list such salaries base their calculations on internal employment surveys Graph 2. Less Than 19% of Graduates Secure Employment at sent to recent graduates of their law schools. While the number of Major Law Firms.28 graduates who respond and/or provide salary information varies from school to school, many schools appear to be reporting aver- In 2007, at the height of the housing and credit bubble, age and/or median salaries based on surveys with a response rate first-year associates were earning $160,000 per year at major law of 50% or less. firms.29 Even prior to the expansion of the housing and credit In 2007, the Tulane University Law School reported a bubble, first-year associates at major firms routinely had starting starting median private-sector salary of $135,000 per year for salaries over $100,000. However, not reported as often, if not 2005 graduates based on a survey that only 24% of graduates ignored, was that generally only graduates of elite law schools completed.44 The school amended the figure after the Wall Street secured such positions.30 Of the 43,518 graduating members of Journal cited the school’s use of the survey in marketing materi- the Class of 2007, only 8,248 (19%) worked at major law firms als in a front-page article on poor job prospects for recent law with 100 or more attorneys nine months after graduation.31 Of school graduates.45 While law schools are increasingly disclosing the 44,000 graduating members of the Class of 2009, only 8,026 the percentage of graduates who respond to the surveys that they (18.2%) worked at major law firms nine months after gradua- use to calculate employment statistics, listing average and median tion.32 The 2008-2009 financial crisis and economic downturn salaries based on such an unrepresentative sample is potentially severely affected the U.S. legal market, significantly reducing the misleading, if not dishonest, to prospective students.46 Further- availability of these already scarce positions. This downturn left more, because there is no standardized methodology for schools an even greater proportion of law school graduates with noth- to release employment statistics, the statistics reported by schools ing to show for their law degrees except thousands of dollars of vary widely as do survey practices. student loan debt.33 Continued uncertainty about the future of Between 2008 and 2011, the University of California, major law firms and the legal profession indicate that the per- Davis, School of Law’s (“UC Davis”) U.S. News and World Re- centage of law students securing employment with major firms port rank increased from 44 to 23, one of the highest rankings will remain at or below current levels.34 increases in recent years.47 While the school expanded the square footage of the law school building,48 and had seen increases in av- erage LSAT scores and GPAs, there are questions about the verac-

Journal of Consumer & Commercial Law 99 ity of the employment statistics that the school reported to U.S. over their employment statistics reports. In July 2009, two Vander- News and World Report. In 2011, the school reported that 95.8% bilt University Law School students founded the Law School of 2009 graduates had secured employment at graduation with Transparency Project (LST).60 LST advocates for law schools to a median private sector salary of $145,000 per year.49 While the release employment information to prospective law students, us- school provides more detailed employment statistics on the em- ing a standardized methodology that allows for objective evalu- ployment statistics section of its website, the data reported to U.S. ation of employment statistics.61 In July 2010, LST sent letters News and World Report probably does not accurately reflect the to every ABA-accredited law school, requesting that the schools actual employment rate or median private sector salaries of gradu- submit employment statistics conforming to a methodology en- ates of the Class of 2009.50 UC Davis’ reported employment rate closed in the request.62 Only 11 law schools responded to LST’s at graduation was higher than the rates reported by most elite law request before the close of the 60-day response period.63 LST later schools.51 Furthermore, similarly ranked law schools reported sig- learned that law schools had communicated with each other about nificantly lower employment rates.52 Graduates of the UC Davis the request.64 Class of 2009 confirm that at least 15 students out of 191 gradu- The Internet has also become a source of criticism of law ates were unemployed at graduation, indicating that UC Davis’ schools.65 Above the Law, a legal blog that “takes a behind the actual employment rate at graduation was likely 92.2% or less.53 scenes look at the world of law” routinely posts articles about law In 2012, UC Davis reported 82.5% employment at gradu- school graduates failing to secure gainful employment in the legal ation with a median starting salary of $145,000 to U.S. News and sector and questioning law school administrations’ marketing and World Report.54As a result of the 13.3% decline in UC Davis’ re- reporting of employment statistics to prospective law students.66 ported employment at graduation, changes in reported statistics, Multiple other blogs raise similar questions, and criticize the U.S. and U.S. News and World Report’s methodology, Davis dropped legal education system.67 from 23 to 29 in the U.S. News and World Report rankings. With- In May 2010, California Bar President Howard Miller out a substantial evaluation of the U.S. News and World Report published a column discussing the inability of many law school methodology, comparing UC Davis’ 2011 reported statistics graduates to find gainful employment and the reporting of false and reviewing the 2011 and 2012 reported statistics of similarly or misleading employment statistics.68 Miller lamented that too ranked law schools, it is not possible to determine how substantial many law school graduates are unable to find the entry-level attor- of an effect the lower rate of reported employment had on UC ney positions that provide the education and experience required Davis’ ranking. Nonetheless, it seems highly likely that the lower to begin a successful legal career.69 In addition, he questions many reported employment rate negatively affected UC Davis’ ranking. law schools’ reporting of employment statistics: UC Davis is not alone in having questions raised about the verac- ity of the school’s reported employment statistics. There is notoriously unreliable self-reporting by law In January 2011, the Villanova University School of Law schools and their graduates of employment statistics. announced that it had knowingly reported false GPA and LSAT They are unreliable in only one direction, since the self- data to the ABA.55 The law school made the announcement after reporting by law schools of “employment” of graduates its new administration conducted an internal investigation of the at graduation and then nine months after graduation school’s previous submissions to the ABA.56 Through the inves- are, together, a significant factor in the U.S. News rank- tigation, the administration found that the school inaccurately ings — which are obsessed over, despite denials, by law reported a median LSAT of 162. Simiarly, in September 2011, schools and their constituencies.70 the University of Illinois College of Law admitted that it had sub- mitted inaccurate GPA and LSAT information for the past three Some law professors are also critical of law schools’ report- of four years to the American Bar Association and U.S. News and ing of employment statistics. William Henderson, a law professor World Report rankings.57 Reporting false LSAT and GPA data is at Indiana University’s Maurer School of Law, questions the legiti- indicative of a culture macy of the employment statistics reported by schools, and advo- in which attracting pro- cates for more transparent reporting standards.71 Brian Tamanaha, U.S. law schools are spective students, ad- a law professor at the Washington University Law School, reports ditional revenue and in- that law students only discover the inaccuracy of law schools’ em- facing criticism over creasing the law school’s ployment statistics after they enroll in law school, and is calling on their employment U.S. News and World law schools to adopt straightforward employment statistic report- Report ranking take pre- ing practices.72 statistics reports. cedence over the accu- In April 2011, Professor Paul Campos of the University rate reporting of employ- of Colorado Law School published an article in The New Repub- ment statistics. lic.73 In the article, Campos compared and contrasted law schools’ The likely misreporting of employment statistics at the reported (in U.S. News and World Report) employment statistics UC Davis School of Law and confirmed misreporting of GPA with his own calculation of the actual employment statistics for and LSAT data at the Villanova University School of Law and graduates of U.S. News and World “Top 50” law schools.74 De- University of Illinois College of Law does not appear unique. In spite the fact that nearly all ABA accredited law schools previ- the latest U.S. News and World Report Rankings, a number of law ously reported employment rates of over 90% employment nine schools with rankings below 50 (non-tier one), reported starting months after graduation to U.S. News and World Report, Professor median private salaries at or above $100,000.58 Without reviewing Campos found that only 45% of graduates of top 50 law schools a school’s employment survey methodology and internal data, it is had non-temporary, legal, full-time positions nine months after not possible to determine the veracity of these statistics. Nonethe- graduation.75 Professor Campos’ inquiry regarding law school em- less, there is reason to doubt the high employment rates and me- ployment statistics raises further questions about the veracity of dian salaries reported by many, if not most, law schools, especially the statistics that law schools report to U.S. News and Report. In given current economic conditions and the high number of major fact, even U.S. News and World Report questions the legitimacy law firm layoffs and deferrals between 2008 and 2010.59 of law schools’ reported employment statistics. In March 2011, Increasingly though, U.S. law schools are facing criticism editor Brian Kelly sent a letter to law school deans requesting that

100 Journal of Consumer & Commercial Law they ensure that their schools are reporting accurate employment tistics. Nonetheless, under current U.S. consumer protection laws, statistics.76 the Federal Trade Commission (“FTC”) could secure a court order The strongest effort to force law schools to stop report- under the FTC Act to stop law schools from reporting false or ing false and misleading employment statistics lies with the fil- misleading employment statistics.91 ing of multiple class action lawsuits against law schools. New York attorneys David Anziska and Jesse Strauss are the leading II. The FTC Act effort to file class action lawsuits against law schools around the The FTC Act prohibits individuals and organizations country.77 As of February 2012, Anziska and Strauss had filed from engaging in deceptive trade practices or false advertising.92 15 class actions lawsuits.78 In addition, in March 2012 Anziska While only the FTC can enforce the Act, it is an effective means and Strauss announced plans to file class action lawsuits against for stopping an organization from deceiving or misleading con- 20 additional schools by May 31, 2012.79 A standard complaint sumers. In multiple instances, the FTC has applied the FTC Act from Anziska and Strauss alleges consumer protection act viola- to non-profit organizations. tions (laws vary by state), fraud, and negligent representation Section Five of the FTC Act prohibits “persons, part- on the part of the law school.80 Whether this effort successfully nerships, or corporations” from engaging in unfair or deceptive encourages law schools to improve employment statistics report- practices.93 The deceptive act must have a “direct, substantial, ing practices remains to be seen. Nonetheless, class action litiga- and reasonably foreseeable effect” on commerce.94 In practice, the tion may provide financial recourse for recent graduates who are FTC considers three factors in determining whether a practice was unemployed or underemployed. unfair or deceptive.95 First, whether the representation, omission In response to increasing criticism of law schools’ report- or practice is likely ed employment statistics, the ABA recently proposed additional to mislead the con- reporting requirements for ABA-accredited law schools.81 The sumer.96 The FTC has Section Five of the proposal amends ABA Standard 509, Basic Consumer Informa- previously found false FTC Act prohibits tion, by requiring law schools to disclose the past three years oral and written rep- graduating classes’ employment statistics in accordance with resentations, sales of “persons, partner- standards determined by an ABA committee.82 The employment systematically defec- statistics must be “fair, accurate, and not misleading,” and must tive products without ships, or corpora- include the percentage of salaries and number of students in- disclosure, and failure 83 tions” from engaging cluded. This is a substantial amendment to Standard 509, the to perform promised standard currently requires law schools to only publish “basic services to be mis- in unfair or deceptive consumer information.”84 In a March 2011 letter to the ABA, leading, satisfying the U.S. Senator Barbara Boxer (D-CA) urged the association to first criteria.97 Second, practices. adopt this proposal to “ensure potential students have a full whether the consumer understanding of the costs and benefits of legal education.”85 was acting reasonably Similarly, U.S. Senator Charles Grassley (R-IA) made a similar in relying on the representation, omission or practice.98 And third, request in July 2011, and continues to press the ABA on the whether the representation, omission, or practice was material, issue.86 The ABA’s proposal and bi-partisan calls of elected offi- meaning that the practice is likely to affect the consumer’s choice cials for transparency is indicative of the increasing political and of product or service and causes injury.99 public awareness of law schools reporting of false or misleading While the FTC’s first and third criteria for determining employment statistics. whether a practice or advertisement is deceptive or misleading are LST, the recognized leader among law students and law fairly straightforward, the second criterion leaves room for ambigu- school graduates advocating for increased transparency, is sup- ity with its reasonableness standard. Multiple FTC cases have estab- portive of the ABA’s proposal.87 Nonetheless, LST believes that lished this standard. In Heinz W. Kirchner, 63 F.T.C. 1282 (1963), the standard should require the reporting of specific statistics.88 the FTC noted that corporations cannot be liable for every pos- Under LST’s proposal, law schools would be required to dis- sible misconception created by a misrepresentation as sometimes close the following for each graduate: 1) Employment status; “foolish or feeble minded” consumers may unreasonably interpret 2) Employer type; 3) Full-time or part-time; 4) Required cre- the representation. Instead, in interpreting a representation, the dentials; 5) Location; 6) Whether the graduate received special FTC examines the impression that the representation leaves with funding; and 7) Job Source.89 While the ABA’s proposal would the public.100 In certain cases, the FTC considered the level of so- shed some light on the employment outcomes for law school phistication and knowledge of the groups that the representation graduates, it may not include all of the information required to targeted in determining the reasonable effect of the representation allow prospective law students to make an informed decision on consumers.101 The FTC has held that it is not reasonable for about whether to pursue legal education. consumers to rely on “puffing,” claims (claims that most consum- Peer pressure, public pressure and continued media scru- ers will not take seriously) or subjective, smell, taste, feel, claims.102 tiny could force law schools to stop reporting misleading employ- Section 12 of the FTC Act prohibits false advertising.103 ment statistics. As of May 2012, U.S. News and World Report does Prohibited false advertisements induce or are likely to induce not provide a disclaimer that some law schools may misreport consumers to purchase food, drugs, devices, services, or cosmet- data. Furthermore, while some law schools indicate on their web- ics.104 Section 15(a)(1) defines “false advertisement” as one that is sites that they base their employment statistics on a survey that materially misleading.105 To determine whether an advertisement a substantial number of graduates did not respond to, many do is misleading, the FTC considers the representation made by the not.90 The ABA’s proposal to change employment statistics report- advertisement, and the extent to which the advertisement fails to ing requirements would force law schools to report more accurate reveal material facts within the context of those representations.106 employment statistics. Increasing scrutiny over law schools’ re- Under the FTC Act, the FTC can enjoin false advertisements by cruiting and reporting practices could generate the political will suing in U.S. District Court.107 Furthermore, if a federal pros- for a Congressional investigation into law schools and potential ecutor can show that an individual or corporation disseminated a legislation requiring schools to report accurate employment sta- false advertisement with the intention to defraud or mislead, he or

Journal of Consumer & Commercial Law 101 she may be charged with a misdemeanor, and face a fine of up to law school or not attending law school.122 Students who attend $5,000 and imprisonment for up to six months.108 a law school with no monetary cost through a scholarship cover- While the FTC Act’s prohibitions on false advertising and ing living and tuition expenses sacrifice income that they could deceptive practices clearly apply to for-profit organizations and make by pursuing a professional career with their college diplo- individuals, it is somewhat ambiguous whether the FTC Act ap- ma, which is almost always required to attend a U.S. law school. plies to not-for-profit organizations. Section 4 of the FTC Act As of 2012, there are 200 ABA-Accredited law schools and a broadly defines corporations. Under Section 4, a corporation is number of unaccredited law schools. Virtually anyone with a defined as any company, trust or association that is organized to college diploma can attend law school, including those individu- carry on business for its own profit or that of its members.109 The als with a low GPA or low LSAT. FTC has long claimed to hold jurisdiction over not-for-profit or- The largest ABA-accredited law school is the Thomas ganizations that provide pecuniary benefits to members.110 Fur- Cooley School of Law, a private not-for-profit institution that thermore, courts have upheld the FTC’s power to exercise such enrolls over 4,000 students, over 3,500 whom are part-time stu- jurisdiction when challenged.111The FTC has properly exercised dents.123 Cooley refuses to submit information to U.S. News jurisdiction over non-profit organizations that provided pecuni- and World Report, and reports a median undergraduate GPA of ary benefits to their members.112 In California Dental Association 2.99 and a median LSAT score of 146, well below the median v. FTC, 526 U.S. 756 (1999), the Court ruled that the FTC could GPAs and LSAT scores of most low-ranked and unranked law exercise jurisdiction over an association that engaged in lobbying, schools.124 Cooley releases annual rankings in which it consis- litigation, marketing and public relations on behalf of its mem- tently ranks itself as a “Top 10” law school, often-outranking bers.113 TheCalifornia Dental Association Court reasoned that the traditional elite law schools such as Harvard or Columbia. In association transferred “far more than de minimis or merely pre- addition, the school has a marketing campaign emphasizing sumed economic benefits” to members and thus, fell within the that reputation does not matter: “If the NFL only signed play- jurisdiction of the FTC Act and the FTC.114 ers from the Top 20 ‘college football reputations,’ 62 out of 88 The FTC has authority to exercise jurisdiction over not- NFL quarterbacks would not be on a roster today.”125 The school for-profit organizations that provide pecuniary benefits for their reports $52,000 as the average starting salary for graduates, and members, and consequently, enforce multiple provisions of the does not report an employment rate on its website.126 For fiscal FTC Act. Nonetheless, do law schools qualify as not-for-profit or- year 2009, only 36% of former Cooley law students were active- ganizations that provide pecuniary benefits to their membership? ly repaying outstanding federal student loans; 36% is a signifi- Do the FTC Act’s prohibitions on deception and false advertising cantly lower rate than the repayment rates for graduates of other potentially apply to law schools, and, do law schools that report law schools.127 Within the legal community, Cooley is known for false or misleading employment statistics violate the FTC Act? publishing what many consider fake rankings, questionable mar- keting practices, and a willingness to accept students with very III. Reporting False Employment Statistics Violates the FTC low GPAs and LSAT scores.128 Nonetheless, without a review of Act internal documents, it is not possible to determine the actual Although law schools are institutions of higher educa- employment outcomes for graduates. As of May 2012, Cooley is tion, in many ways, they act as not-for-profit organizations that subject to a class action lawsuit for fraud in which the plaintiffs provide pecuniary benefits to their members. Students pay tu- are represented by New York City attorneys Davis Anziska and ition, a form of a membership fee, to receive legal training from Jesse Strauss..129 the law school.115 This legal training allegedly provides economic While the Thomas Cooley School of Law is likely an ex- benefits by allowing students who complete a degree to pursue a treme example of a law school investing heavily in marketing to career in law. Students would not likely pay for legal training if offset a poor reputation, they did not believe that the value of the training equaled or out- it is indicative of the ten- weighed its cost. Because law schools provide pecuniary benefits dency for law schools to The FTC Act was en- to students, law schools fall under the jurisdiction of the FTC act like for-profit busi- acted to regulate Act.116 If a law school reports false or misleading employment sta- nesses competing for cus- tistics, the law school does so in violation of the FTC Act’s prohi- tomers.130 The FTC Act the trade practices bition on deceptive practices and false advertising.117 was enacted to regulate the trade practices of busi- of businesses, and A. U.S. Law Schools are Not-For-Profit Organizations Provid- nesses, and prevent busi- prevent businesses ing Pecuniary Benefits to Students and FTC Act Applies nesses from misleading Nearly all ABA-Accredited law schools are part of a pub- consumers.131 As previous- from misleading lic not-for-profit or private not-for-profit institution of higher ly discussed, there is heavy education that charge enrolled students tuition. This fee is akin competition among law consumers. to a membership fee that an individual or organization pays to schools to maximize their an association with the hope of gaining services or benefits from U.S. News and World Report ranking, and to attract the best and membership with that organization.118 Furthermore, most law brightest law students.132 The inclusion of employment statistics schools rely heavily upon marketing and recruiting practices to in the U.S. News and World Report rankings and marketing mate- enroll prospective students.119 In many ways, law schools are rials indicates the importance of this information to prospective more like for-profit businesses, competing over customers (law law students. Students generally attend law school to prepare for students) to sell a product that provides direct economic ben- a legal career, and in doing so, receive economic benefits by their efits than traditional institutions of higher education.120 Con- attendance and completion of a law degree.133 Just as the individu- sequently, the FTC has jurisdiction over law schools under the als and organizations who joined the California Dental Associa- FTC Act.121 tion (CDA) in California Dental Association v. FTC, 526 U.S. 756 Law students choose to enroll in a law school because (1999) sought the economic benefits of lobbying, marketing, and they judge that the legal training, and economic opportunities regulatory advice provided by CDA, law students seek the eco- provided by the school will likely be superior to that of another nomic benefits of a career in law, for which law schools claim to

102 Journal of Consumer & Commercial Law prepare them.134 Consequently, the FTC, which has jurisdiction rials that reported employment statistics only represent outcomes over not-for-profit organizations that provide pecuniary benefits for students that respond to the school’s employment survey, this to members, has jurisdiction over law schools.135 disclosure is not included in the U.S. News and World Report rank- Law schools seeking to avoid application of the FTC Act ings. As a result, prospective law students who seek to determine will likely argue that the Act does not apply to law schools. Law the employment prospects for graduates of a particular law school schools are generally associated with institutions of higher educa- must rely on the employment statistics that the school reports in tion, and although students pay institutions of higher education marketing materials or to U.S. News and World Report. tuition to attend classes, the institutions provide educational, not Without making a public records request to public law economic, benefits.136 Institutions of higher education do not schools, prospective law students have no reasonable means other provide students with lobbying, marketing and regulatory advice, than word of mouth, a school’s marketing materials and the U.S. distinguishing the institutions from the industry associations that News and World Report law school rankings and profiles to de- the FTC has previously exercised jurisdiction over.137 Instead, in- termine the employment prospects for graduates of a law school. stitutions of higher education help students to gain knowledge The emphasis on ethics within the legal education system, and a and develop reasoning abilities.138 Furthermore, if the FTC Act general sense of intellectual honesty in academia likely convince applies to law schools then it likely applies to all colleges and uni- prospective law students to rely on, and trust information report- versities. Thus, application of the FTC Act to law schools would ed by law schools.149 Consequently, law students act reasonably radically expand the law’s scope, creating new oversight responsi- in relying on the employment statistics provided by law schools. bility for the FTC to monitor the business practices of the nation’s The employment prospects of graduates of a law school are 4,681 colleges and universities.139 Furthermore, the addition of one of the most important criteria in choosing a law school for pro- this obligation would distract the FTC from its intended purpose spective students. Law schools prepare students for a legal career of regulating trade practices among for-profit businesses.140 with the end goal of the law student securing gainful legal employ- This argument fails because law schools are a special type of ment upon graduation. Prospective students are likely to heavily institution of higher education. As long as law schools continue to weigh employment prospects, if reported, of graduates of a law provide legal education designed to prepare students for a legal ca- school in determining whether to attend. Accordingly, the employ- reer, the FTC likely has jurisdiction. While institutions of higher ment statistics reported by a law school are likely to play a signifi- education generally focus on developing knowledge and critical cant role in a prospective law student’s decision to attend that law thinking skills, law schools are distinct in that they prepare stu- school. A law school’s reported employment statistics are therefore dents for a legal career. Most individuals pursue a career to receive material to the prospective student’s choice to attend, thereby satis- economic benefits or an income from that career. In preparing fying the third requirement for deception under the FTC Act. law students to pursue a legal career, law schools directly provide In addition to violating the FTC Act’s prohibition on de- pecuniary or economic benefits to students. This is distinguish- ceptive practices, a law school that reports false or misleading em- able from a liberal arts program at an institution of higher educa- ployment statistics also likely violates the FTC Act’s prohibition tion, which although focused on a specific subject, generally does on false advertising.150 Under the FTC Act, a false advertisement is not prepare students for a specific career field. Furthermore, law an advertisement that is materially misleading, and is likely to in- schools actively market themselves, and compete to attract the duce consumers to purchase food, drugs, services or cosmetics.151 most qualified law students.141 The FTC likely has jurisdiction To determine whether an advertisement is false, the FTC consid- over law schools as long as the schools provide legal education, ers the representation made by the advertisement, and the extent and actively market themselves to prospective students. to which the advertisement fails to reveal material facts within the context of those representations.152 Employment outcomes are B. Reporting False and Illegitimate Employment Statistics material in a law student’s decision to attend a law school, and Violates the FTC Act Sections 5 and 12 false or misleading employment statistics reported by a law school The FTC Act was enacted to help prevent organizations misrepresent a law school’s employment outcomes. Thus, a law from deceptively marketing or falsely advertising the goods that school that reports false or misleading employment statistics likely they sell to consumers.142 U.S. law schools compete heavily to maxi- violates the FTC Act’s prohibition on false advertising. mize their U.S. News and World Report ranking, improve their repu- Law schools that report false or misleading employment tation, and enroll students with high LSAT scores and GPAs.143 statistics could argue that employment statistics are not material Despite a focus on ethics within the legal education system, it is to a prospective student’s decision to attend law school. There- increasingly evident that many law schools are reporting false or fore, reporting false or misleading employment statistics does not misleading employment statistics to U.S. News and World Report constitute a deceptive practice or false advertising under the FTC and prospective students.144 Without reviewing internal school Act.153 While law schools are professional schools, they focus on documents,145 or conducting independent employment surveys of a providing students a legal education and developing students’ crit- law school’s graduates it is not possible to demonstrate that a school ical and legal thinking abilities. Furthermore, not all law students is reporting false employment statistics.146 Nonetheless, if a school actually enter the legal career field, meaning that employment sta- does report false employment statistics to U.S. News and World Re- tistics play a less significant of a role in a law student’s decision to port or in marketing materials, the school likely violates the FTC attend law school than argued by the FTC. Act by engaging in deception and false advertising. Nonetheless, a review of the history of legal education in Section 5 of the FTC Act prohibits deceptive trade practic- the U.S. indicates that this argument is flawed.154 Prior to the de- es.147 To determine whether a practice is deceptive the FTC con- velopment of law schools, most attorneys would complete an ap- siders whether the practice is likely to mislead consumers, would prenticeship under a practicing attorney. Law schools were even- mislead a reasonable consumer, and is material or likely to affect tually developed to combine the teaching of legal principles and the consumer’s product choice and causes injury.148 A law school thinking with practical legal training. The increasing modern em- that reports false or misleading employment statistics to U.S. phasis on “hands on” legal training, as reported by law schools ad- News and World Report or in marketing materials is highly likely to ministrators, demonstrates an even greater emphasis for preparing mislead prospective students about the employment outcomes of students not just to understand legal principles and theories, but its graduates. While many law schools disclose in marketing mate- also to practice law.155 While law schools do develop students’ legal

Journal of Consumer & Commercial Law 103 knowledge and thinking abilities, law schools primarily focus on limited, or no resources to determine a school’s actual employ- preparing students for a career in law, indicating that reported ment statistics. Those employment statistics play a material role in employment outcomes are material to a prospective law student’s a prospective law student’s choice to attend a law school. decision whether to attend a law school. Without third-party intervention, law schools will likely continue to report misleading or false employment statistics as C. Enforcement of FTC Act for Law Schools Would Improve the effort to maximize a law school’sU.S. News and World Report Legal Education System ranking continues.163 Increasing media coverage and scrutiny of Law schools that report false or misleading employment law schools marketing practices, David Anziska’s and Jesse Strauss’ information harm the U.S. legal education system and profes- class action litigation effort, and reports in early 2012 of a signifi- sion, as well as society. Inaccurate employment statistics result in cant decline in law school applications give some reason for opti- students enrolling in law school who may otherwise not choose mism that prospective law students are beginning to demonstrate to go to law school, leave former law students (graduates and skepticism as to the value of attending law school.164 Furthermore, non-graduates) unable to repay their student loans,156 and satu- the ABA’s recent proposal to require law schools to disclose specif- rate the legal market with too many lawyers.157 The FTC should ic employment information may spell the end of ABA-accredited investigate U.S. law schools, and enforce the FTC Act in cases law schools reporting false or misleading employment statistics.165 where a law school reports false or misleading employment statis- While ending the reporting of false and misleading em- tics. Investigation and prosecution would increase accountability ployment statistics will help to ensure that prospective law stu- and transparency in the legal education system, and enable pro- dents can make a fully informed decision to attend law school, spective law students to make more fully informed enrollment there is much more that can be done to reestablish the integrity of decisions. Furthermore, just as questions have been raised about the U.S. legal education system. Requiring law schools to disclose sending the “nation’s best and brightest” individuals to work on student loan repayment rates would help prospective students to Wall Street, it may be reasonable to ask, as Supreme Court Justice determine if most graduates are finding gainful employment.166 Antonin Scalia has, whether sending so many individuals to law In addition, a gainful employment regulation that disqualifies law school is a prudent investment in human capital.158 schools, with low student loan repayment rates or debt/income False or misleading employment statistics set unrealistic ratios, for federal financial aid under the Higher Education Act of expectations for prospective law students. 90%, and often over 1965 may limit further tuition increases and student loan debt.167 90%, of graduating classes at second, third and fourth tier law While law schools will likely oppose all of these proposals, the schools, which constitute the majority of law schools in the U.S., status quo needs to change.168 A legal education system that em- will not secure employment at a major law firm with a six-figure phasizes honesty and justice, and requires students to take a class salary upon graduation.159 66% or more of graduating classes at on legal ethics should not have a culture in which law schools most tier one law schools will not secure such a position.160 None- actively mislead prospective students about their likely employ- theless, the median private sector salaries and employment rates ment outcomes.169 reported by many law schools do not disclose true graduate em- ployment outcomes. Consequently, prospective students enroll * Joel F. Murray is an associate attorney at MDK Law Associates with unrealistic and often grossly exaggerated, post-graduation in Seattle, Washington. Prior to joining MDK Law Associates, employment and income expectations. As a result, many law stu- Joel served as National President of the Law School Democrats dents do not fully understand the consequences of the loans that and worked on the U.S. Senate Health, Education, Labor and they take out or their ability to repay them.161 Pensions Committee’s investigation into for-profit colleges and As law schools continue to produce law students, the universities. Joel is a graduate of the University of Washington legal employment market has become overly saturated. Students (B.A.), London School of Economics (MSc), and University of who enrolled in law school, expecting a law degree to secure a California, Davis, School of Law (J.D.). You can contact Joel at middle class or upper-middle class lifestyle, find themselves earn- [email protected]. ing $20-$30 per hour, without benefits, for contract legal work and unable to begin the career marketed to them by their law 1. 16 U.S.C. §§ 41 et seq. school.162 Had law schools not engaged in reporting false or mis- 2. American Bar Association, First Year J.D. and Total J.D. leading employment statistics, at least some of these individuals Minority Enrollment for 1971 - 2010, available at http:// would likely not have pursued a law degree. Not attending law www.americanbar.org/content/dam/aba/migrated/legaled/statis- school would have saved them the hardship of a failed career and tics/charts/stats_8.authcheckdam .pdf. William D. Henderson & thousands of dollars in student loan debt that is not discharge- Andrew P. Morriss, How the Rankings Arms Race Has Undercut able in bankruptcy. Consequently, by reporting false or mislead- Morality, National Jurist, March 2011, at 10. ing employment statistics, law schools violate the FTC Act, and 3. This figure does not include the opportunity cost for students harm the legal profession and education system. to attend school full-time rather than working full-time. 4. Higher Education Act of 1965, 20 U.S.C. § 1070 et seq. Conclusion 5. Henderson & Morriss, supra note 2. The FTC should investigate the advertising and employ- 6. Best Law Schools, U.S. News and World Report, (March ment statistics reporting practices of U.S. law schools. Many law 15, 2011) http://grad-schools.usnews.rankingsandreviews.com/ schools are violating the FTC Act by reporting false and mis- best-graduate-schools/top-law-schools/law-rankings (hereinafter leading employment statistics. The FTC has jurisdiction over law “2011 U.S. News Rankings”); Brian Burnsed, Law Students Rank schools because they are professional schools oriented towards Their Future,U.S. News and World Report, Jan. 7, 2011, preparing students for legal careers, and therefore, provide pe- http://www.usnews.com/education/best-graduate-schools/top- cuniary benefits to students. If a law school reports false or mis- law-schools/paying/articles/2011/01/07/law-students-rank-their- leading employment statistics in marketing materials or to U.S. future. News and World Report, the law school engages in deception and 7. Rachel F. Moran, Commentary: Of Rankings and Regulation: Are false advertising in violation of the FTC Act. Reporting false em- the U.S. News & World Report Rankings Really a Subversive Force in ployment statistics is deceptive as prospective law students have Legal Education?, 81 Ind. L.J. 383 (2006), 383. See generally Bre

104 Journal of Consumer & Commercial Law nan & Leduc, Judging the Law Schools (2011), available at grants.html?pagewanted=1&_r=1&hp&adxnnlx=1304186507- http://www.cooley.edu/rankings/_docs/Judging_12th_Ed_2010. DBPoLG8Jyo5jV99Q6kqSGw. pdf (law school rankings published by Thomas Cooley School 21. American Bar Association, Law School Tuition 1985- of Law); Brian Leiter, Brian Leiter’s Law School Rankings, (April 2009, available at http://www.americanbar.org/content/dam/ 4, 2011) http://www.leiterrankings.com/new/index.shtml; Law aba/migrated/legaled/statistics/charts/stats_5.authcheckdam.pdf; School Rankings, Princeton Review, (April 4, 2011) http:// American Bar Association, Average Amount Borrowed for www.princetonreview.com/law-school-rankings.aspx. Law School 2001-2009, available at http://www.americanbar. 8. United States Government Accountability Office, Is- org/content/dam/aba/migrated/legaled/statistics/charts/stats_20. sues Related to Law School Cost and Access. October 2009 authcheckdam.pdf. Student loan debt statistics were not available available at http://www.gao.gov/new.items/d1020.pdf (hereinaf- for years prior to 2001. ter “GAO Report”). 22. Id. 9. See infra, section I, Reporting False Employment Statistics, . 23. Id. 10. Id. 24. Id. Information for the average amount borrowed prior to 11. 16 U.S.C. §§ 5 & 12; see infra Section I, Reporting False 2002 is not available to the best of the author’s knowledge. Employment Statistics Violates the FTC Act. 25. Supra note 8, GAO Report. 12. J. Paul Lomio and Erika V. Wayne, Ranking of Top Law Schools 26. Id. at 2; Eric Kelderman, Law-School Cost Is Pushed Up by 1987 – 2006 By U.S. News & World Report, Legal Research Paper Quest for Prestige, Not Accreditation, GAO Survey Finds, The Series, March 2005, available at http://www.law.stanford.edu/ Chronicle of Higher Education, Oct. 26, 2009, available at publications/projects/lrps/pdf/lomiowayne_rp4.pdf. http://chronicle.com/article/Competition-Not/48940/. See also Kar- 13. A small number of ABA-accredited law schools refuse to sub- en Sloan, Legal Scholarship Carries A High Price Tag, National mit statistics to U.S. News and World Report. Law Journal, April 20, 2011, available at http://www.law.com/ 14. See generally Paul Caron, U.S. News Changes Methodology in jsp/nlj/PubArticleNLJ.jsp?id=1202490888822&Legal_scholar- Forthcoming New Rankings to Stop Schools From Gaming Employ- ship_carries_a_high_price_tag&slreturn=1&hbxlogin=1. ment Data, Tax Prof Blog (March 9, 2011) http://taxprof.type- 27. Id. supra note 20, Campos, at 1-2. pad.com/taxprof_blog/2011/03/us-news-confirms-.html. For a 28. American Bar Association and National Association of Legal detailed look at law school debt and employment statistics review Employers. the Law School Transparency Project’s statistics database. Class 29. Major law firms are defined as law firms with 101 or more of 2009 U.S. News Data, Law School Transparency Project, attorneys. Dealbook, For Lawyers, Perks to Fit a Lifestyle, N.Y. Apr. 10, 2011, available at http://www.lawschooltransparency. Times, Nov. 26, 2007, available at http://dealbook.nytimes. com/2011/04/class-of-2009-u-s-news-data/. com/2007/11/26/for-lawyers-perks-to-fit-a-lifestyle; Joseph 15. Id. Goldstein, Law Firms Racing to Boast Best Pay for Associates, N.Y. 16. Robert Morse & Sam Flanigan, Law School Rankings Meth- Sun, Nov. 2, 2007, available at http://www.nysun.com/business/ odology, U.S. News and World Report, 2011, http://www.us- law-firms-racing-to-boast-best-pay-for-associates/65738; Jes- news.com/education/best-graduate-schools/articles/2011/03/14/ sica Guyn, Right Out of Law School, Starting Salary, $160,000 / law-school-rankings-methodology-2012. Bay Area Firms Match Wages in New York to Draw A-List Talent, 17. Changes in the rankings likely allows U.S. News and World S.F. Chronicle, May 5, 2007, available at http://articles.sfgate. Report to attract readers. com/2007-05-05/business/17244295_1_first-year-associates- 18. Supra note 16, Morse and Flanigan. orrick-herrington-sutcliffe; Catherine Rampell, The Two-Track 19. Kenneth Anderson, LSAC Study on Law School Gaming Re- Lawyer Market, N.Y. Times Economix, July 27, 2010, available sources for US News Rankings, The Volkh Conspiracy (Dec. 3, at http://economix.blogs.nytimes.com/2010/07/26/the-two- 2009) http://volokh.com/2009/12/03/lsac-study-on-law-school- track-lawyer-market/. gaming-resources-for-us-news-rankings; Karen Sloan, Research 30. Amir Efrati, Hard Case: Job Market Wanes for U.S. Lawyers, Documents the ‘U.S. News’ Effect on Law Schools, National Wall St. J., Sept. 24, 2007, available at http://online.wsj.com/ar- Law Journal, Dec. 2, 2009, available at http://www.law.com/ ticle/SB119040786780835602.html; Annie Lowrey, When Law jsp/nlj/PubArticleNLJ.jsp?id=1202435994960&src=EMC- School Becomes a Bad Investment, Wash. Post, Oct. 30, 2010, Email&et=editorial&bu=National%20Law%20 available at http://www.washingtonpost.com/wp-dyn/content/ Journal&pt=NLJ.com-%20Daily%20Headlines&cn=20 article/2010/10/30 /AR2010103004638.html; Staff, Stingier Job 091203NLJ&kw=Research%20documents%20the%20 Market Awaits New Law School Grads, Associated Press, Sept. %27U.S.%20News%27%20effect%20on%20law%20 24, 2007, available at http://diverseeducation.com/article/9564/. schools&slreturn=1&hbxlogin=1. See generally Amir Efrati, Many individuals define “elite law schools” as the “Top 14” law Law School Rankings Reviewed to Deter ‘Gaming’, Wall St. schools listed in the U.S. News and World Report rankings. In past J., Aug. 26, 2008, available at http://online.wsj.com/article/ years, the Top 14 has generally included Harvard, Yale, Stanford, SB121971712700771731.html. Columbia, New York University, Chicago, Pennsylvania, Virgin- 20. Fellowships or employment at the school, after graduation have ia, California-Berkeley, Michigan, Duke, Northwestern, Cornell become common practice for part-time employment of students. and Georgetown. Tier One law schools are schools ranked be- Paul Campos, Served: How Law Schools Completely Misrepresent tween 16 and 50; Tier Two schools are typically ranked between Their Job Numbers, The New Republic, April 15, 2011, available 50-100; and Tier Three and Four schools are ranked over 100 or at http://www.tnr.com/article/87251/law-school-employment- unranked. See supra note 12, J. Paul Lomio & Wayne. harvard-yale-georgetown. In addition, some law schools appear 31. National Association of Legal Employers, Class of to be engaging in “bait and switch”-like practices by offering high 2007 National Summary Report (June 2008), available at dollar merit based scholarships that require students to have a cer- http://www.nalp.org/uploads/1229_natlsummary07revised.pdf. tain GPA to keep the scholarship during the second and third 32. Id. years of law schools. David Segal, How Law Students Lose the 33. Jonathan D. Glater, Finding Debt a Bigger Hurdle Than Bar Grant Game as Schools Win, N.Y. Times, April 30, 2011, available Exam, N.Y. Times, Jul. 1, 2009, available at http://www.nytimes. at http://www.nytimes.com/2011/05/01/business/law-school- com/2009/07/02/business/02lawyer.html; supra note 30, Low-

Journal of Consumer & Commercial Law 105 rey; David Segal, Is Law School a Losing Game, N.Y. Times, Jan. of California, Davis, regarding the University of California, Da- 11, 2011, available at http://www.nytimes.com/2011/01/09/ vis, School of Law’s reporting of employment statistics. Early re- business/09law.html. sponses to the public records request indicate that the law school 34. Staff, A Less Gilded Future, The Economist, May 5, 2011, considered individuals who were studying for the bar exam full- available at http://www.economist.com/node/18651114 (dis- time “employed at time of graduation.” cussing uncertainty for and potential decline of major law firms). 51. The UC Davis School of Law’s reported employment rate 35. American Bar Association and National Association of Legal at graduation, published in U.S. News & World Report, for the Employers. Class of 2009 was higher than the rates reported by: Yale Uni- 36. American Bar Association, First Year J.D. and To- versity Law School (94.5%), Harvard University Law School tal J.D. Minority Enrollment for 1971-2011, available at (93.7%), Stanford University Law School (94.5%), University of http://www.americanbar.org/content/dam/aba/administrative/ Chicago Law School (94.2%), University of Michigan School of legal_education_and_admissions_to_the_bar/statistics/jd_ Law (94.9%), University of California, Berkeley School of Law enrollment_1yr_total_minority.authcheckdam.pdf. (92.2%), Northwestern University Law School (92.7%), Cornell 37. Id. University Law School (92.8%), Georgetown University Law 38. Id. Center (90.1%), University of Texas School of Law (91.2%). Su- 39. Id. pra note 6, 2011 U.S. News Rankings. 40. Id. 52. Id. 41. Id. 53. Interview with Phillip Yeager, 2009 Graduate of University of 42. Brian Boyd, Exceeding expectations: UMass Law School Al- California, Davis, School of Law, March 22, 2011, notes on file ready Proving Critics Wrong, South Coast Today, Feb. 27, with author. 2011, available at http://www.southcoasttoday.com/apps/pbcs. 54. U.S. News and World Report, University of California-Davis, dll/article?AID=/20110227/NEWS/102270326/-1/NewsMap. U.S. News and World Report, (May 20, 2012) http://grad- (discussing a new public law school earning a profit and sending schools.usnews.rankingsandreviews.com/best-graduate-schools/ $918,000 to the state government in its first year of operation); top-law-schools/university-of-california-davis-03017. supra note 33, Segal (stating “You may think of law schools as 55. Jack Crittenden, A New Low in the Rankings Arms Race, Na- training grounds for new lawyers, but that is just part of it… They tional Jurist, March 2011, at 4-6, available at http://www.nxt- are also cash cows…Tuition at even mediocre law schools can cost book.com/nxtbooks/cypress/nationaljurist0311/#/4. up to $43,000 a year. Those huge lecture-hall classes — remem- 56. Id. ber “The Paper Chase”? — keep teaching costs down. There are 57. Martha Neil, U of Illinois Corrects LSAT and GPA Stats for no labs or expensive equipment to maintain. So much money Additional Law Classes, ABA Journal, Sept. 28, 2011, available flows into law schools that law professors are among the highest at http://www.abajournal.com/news/article/u_of_illinois_cor- paid in academia, and law schools that are part of universities rects_lsat_and_gpa_stats_for_additional_law_classes/. often subsidize the money-losing fields of higher education.”); 58. Supra note 43, Hopkins. Ilya Somin, Big-Name Universities That Don’t Have Law Schools, 59. Supra note 30, Efrati. The Volokh Conspiracy, (May 12, 2008), http://volokh.com/ 60. Law School Transparency, About LST, (April 4, 2011) http:// posts/1210614188.shtml (stating, “Why these universities haven’t www.lawschooltransparency.com/about/. established law schools is a bit of a mystery (at least to me). Law 61. Law School Transparency, Mission, (April 4, 2011) http:// schools tend to bring in net revenue for the university.”). www.lawschooltransparency.com/mission/. 43. Katy Hopkins, 10 Law Degrees with Most Financial Value at 62. Kyle P. McEntee, Patrick J. Lynch, & Natalie J. Reyes, Graduation, U.S. News and World Report, (March 29, 2011), Law School Transparency Reports: The Initial Request http://www.usnews.com/education/best-graduate-schools/top- 1-3, Nov. 15, 2010, available at http://taxprof.typepad.com/files/ law-schools/articles/2011/03/29/10-law-degrees-with-most-fi- lst.pdf. nancial-value-at-graduation. See supra note 6, 2011 U.S. News 63. Id. at 7. Rankings. 64. Id. at 1. 44. Amir Efrati, The Dark Side of the Legal Job Market, WSJ Law 65. See Lucille A. Jewel, You’re Doing It Wrong: How the Anti-Law Blog, (Sept. 24, 2007), http://blogs.wsj.com/law/2007/09/24/ School Scam Blogging Movement Can Shape the Legal Profession, 12 the-dark-side-of-legal-job-market. Minn. J. of Law & Tech. 239, 239 (2011). 45. Supra note 30, Efrati. 66. Above the Law, About Above the Law, (April 4, 2011) http:// 46. Supra note 6, 2011 U.S. News Rankings. abovethelaw.com/about/; infra note 85, Mystal; Elie Mystal, 47. Supra note 12, Lomio & Wayne. Law Students at a Top Law School Protest Continued Unemploy- 48. Class of 2009 U.S. News Data, Law School Transparency ment, Above the Law, (March 29 2011) http://abovethelaw. Project, Apr. 10, 2011, available at http://www.lawschool- com/2011/03/law-students-at-a-top-school-protest-continued- transparency.com/2011/04/class-of-2009-u-s-news-data/. See also unemployment/; Elie Mystal, In Five Years Will the Endless March University of California, Davis, School of Law, King Hall Expan- of New Lawyers Finally Stop?, Above the Law, (March 23, 2011) sion and Renovation (April 4, 2011) http://building.law.ucdavis. http://abovethelaw.com/2011/03/in-five-years-will-the-endless- edu/project/ index.html. march-of-new-lawyers-finally-stop/. 49. U.S. News and World Report, University of California-Davis, 67. See generally Law School Tuition Bubble, (April 4, 2011) U.S. News and World Report (April 4, 2011) http://grad- http://lawschooltuitionbubble.wordpress.com/; Shilling Me schools.usnews.rankingsandreviews.com/best-graduate-schools/ Softly, (April 4, 2011) http://shillingmesoftly.blogspot.com/; top-law-schools/school-of-law-03017. The Jobless Juris Doctor, (April 4, 2011) http://www.noto- 50. University of California, Davis, School of Law, University lawschool.com/; Third Tier Reality, (April 4, 2011) http:// of California Davis School of Law Employment and Salary Report thirdtierreality.blogspot.com/. Summary Class of 2009 (April 4, 2011) http://www.law.ucdavis. 68. Howard B. Miller, Op-Ed, Truth in Lending and in Careers, edu/prospective/career-services/statistics.html. In May 2011, California Bar Journal, May 2010, available at http://lawweb. the author placed a public records request with the University usc.edu/assets/docs/contribute/CaliforniaBarJournalPresidents-

106 Journal of Consumer & Commercial Law ColumnMay2010.pdf. 95. William T. Vukowich, Consumer Protection in the 21st 69. Id. Century: A Global Perspective 129-36 (2002); Letter from 70. Id. John C. Miller III, FTC Chairman, to John D. Dingell, Chair- 71. Jack Crittenden, The Problem with Law School Employment man, House Committee on Energy and Commerce, Oct. 14, Data, PreLaw Magazine, Winter 2011, available at http:// 1983 (hereinafter “FTC Letter”). www.lawschoolpodcaster.com/2011/03/29/the-problem-with- 96. Id. at 1. law-school-employment-data. See Justin Pope, Law Schools 97. Id. Growing, but Jobs Aren’t, Associated Press, June 17, 2008, 98. Id. at 2-3. See American Home Products, 695 F.2d 681, 688 available at http://www.capecodonline.com/apps/pbcs.dll/ (3d Cir. 1982); Porter & Dietsch, 90 F.T.C. 770, 864-65 (1977), article?AID=/20080617/NEWS11/80617006/-1/rss04. 605 F.2d 294 (7th Cir. 1979), cert. denied, 445 U.S. 950 (1980); 72. Jack Crittenden, Angry Law Grads, National Jurist, Oct. Heinz W. Kirchner, 63 F.T.C. 1282, 1290 (1963). 2010, at 20, available at http://www.nxtbook.com/nxtbooks/cy- 99. Id. at 4. press/nationaljurist1010/index.php?startid=20#/20. 100. Grolier, 91 F.T.C. 315, 430 (1978). 73. Supra note 20, Campos, at 1-2. 101. Horizon Corp., 97 F.T.C. 464, 810 n.13 (1981). 74. Id. 102. Supra note 75, FTC Letter at 4. 75. Id. 103. 15 U.S.C. § 52. 76. Robert Morse, U.S. News Urges Law School Deans to Improve 104. Id. Employment Data, U.S. News and World Report, (March 9, 105. 15 U.S.C. § 55(a)(1). 2011) http://www.usnews.com/education/blogs/college-rank- 106. Id. ings-blog/2011/03/09/us-news-urges-law-school-deans-to-im- 107. 15 U.S.C. § 53. prove-employment-data. 108. 15 U.S.C. § 54. 77. Staci Zaretsky, Twelve More Law Schools Slapped with Class 109 . 15 U.S.C. § 44. Action Lawsuits Over Employment Data, Above the Law, Feb. 110 . American Medical Assn., 94 F.T.C. 701, 983-84 (1979). 1, 2012, available at http://abovethelaw.com/2012/02/twelve- 111. California Dental Association v. FTC, 526 U.S. 756, 766 more-law-schools-slapped-with-class-action-lawsuits-over-em- (1999); F.T.C. v. Nat’l Comm’n on Egg Nutrition, 517 F.2d 485 ployment-data/. (7th Cir. 1975); American Medical Ass’n., 94 F.T.C. at 983-84 78. Id. (1979). 79. Class Action Lawsuits Against 20 More Law Schools to be Filed, 112. California Dental Ass’n, 526 U.S. at 766 (1999); American JD Journal, March 15, 2012, available at http://www.jdjournal. Medical Ass’n, 94 F.T.C. at 983-84 (1979). com/2012/03/15/class-action-lawsuits-against-20-more-law- 113. California Dental Ass’n, 526 U.S. at 766 (1999). schools-to-be-filed/. 114. Id. at 766-67. 80. Class Action Complaint, Cooper et al v. New York Law 115. California Dental Ass’n, 526 U.S. at 766 (1999). School, available at http://www.nylj.com/nylawyer/adgifs/ 116. 15 U.S.C. §§ 41 et seq. decisions/081111nylscomplaint.pdf. 117. §§ 45 & 52; supra Background at 3-13. 81. Memorandum from Standard 509 (Consumer Information) 118. California Dental Ass’n, 526 U.S. at 766 (1999). Subcommittee to Standards Review Committee, March 14, 2011, 119. Supra Background at 3-13. available at http://apps.americanbar.org/legaled/committees/ 120. Id. Standards%20Review%20documents/April%202011%20Meet- 121. § 41 et seq. ing/Report%20of%20Subcommittee%20on%20Consumer%20 122 . Supra Background at 3-6. Information.pdf (hereinafter “ABA Memorandum”). 123. Thomas Cooley School of Law,Overview: Facts-at-a-Glance, 82. Id. at 3. (April 4, 2011) http://www.cooley.edu/overview/factsataglance. 83. Id. htm. (hereinafter Cooley Overview) 84. ABA Standard 509. 124. Id. 85. Karen Sloan, Sen. Boxer Joins Debate Over Law School Trans- 125. Thomas M. Cooley School of Law, The NFL vs. College Foot- parency, National Law Journal, March 31, 2011, available at ball Reputation, (April 4, 2011) http://www.cooley.edu/rankings/ http://www.law.com/jsp/nlj/PubArticleNLJ.jsp?id=120248873 nfl_analogy.html. 3307&slreturn=1&hbxlogin=1. See generally Elie Mystal, Watch 126. Supra note 123, Cooley Overview. Out, Law Schools: A United States Senator Wants You to Stop Ly- 127. Cooley’s student loan repayment rate is significantly below ing, Above the Law, (March 31, 2011) http://abovethelaw. that of other law schools and universities that receive federal fi- com/2011/03/watch-out-law-schools-united-states-senators- nancial aid. 2009 student loan repayment rates (only available for want-you-to-stop-lying. 57 law schools): Charlotte School of Law (0%); Phoenix School 86. Mark Hansen, Sen. Grassley Questions ABA’s Law School Ac- of Law (19%); Charleston School of Law (23%); Atlanta’s John creditation Process, ABA Journal, July 13, 2011, available at Marshall School of Law (28%); Seton Hall School of Law (29%); http://www.abajournal.com/news/article/grassley_seeks_an- Golden Gate School of Law (32%); Touro School of Law (34%); swers_on_abas_law_school_accreditation_process/. Stetson School of Law (36%); Thomas M. Cooley School of Law 87. LST’s Proposal: The Job Outcome List and a National Salary (36%); Inter-American School of Law (38%); Florida Coastal Database, Law School Transparency Project, March 29, 2011 School of Law (41%); Thomas Jefferson School of Law (41%); http://www.lawschooltransparency.com/2011/03/lsts-proposal/. California Western School of Law (44%); Laverne School of Law 88. Id. (45%); Western State College of Law (48%); New England School 89. Id. of Law (50%); John Marshall School of Law (51%); Ave Maria 90. Supra note 20, Campos, at 1-2. School of Law (51%); Appalachian School of Law (51%); Mc- 91. 15 U.S.C. §§ 41, 44 & 45. George Law School (51%); Southwestern School of Law (51%); 92. Id. Vermont Law School (53%); City University of New York School 93. 15 U.S.C. § 45(1). of Law (53%); Roger Williams School of Law (54%); Mississippi 94. 15 U.S.C. § 45(3). College of Law (55%); New York Law School (55%); Chapman

Journal of Consumer & Commercial Law 107 University School of Law (55%); Whittier School of Law (56%); sions memos, from public law schools using different state-level Michigan State School of Law (57%); Loyola Law School (57%); freedom of information laws. San Diego School of Law (58%); Miami School of Law (59%); 146. On April 27, 2011 the author submitted a public records Albany School of Law (59%); Pennsylvania State School of Law request to the University of California, Davis requesting copies (60%); William Mitchell School of Law (60%); Pepperdine of correspondence and documents regarding the law school’s cal- School of Law (62%); Brooklyn Law School (62%); Wayne State culation of employment statistics and reporting of employment School of Law (62%); George Mason School of Law (63%); Wake statistics for individuals who graduated between the years of 2006 Forest School of Law (64%); South Texas School of Law (64%); and 2009. Villanova School of Law (65%); Texas Weselyan School of Law 147. 15 U.S.C. § 45. (66%); Georgetown University Law Center (66%); New Hamp- 148. Supra note 95, FTC Letter, at 3-6. shire School of Law (67%); Quinnipiac School of Law (67%); 149. Supra note 144, Rubin. University of California, Hastings; School of Law (69%); Benja- 150. 15 U.S.C. § 52. min Cardozo School of Law (69%); Temple University School of 151. Id. Law (69%); Michigan School of Law (71%); Duke Law School 152. Id. (75%); Georgia State University; School of Law (77%); Stan- 153. 15 U.S.C. § 41 et seq. ford University Law School (84%); Harvard Law School (84%); 154. Supra note 144, Rubin. University of Connecticut School of Law (87%); Columbia Law 155. Supra note 8, GAO Report. School (87%). National Center for Education Statistics, U.S. De- 156. Supra note 127, Law School Student Loan Repayment Rates partment of Education, Integrated Postsecondary Education Data (listing student loan repayment rates for 57 law schools for fiscal System, (April 6, 2011) http://nces.ed.gov/ipeds/datacenter/. The year 2009). Obama Administration recently proposed a gainful employment 157. Supra note 30, Efrati. regulation that would make for-profit colleges and career-voca- 158. Ashby Jones, Scalia: ‘We Are Devoting Too Many of Our Best tional education institutions ineligible for federal financial aid if Minds to’ Lawyering, Wall St. J. Law Blog, Oct. 1, 2009, avail- the institutions had loan repayment rates below 40%. Higher Ed- able at http://blogs.wsj.com/law/2009/10/01/scalia-we-are-de- ucation Act of 1965, 20 U.S.C. § 1070 et seq.; Program Integrity: voting-too-many-of-our-best-minds-to-lawyering/; Schumpter, Gainful Employment-New Programs, 75 Fed. Reg. 43616 (final Talent and the Banks: Sucking Up Too Many of America’s Brightest rule proposal on Oct. 29, 2010), available at http://www.gpo. Minds, The Economist: Schumpter, April 13, 2011, available gov/fdsys/pkg/FR-2010-10-29/pdf/2010-27395.pdf. (hereinafter at http://www.economist.com/blogs/schumpeter/2011/04%20/ “Final Proposal”) (proposing promulgation of Gainful Employ- talentandbanks. See generally Paul Kedrosky & Dane Stangler, ment rule under 34 C.F.R. § 600). National Center for Education Kauffman Foundation, Financialization and It’s Entrepre- Statistics, U.S. Department of Education, Integrated Postsecond- neurial Consequences (March 2011), available at http://www. ary Education Data System, (April 6, 2011) http://nces.ed.gov/ kauffman.org/uploadedFiles/financialization_report_3-23-11. ipeds/datacenter. pdf. 128. Elie Mystal, Latest Cooley Law School Rankings Achieve New 159. Law Schools Report, National Law Journal, Feb. 28, 2011, Heights of Intellectual Dishonesty, Above the Law, Feb. 8, 2011 available at http://www.law.com/jsp/nlj/PubArticleNLJ.jsp?id= http://abovethelaw.com/2011/02/latest-cooley-law-school-rank- 1202483173162&slreturn=1&hbxlogin=1 (listing top 50 law ings-achieve-new-heights-of-intellectual-dishonesty/. schools that place graduates with major law firms). 129. Matthew Shaer, Law Schools Sued for Lying About Lawyering, 160. Id. New York Magazine, Feb. 1 2012, available at http://nymag. 161. Supra, 127, 2009 student loan repayment rates. com/daily/intel/2012/02/law-schools-sued-for-lying-about-law- 162. Supra note 68, Miller. yering.html. 163. Supra Reporting False Employment Statistics, at 4-14. 130. Supra Background at 3-13. 164. Nathan Koppel, Law School Loses Its Allure as Jobs at Firms 131. Id. Are Scarce, Wall St. J., March 17, 2011, available at http://on- 132. Id. line.wsj.com/article/SB10001424052748704396504576204692 133. Supra note 65, Miller; supra note19, Sloan. 878631986.html. 134. California Dental Ass’n v. FTC, 526 U.S. 756 (1999). 165. Supra note 81, ABA Memorandum, at 6. 135. 15 U.S.C. §§ 44, 45 & 52; California Dental Ass’n, 526 166. See supra note 127, 2009 student loan repayment rates. U.S. at 766 (1999). 167. See 75 Fed. Reg. 43615, 43615-18 (Jul. 26, 2010) (rulemak- 136. See generally Id. ing notice for proposed “Gainful Employment Rule” that would 137. California Dental Ass’n 526 U.S. at 766. determine proprietary colleges and universities’ eligibility for fed- 138. Id. at 766. eral Title IV financial aid on former students’ student loan repay- 139. The Almanac of Higher Education. The Chronicle of ment rates and debt to income ratios). Higher Education, Aug. 28, 2009 at LVI (1): 5. 168. See generally Sarah Kellog, The Transformation of Legal Educa- 140. Statutory Attacks on Deceptive Advertising, 43 Harv. L. Rev. tion, DC Bar, May 2011, available at http://www.dcbar.org/for_ 945, 945-46 (1930). lawyers/resources/publications/washington_lawyer/may_2011/ 141. Supra Background at 3-13. legal_education.cfm. 142. See generally supra note 95,Vukowich. 169. Supra note 68, Miller. 143. Supra Background, at 3-13. 144. Id. See generally Lauren Solberg, Reforming the Legal Ethics Curriculum: A Comment on Edward Rubin’s “What’s Wrong with Langdell’s Method and What to Do About It”, 62 Vand. L. Rev. En Banc 12 (2009); Edward Rubin, What’s Wrong with Langdell’s Method and What to Do About It, 60 Vand. L. Rev. 609 (2009). 145. An interesting research project would be to request and re- view internal employment documents, e-mails, marketing/admis-

108 Journal of Consumer & Commercial Law Consumer News Alert Recent Decisions

ince October 2006, the Center for Consumer Law first trust deed, regardless of when the borrower sends notice of has published the “Consumer News Alert.” This rescission.” McOmie-Gray v. Bank of Am. Home Loans, 667 F.3d short newsletter contains everything from consumer 1325 (9th Cir. 2012). tips and scam alerts, to shopping hints and financial calculators. It also has a section just for attorneys, Class improperly certified. The Ninth Circuit held that a nation- highlighting recent decisions. The alert is delivered wide class should not have been certified in a lawsuit alleging that Sby email three times a week. Below is a listing of some of the cases Honda misrepresented the characteristics of a high-tech braking highlighted during the past few months. To subscribe and begin system. The court concluded that class certification was improper receiving your free copy of the Consumer News Alert in your in this instance because the district court erroneously concluded mailbox, visit www.peopleslawyer.net. that California law could be applied to the entire nationwide class. The court also found that class certification was inappro- UNITED STATES COURTS OF APPEAL priate because it could not be presumed that all consumers who purchased or leased the Acura RL relied on the Honda advertise- Home borrower cannot sue to enforce HAMP rights. The Eleventh ments at issue. Mazza v. Am. Honda Motor Co., 666 F.3d 581 Circuit held that a home borrower did not have a private right (9th Cir. 2012). of action to sue his lender for failing to grant him a permanent loan modification under the federal Home Affordable Modifica- Law firm did not violate fair Debt Collection Practices Act. The tion Program (HAMP). Miller v. Chase Home Fin., LLC, No. 11- Eighth Circuit held that a law firm didn’t violate federal debt 15166, 2012 U.S. App. LEXIS 7961 (11th Cir. Apr. 19, 2012). collection law by submitting a client affidavit and legal memoran- dum arguing that the plaintiff was liable for her former husband’s Arbitration clause in student loan agreement is enforceable. The unpaid credit card balance. According to the plaintiff, the firm Ninth Circuit held that an arbitration clause in student’s loan violated §1692e of the Act by making false statements and mis- agreement is enforceable. The court found that a student’s fraud representations in its filings in the state court collection action. claim against the lender was subject to an arbitration clause in its The court noted, “It was not false or misleading to submit a client loan agreements. Kilgore v. KeyBank, N.A., 673 F.3d 947 (9th affidavit and legal memorandum arguing [the firm’s] legal posi- Cir. 2012). tion that [the plaintiff] was liable for the unpaid account balance, even if [her ex-husband] was the only one who used the credit Truth in Lending Act rescission claim time-barred after three years. card and made partial payments on the account, when Discover’s The Ninth Circuit held that the Truth in Lending Act’s statute records reflected that [he] submitted the initial application, added of repose extinguished a borrower’s right to rescission three years [the plaintiff] to the account by phone, neither spouse questioned after the consummation of her loan – regardless of whether she statements identifying it as a joint account, partial payments were provided notice of her rescission within that period. The court made by checks from a joint account, and a [divorce agreement] noted that, “15 U.S.C. §1635(f) is a three-year statute of repose, signed by [the plaintiff] listed it as a joint obligation for the cou- requiring dismissal of a claim for rescission brought more than ple’s ‘living expenses.’” Hemmingsen v. Messerli & Kramer, P.A., three years after the consummation of the loan secured by the 674 F.3d 814 (8th Cir. 2012).

Journal of Consumer & Commercial Law 109 Non-debtor may be consumer under Fair Debt Collection Practices U.S. App. LEXIS 7789 (7th Cir. Apr. 18, 2012). Act. The Eighth Circuit held that a non-debtor mistakenly tar- geted by a debt collector has standing to sue under the FDCPA. Condo purchaser waited too long to assert statutory rescission rights. The court noted that the question hinged on the phrase “alleg- The Sixth Circuit held that condominium purchasers waited too edly obligated.” The court stated: “We find that PRA [the Debt long to exercise their right to rescind their contract pursuant to Collector] alleged that Dunham owed a payment obligation. federal law requiring PRA concedes, as it must, that it contacted Dunham with letters certain disclosures The court agreed that demanding that a ‘James Dunham’ pay the payment obligation. in land sales. Two the action was untimely If Dunham paid the payment obligation, PRA would have likely years after signing the under the statute, re- found that ‘James Dunham’ satisfied his payment obligation. agreement, the plain- Therefore, PRA alleged, albeit mistakenly, that Dunham owed tiffs sued to rescind jecting the plaintiffs’ the payment obligation. Simply put, a mistaken allegation is an under the Interstate argument that the two- allegation nonetheless. Thus, we read § 1692a(3) to include in- Land Sales Full Dis- dividuals who are mistakenly dunned by debt collectors.” Dun- closure Act. Accord- year limit was tolled by ham v. Portfolio Recovery Assocs., LLC, 663 F.3d 997 (8th Cir. ing to the plaintiffs, the developer’s failure 2011). the developer violated to provide them proper the Act by failing to Truth in Lending plaintiff may have extended right to rescind. The provide them with a notice of their right to Seventh Circuit held that a TILA plaintiff may have three years to property report. Sec- rescind in violation of rescind a home loan due to his lender’s alleged failure provide all tion 1703(c) of the §1711 of the Act. the required notices in a mortgage refinancing transaction.Marr Act generally requires v. Bank of Am., N.A., 662 F.3d 963 (7th Cir. 2011). the exercise of rescis- sion rights within Landowners fines for violating municipal code not “debt.” The Sev- two years of signing. enth Circuit held that fines for violating municipal code did not The court agreed that stem from a consensual consumer transaction and were not debts the action was untimely under the statute, rejecting the plaintiffs’ under the FDCPA. Gulley v. Markoff & Krasny, 664 F.3d 1073 argument that the two-year limit was tolled by the developer’s (7th Cir. 2011). failure to provide them proper notice of their right to rescind in violation of §1711 of the Act. “We hold that a purchaser or lessee Debit card charge didn’t violate Social Security Act. The Seventh must comply with both §1703(c)’s two-year limit for exercising Circuit held that a television service provider did not violate the right of rescission and §1711(b)’s three-year limit for filing federal law by charging an early termination fee against a Social suit based on the seller’s refusal to honor the buyer’s rescission.” Security recipient’s debit card account. The Social Security Act While the court concluded that the plaintiffs’ statutory rescission generally prohibits the assignment, attachment or garnishment action was untimely, it remanded the matter for the trial court to of benefits. The plaintiff alleged that the charge violated federal consider whether the plaintiffs were entitled to equitable rescis- law because all the funds in her debit card account consisted of sion. Veneklase v. Bridgewater Condos, L.C., 670 F.3d 705 (6th her Social Security benefits. But the court decided that there was Cir. 2012). no violation of the statute, explaining that “spending money with a source in Social Security benefits is distinct from assigning the Voluntary Payment rule bars class action. The Sixth Circuit held benefit stream itself.” Townsel v. DISH Network L.L.C., 668 F.3d that a customer’s voluntary payment of a Budget Rent-A-Car fuel 967 (7th Cir. 2012). service fee bars his consumer class action challenging that charge. Budget argued that the plaintiff’s lawsuit was barred by Ohio’s Debtor in bankruptcy cannot discharge award for loss of consortium. voluntary payment doctrine because the plaintiff had paid the The Seventh Circuit held that a Chapter 7 debtor could not $13.99 fee when he returned his car. Generally, under the vol- obtain a bankruptcy discharge of a $300,000 award for loss of untary payment doctrine, one who voluntarily makes a payment consortium stemming from the attempted murder of his ex-wife. to another cannot later sue merely because he was mistaken as to Jendusa-Nicolai v. Larsen, No. 11-1256, 2012 U.S. App. LEXIS his liability to pay. The court here concluded that the doctrine 7793 (7th Cir. Apr. 18, 2012). applied to bar the plaintiff’s class action.Salling v. Budget Rent-A- Car Sys., 672 F.3d 442 (6th Cir. 2012). Credit card receipt did not violate FACTA. The Seventh Circuit held that Shell Oil did not “willfully” violate the Fair and Ac- New tobacco warning statute constitutional. The Sixth Circuit held curate Credit Transactions Act by printing the last four digits of that the new federal statute requiring tobacco companies to in- a customer’s “account number” on a gas pump receipt. The FAC- clude graphic warnings on cigarette packages does not violate the TA requires the truncation of credit-card numbers on electroni- First Amendment. Discount Tobacco City & Lottery, Inc. v. United cally printed receipts. The case presented the question whether States, 674 F.3d 509 (6th Cir. 2012). the terms “card number” and “primary account number” are in- terchangeable. Under the Act, the receipt must not display “more Health club employee not bound by arbitration clause. The Fifth Cir- than the last 5 digits of the card number.” The statute does not cuit held that a health club employee suing for unpaid overtime define the phrase “card number.” The court found it did not have was not bound by an arbitration clause in his employee hand- to define “card number,” stating, “because we can’t see why any- book. The court decided that the defendant’s arbitration clause one should care how the term is defined. A precise definition does was illusory and unenforceable because the employer retained the not matter as long as the receipt contains too few digits to allow unilateral right to modify or terminate the arbitration provision identity theft. The Act does its work by limiting the number of at any time. Carey v. 24 Hour Fitness, USA, Inc., 669 F.3d 202 exposed digits, and Shell Oil printed one fewer digit than the Act (5th Cir. 2012). allows.” Straaten v. Shell Oil Prods. Co. LLC, No. 11-8031, 2012

110 Journal of Consumer & Commercial Law Federal law does not preempt lawsuit against bank for wrongful re- than the risk associated with a reading that was merely careless.’” possession. The Fourth Circuit held that federal banking law does Long v. Tommy Hilfiger U.S.A., Inc., 671 F.3d 371 (3d Cir. 2012). not preempt a lawsuit alleging that an auto lender violated state post-repossession notice requirements. Epps v. JPMorgan Chase Potential identity theft victims do not have standing to sue. The Third Bank, N.A., No. 10-2444, 2012 U.S. App. LEXIS 6841 (4th Cir. Circuit held that employees at a firm whose payroll was processed Apr. 5, 2012). by a company that had been infiltrated by a hacker could not sue for the increased risk of identity theft. The court concluded Offer of settlement didn’t moot Fair Debt Collection Practices suit. that the plaintiffs’ allegations of hypothetical, future injury did The Fourth Circuit held that a law firm’s offer of settlement was not establish standing under Article III of the Constitution. Reilly insufficient to moot a lawsuit over its allegedly unfair debt collec- v. Ceridian Corp., 664 F.3d 38 (3d Cir. 2011). tion practices. Prior to any discovery, the law firm made the plain- tiff a Rule 68 offer of judgment. Under the terms of the proposed N.Y. attorney disclosure rule is unconstitutional. The Second Circuit settlement, the firm agreed to pay $1,001 for statutory damages held a New York rule requiring certain disclaimers by attorneys and the plaintiff’s costs and attorney fees. Regarding the plaintiff’s who advertise themselves as certified specialists is unconstitution- actual damages – which she failed to specify in her complaint – al. The rule requires that an attorney “prominently” include a dis- the firm offered to pay a minimum of $250 or, in the alternative, claimer indicating: (1) the certifying organization is not affiliated allow her to present evidence for the district court to determine with any government agency; (2) certification is not required to an amount. The court decided that the firm’s conditional offer to practice law in the state; and (3) certification does not necessarily pay actual damages failed to satisfy the standard that an offer be indicate that the attorney has greater competence than other expe- “unequivocal” because it prevented the plaintiff from having a rienced lawyers in the field. The court decided that the disclaimer jury determine actual damages. Warren v. Sessoms & Rogers, P.A., regarding competency violated the First Amendment as did the No. 2105, No. 2155, 2012 U.S. App. LEXIS 552 (4th Cir. Jan. disclaimer that certification is not required to practice law. Finally, 11, 2012). the court concluded that the lack of standards for enforcement of the rule’s requirement that the disclaimer be “prominently dis- Substitute arbitrator can hear consumer case when NAF is desig- played” rendered it void for vagueness as applied to the plaintiff. nated as arbitration forum. The Third Circuit held that a com- Hayes v. N.Y. Atty. Griev. Comm. of the Eighth Judicial Dist., 672 puter company sued for selling a defective product could enforce F.3d 158 (2d Cir. 2012). an arbitration clause in its customer agreement, even though the designated arbitrator, The National Arbitration Forum, was no State law defamation and intentional infliction of emotional distress longer available to hear disputes. Khan v. Dell Inc., 669 F.3d 350 claim preempted by Fair Credit Reporting Act. The Seventh Circuit (3d Cir. 2012). held that a consumer’s state common law claims were preempt- ed by the FCRA, which provides no requirement or prohibition Retailer isn’t liable for willful violation of FACTA. The Third Cir- could be imposed under state law with respect to matters regu- cuit held that a retailer that printed the month of a credit card’s lated by the FCRA. Macpherson v. JPMorgan Chase Bank, N.A., expiration on a cus- 665 F.3d 45 (2d Cir. 2011). The Third Circuit held tomer’s receipt isn’t that a retailer that liable for a “willful” UNITED STATES DISTRICT COURTS violation of the Fair printed the month of a and Accurate Credit Car manufacturer cannot compel arbitration. A U.S. District Court credit card’s expiration Transactions Act. in California held that Toyota can’t compel the arbitration of class The retailer dis- claims brought by customers who seek damages for diminution on a customer’s receipt played the month in the market value of their vehicles as a result of alleged defects isn’t liable for a “willful” but not the year of that lead to incidents of sudden, unintended acceleration. The violation of the Fair and the card’s expiration court found that as to some plaintiffs Toyota has waived the right date. The FACTA to compel arbitration, and that as a non-signatory to the agree- Accurate Credit Transac- provides that mer- ment it could not enforce the arbitration as to all plaintiffs. In tions Act. chants who accept re Toyota Motor Corp. Unintended Acceleration Mktg., Case No.: credit or debit cards 8:10ML02151 JVS (FMOx), 2011 U.S. Dist. LEXIS 80965 shall not print “the (C.D. Cal. July 19, 2011). expiration date” of the cards upon any NATIONAL LABOR RELATIONS BOARD receipt. The court stated, “We conclude that the most natural reading of the phrase NLRB rule workers cannot be barred from maintaining or joining ‘expiration date’ is that it refers to the information or data (usu- a class action. The National Labor Relations Board has just ruled ally a string of numbers) contained in the expiration date ‘field’ that workers must be allowed to pursue legal claims as a group. on the face of the credit or debit card. In other words, FACTA is The NLRB said such agreements interfere with workers’ protected best read as prohibiting merchants from printing the numbers in rights to join together to improve working conditions and consti- that field, which [the plaintiff] alleges Hilfiger did in this case by tute an unfair labor practice. D.R. Horton, Inc. and Michael Cuda, printing ‘EXPIRY: 04/##.’ The fact that Hilfiger printed only a 357 NLRB No. 184 (Jan. 3, 2012). part or portion of the expiration date numbers from [the plain- tiff’s] credit card does not change the result.” The court nonethe- STATE COURTS less concluded that there was not a willful violation of the Act. The court explained that the retailer’s interpretation of the statute, Automatic stay for bankrupt party doesn’t apply to co-defendants. The “although erroneous, was at least objectively reasonable. [The re- Alabama Supreme Court held that an insolvent asbestos defen- tailer] did not run ‘a risk of violating the law substantially greater dant’s bankruptcy filing does not stay all litigation involving sol-

Journal of Consumer & Commercial Law 111 vent co-defendants. Bradberry v. Carrier Corp., 1100994, 2011 At-will employee waived Ala. LEXIS 212 (Ala. Dec. 16, 2011). right to jury. The Texas The Texas Supreme Supreme Court held that Court held that an em- Arbitration clause in job application is unenforceable. The Califor- an employer could en- ployer could enforce a nia Court of Appeals held that an employer could not enforce an force a jury waiver against arbitration clause in its job applications when sued for violating an at-will employee who jury waiver against an state wage and hour law. The court concluded that the arbitration signed the agreement un- at-will employee who clause was unfairly one-sided and otherwise unconscionable. “[E] der threat of being fired. signed the agreement ven though the plaintiffs undoubtedly saw the arbitration para- The court stated, “we graph when they initialed it, their declarations state they did not agree that a jury waiver under threat of being know what ‘binding arbitration’ meant, no one explained it to agreement that is coerced fired. them, and they were unaware they were giving up their right to is invalid, we disagree trial. There was no evidence any of the plaintiffs were sophisti- that Frank Kent’s threat cated in legal matters. This, combined with the non-negotiable, to exercise a legal right take-it-or-leave-it circumstances surrounding the application for amounts to coercion that employment, result in a strong showing of procedural unconscio- would invalidate the Jury nability.” Wisdom v. AccentCare, Inc., 202 Cal. App. 4th 591 (Cal. Trial Waiver, and conditionally grant mandamus relief. We hold App. 3d Dist. 2012), pet. granted S200128, 2012 Cal. LEXIS that Valdez did not allege coercion in such a way that would in- 2935 (Cal. Mar. 28, 2012). validate the Jury Trial Waiver since an at-will employer’s threat to exercise its legal right to terminate an employee cannot amount Young child can recover for emotional distress. The Idaho Supreme to coercion that invalidates a jury waiver agreement.” In re Frank Court held that an 18-month-old girl did not have to suffer physi- Kent Motor Co., No. 10-0687, 2012 Tex. LEXIS 199 (Tex. 2012). cal injuries in an automobile accident in order to recover damages for emotional distress. Carrillo v. Boise Tire Co., No. 37026, 2012 Employee who was fired for refusing to commit an illegal act may Ida. LEXIS 95 (Idaho Apr. 13, 2012), reh’g denied No. 37026- recover punitive damages. The Texas Supreme Court held that an 2009, 2012 Ida. LEXIS 98 (Idaho Apr. 18, 2012). employee who was terminated for refusing to perform an illegal act might recover punitive damages. In the instant case, however, Arbitration clause unenforceable under state law. The Missouri Su- the plaintiff failed to meet the legal standard required to recover preme Court held that an arbitration clause and class action waiv- such damages. Safeshred, Inc. v. Martinez, No. 10-0426, 2012 er in a title loan contract was unconscionable and unenforceable. Tex. LEXIS 337 (Tex. Apr. 20, 2012). The court in an earlier decision concluded that the clause was unconscionable and unenforceable given the nominal amount Voluntary payment rules do not prevent suit against a telephone com- the plaintiff could anticipate recovering on an individual claim. pany for “cramming.” The Wisconsin Supreme Court held that The U.S. Supreme Court vacated that decision, however, in light the voluntary payment doctrine did not bar telephone customers of AT&T Mobility v. Concepcion. Applying “traditional Missouri from suing their service providers under a state statute for engag- contract law,” the Missouri court revoked the arbitration clause in ing in deceptive billing practices. MBS-Certified Pub. Accountants, its entirety on the ground of unconscionability in the formation LLC v. Wis. Bell, Inc., 809 N.W.2d 857, 2012 WI 15 (Wis. 2012). of the agreement. Brewer v. Mo. Title Loans, No. SC90647, 2012 Mo. LEXIS 62 (Mo. Mar. 6, 2012).

Reverse mortgage payments are subject to garnishment. The New Jersey Appellate Division held that a judgment creditor could garnish a defendant’s reverse-mortgage payments in order to sat- isfy a personal injury award. The court noted, “the mortgagee’s obligation to make monthly payments to defendant, the judg- ment debtor, is properly construed to be a ‘debt’ against which plaintiffs, the judgment creditors, may obtain an order directing execution and garnishment . . . .” Cameron v. Ewing, 424 N.J. Super. 396 (App. Div. 2012).

StubHub cannot be sued for ticket scalping. The North Carolina Court of Appeals has ruled that federal law immunizes StubHub from a state lawsuit alleging that the online ticket company en- gaged in unfair or deceptive trade practices by scalping tickets. Relying on the immunity provided by Section 230 of the Com- munications Decency Act (47 U.S.C. § 230), the court noted, “there have been approximately 300 reported decisions addressing immunity claims advanced under 47 U.S.C. § 230 in the lower federal and state courts. All but a handful of these decisions find that the website is entitled to immunity from liability.” Hill v. Stubhub, Inc., No. COA11-685, 2012 N.C. App. LEXIS 326 (N.C. Ct. App. Mar. 6, 2012).

112 Journal of Consumer & Commercial Law RECENT DEVELOPMENTS

DECEPTIVE TRADE PRACTICES AND WARRANTIES

DTPA UNCONSCIONABILITY DOES NOT REQUIRE licensed (“TREC”) professional real estate inspector, performed a RELIANCE home inspection on a residence owned by Frank and Terri Cas- tro. Retherford completed the inspection and noted that the roof Bever Properties, L.L.C. v. Jerry Huffman Custom Builder, and attic were water damaged, as were two other rooms in the L.L.C., 355 S.W.3d 878 (Tex. App.—Dallas 2011). home. Retherford concluded that the water damage was not a serious issue, although he included photos in the inspection re- FACTS: Jerry Huffman Custom Builders (“Huffman”) pur- port. He also offered advice on how to fix ventilation problems chased real property for the purpose of developing an office con- in the attic, which he determined to be the cause of the water dominium. Huffman sold condominium units to Drs. Kirwan damage. Several months later, three inches of rain fell and water and Cheung, and Bever Properties (“Bever”). Bever subsequently began running down the wall of the Castro residence in the area leased its unit to Dr. Taylor, a dentist. Bever and Taylor (to- that the water damage was noted in the inspection report. Upon gether, “Appellants”) desired to construct prominent signage at inspection, the Castros noticed clearly loose screws in their roof. the location of the unit for Taylor’s dental business. Multiple The roof was repaired but not entirely replaced, and several hun- disputes arose between Appellants and Drs. Kirwan and Cheung, dred loose screws were found. The Castros enlisted the help of a and between Appellants and the office condominium association, second TREC-licensed professional home inspector, who found Plano Parkway Office Condominiums (“PPOC”) because of the long-term water damage and determined that it was caused by the planned signage. leaking roof, not ventilation issues. Appellants filed suit against Huffman, Kirwan, Cheung, The Castros sued Retherford for DTPA violations and and PPOC (together, “Appellees”), alleging that Bever purchased negligent misrepresentations. The trial court only entered a judg- the unit based, in part, upon assurances that prominent sig- ment for DTPA violations, finding that Retherford represented nage could be placed on the property. Appellants alleged that that his services had characteristics, uses, and benefits which they Appellees’ actions, representations, and failures to disclosure did not have and that he represented that his services were of a information misled Appellants regarding signage and thwarted particular standard or quality when they were not. Appellants’ placement of the desired signage on the office condo- HOLDING: Reversed. minium. After Appellants filed its case against, PPOC filed suit REASONING: The DTPA was designed to “protect consumers against Bever seeking an injunction to enjoin Appellants from vi- against false, misleading, and deceptive business practices, uncon- olating use and occupancy restrictions and for attorney’s fees, and scionable actions, and breaches of warranty and to provide effi- the two suits were consolidated. Appellees filed no-evidence and cient and economical procedures to secure such protection.” Tex. traditional motions for summary judgment on Appellants’ claims Bus. & Com. Code Ann. § 17.44(a) (West 2011). However, an against them. The trial court granted the motion for summary exemption from liability exists for those who render professional judgment. On appeal, Bever contested the summary judgment services when the essence of that service is based on providing granted to Huffman. advice, judgment, or opinion. A professional service is one that HOLDING: Reversed. arises “out of acts particular to the individual’s specialized voca- REASONING: Appellants claimed multiple violations of the De- tion.” Nast v. State Farm Fire & Cas. Co., 82 S.W.3d 114, 122 ceptive Trade Practices Act (“DTPA”) by Appellees, including (Tex. App.—San Antonio 2002). Professions included in the that they engaged in an unconscionable action or course of action DTPA exemption are not statutorily defined or established with in violation of section 17.50(a)(3) of the business and commerce any certainty. code. This section provides that a consumer may maintain an A real estate inspection may be performed by a pro- action where any unconscionable action or course of action by fessional inspector, defined as “a person who represents to the any person constitutes a producing cause of economic or mental public that the person is trained and qualified to perform a real anguish damages. Appellants asserted that Appellees’ motion for estate inspection and who accepts employment to perform a real summary judgment failed to address the “distinct” claim that Ap- estate inspection for a buyer or seller of real property.” Tex. Occ. pellees engage in an unconscionable action or course of action. Code Ann. § 1102.001(8) (West 2004). The court found that a The court agreed, finding that section 1750(a)(3) contains no professional real estate inspector fit the following qualifications: reliance requirement. Because Appellees’ motions for summary (1) engages in work involving mental or intellectual rather than judgment did not address Appellants’ distinct claims of violation physical labor; (2) requires special education to be used on be- of section 17.50(a)(3) of the business and commerce code, the half of others; and (3) earns profits dependent mainly on those court reversed the trial court’s summary judgment in favor of Ap- considerations. The court also determined that the contents of pellees on Appellants’ claim of violation of this section. the inspection report constituted the inspector’s opinion as to the condition of the house, as it has been statutorily defined as such.§ HOME INSPECTOR PERFORMS PROFESSIONAL SER- 1102.001(9). Further, the essence of an inspector’s service is pro- VICES AND IS EXEMPT FROM DTPA viding that opinion. The court concluded that because the service provided by a professional real estate inspector is essentially an Retherford v. Castro, ____ S.W.3d ____ (Tex. 2012). opinion and not a representation of fact, the DTPA professional services exemption applies. FACTS: Wesley Retherford, a Texas Real Estate Commission-

Journal of Consumer & Commercial Law 113 RECENT DEVELOPMENTS

CONSUMER CREDIT

RETAILER DID NOT COMMIT WILLFUL VIOLATION tion Z, 12 C.F.R pt. 226 (“Regulation Z”). Model Form H-8 is OF FACTA a general rescission form, while Model Form H-9 is a rescission form designed for refinancing transactions. The latter includes Long v. Tommy Hilfiger, U.S.A., Inc., 671 F.3d 371 (3d Cir. two additional sentences specific to refinancing transactions. 2012). Several months after refinancing the loan, Watkins fell behind on his mortgage payments and SunTrust scheduled a FACTS: Plaintiff Long, purchased neckwear from Hilfiger using foreclosure sale of his house. Watkins’s attorney announced that his credit card, and received a receipt reflecting the purchase. The Watkins was rescinding the refinance transaction because Sun- bottom of the receipt showed the last four digits of Long’s credit Trust’s use of Model Form H-8 did not give him proper notice card along with the month, but not the year, of the card’s expira- of his right to rescind as required by the Truth in Lending Act tion date. The Fair and Accurate Transactions Act (“FACTA”) (“TILA”). SunTrust refused to rescind the transaction and Wat- provides that merchants who accept credit or debit cards shall not kins sued. SunTrust moved to dismiss the suit. The district court print the expiration date of the card on any receipt issued to the granted the motion. cardholder. FACTA further provides for statutory damages for HOLDING: Affirmed. willful violations, and actual damages for negligent violations. REASONING: The court began its analysis by reviewing the stat- The Congressional intent behind FACTA was to thwart utory and regulatory language of TILA and Regulation Z. TILA identity and credit theft attempts by keeping pertinent informa- requires lenders to make a number of disclosures to borrowers, tion out of would-be thieves’ hands. Long, conceding that he had including a clear and conspicuous disclosure of the borrower’s suffered no actual damages, sued Hilfiger for willful violations of right to rescind a consumer credit transaction in which the bor- FACTA, and Hilfiger responded with a motion to dismiss. The rower gives the lender a security interest in the borrower’s princi- district court granted Hilfiger’s motion, holding that Hilfiger’s pal dwelling. 15 U.S.C. §§ 1601(a), 1635(a). According to the actions did not violate FACTA, but that if Hilfiger did, the viola- rules in Regulation Z, the disclosure of the right to rescind must tion was not willful because Hilfiger’s reading of the statute was include the following elements: (1) the retention or acquisition not unreasonable. of a security interest in the consumer’s principal dwelling; (2) the HOLDING: Affirmed. consumer’s right to rescind the transaction; (3) how to exercise REASONING: The court first found that Hilfiger’s actions did, this right, including the address of the creditor’s place of busi- in fact, violate FACTA. It rejected Hilfiger’s argument that as ness; (4) the effects of rescission; and (5) the date the rescission long as a merchant redacted part of the expiration date, it was not period expires. 12 C.F.R. § an expiration date at all. The court reasoned that this argument 226.23(b)(1). SunTrust’s use of a would allow merchants to pick different parts of the date to redact The court held form substantially from the receipt and thieves could then piece together full expira- that SunTrust was not re- similar to Model Form tion dates using information printed on different receipts. This quired to include the in- would be inconsistent with the statute’s objective of preventing formation contained in the H-8 is sufficient to identity theft. two additional sentences satisfy the require- However, the court held that this was not a willful viola- found in Model Form H-9. ments for disclosure tion under the standard set forth in Safeco Ins. Co. of Am. v. Burr, It found the two additional 551 U.S. 47 (2007). Hilfiger’s actions could not be willful un- sentences to be merely a of a borrower’s right der Safeco unless Hilfiger’s reading of the statute was objectively particularized restatement to rescind. unreasonable. A court must find that the company ran a risk of of what is contained in violating the law substantially greater than the risk associated with Model Form H-8. The court explained that neither TILA nor a reading that was merely careless. The court reasoned that even Regulation Z makes a distinction among the various types of con- though Hilfiger’s reading of the statute was erroneous, it was not sumer credit transactions. The right to rescind is made applicable objectively unreasonable, and therefore Hilfiger was not liable for to any consumer credit transaction, and the effect of rescission is violating FACTA. the same for all consumer credit transactions. The court noted that the general understanding of rescission is that it restores the LENDER DID NOT VIOLATE THE TRUTH IN LENDING parties to the position they were in prior to the transaction. In the ACT BY USING THE WRONG FORM case of a refinancing transaction, rescission would reinstate the prior loan and security interest. The court concluded that noth- Watkins v. SunTrust Mortg., Inc., 663 F.3d 232 (4th Cir. 2011). ing in TILA requires a lender to specifically advise the borrower of the specific effects of rescinding a mortgage refinancing. Nor FACTS: Edward Watkins (“Watkins”) refinanced the loan on does TILA require a lender to use any model form so long as the his house with a new loan from SunTrust Mortgage, Inc. (“Sun- required information is provided. Trust”). SunTrust had also been the lender on Watkins’s prior The court further stated that even if the TILA somehow loan. At the closing of the refinancing transaction, SunTrust gave required the additional language in the Model Form H-9, there Watkins written notices of his right to rescind the transaction would still be no violation of TILA. The court determined that using Model Form H-8 as included in the Appendix to Regula- four of the five elements were included in Model Form H-8, and

114 Journal of Consumer & Commercial Law RECENT DEVELOPMENTS

it found the fourth element, the effects of rescission, to be sub- the Bank timely notice of rescission, she was not required to bring stantially included in Model Form H-8. As such, the court held suit within the three-year period, and the district court erred in SunTrust’s use of a form substantially similar to Model Form H-8 dismissing the case. She argued that the court should follow the is sufficient to satisfy the requirements for disclosure of a bor- holdings of some circuit courts and apply the one-year statute of rower’s right to rescind as mandated by TILA and Regulation Z. limitations set fort in 15 U.S.C. § 1640(e), which begins tolling on the date on which the lender failed to respond to the bor- TRUTH IN LENDING ACT RECISSION CLAIM TIME- rower’s notice of rescission. The court rejected this theory and BARRED AFTER THREE YEARS held that rescission suits must be brought within three years of the consummation of McOmie-Gray v. Bank of Am. Home Loans, 667 F.3d 1325 (9th the loan, regardless Rescission suits must Cir. 2012). of whether notice of rescission is delivered be brought within three FACTS: On April 14, 2006, Plaintiff Kathryn McOmie-Gray within that three-year years of the consumma- signed a trust deed loan from Paramount Equity Mortgage. At period. It relied on tion of the loan, regard- the closing, McOmie-Gray signed two Notice of Right to Cancel its holding in earlier forms, neither of which explained when the borrower’s right to cases, Miguel v. Coun- less of whether notice of cancel would expire. Defendant Bank of America Home Loans try Funding Corp., rescission is delivered (“the Bank”), later acquired Paramount’s interest in the loan. 309 F.3d 1161 (9th within that three-year On January 18, 2008, McOmie–Gray sent the bank Cir. 2002), and Beach notice of her intent to rescind the loan for violations of the fed- v. Ocwen Fed. Bank, period. eral Truth in Lending Act (“TILA”), citing the Bank’s failure to 532 U.S. 410 (1998). advise McOmie–Gray of the final date to cancel the transaction. Miguel and Beach represented situations where the borrowers ei- The parties then negotiated the rescission for more than a year, ther failed to send a notice of rescission to the lender and then during which time they agreed to toll the statute of limitations on raised the right of rescission as an affirmative defense more than the TILA claims until August 30, 2009. On August 28, 2009, three years after the consummation of the transaction, or never McOmie-Gray filed a complaint with the district court seeking sent a timely notice of rescission to their lender at all. Courts in rescission of the loan for failure to provide three-day rescission both cases held that § 1640 and its notice provision were irrel- notice. The district court dismissed the complaint for failure to evant and contradicted the plain language of § 1635(f). state a claim upon which relief may be granted, concluding that The court then held that, if bound by the holding of the right to rescission was subject to a three-year statute of repose a case, it was likewise bound by the reasoned dicta on an issue under 15 U.S.C. § 1635(f), which had run by April of 2009. “germane to the eventual resolution of the case.” It was obligated McOmie-Gray appealed. to apply the determination from Miguel that § 1635(f) was not HOLDING: Affirmed. merely a statute of limitations, but a statute of repose, and thus REASONING: Pursuant to § 1635(a), a borrower has the right completely extinguished the right to rescission. Because there is to rescind a loan within three days of closing. Where the lender an absolute three-year limit for rescission actions and the plaintiff fails to deliver proper notice of rescission rights, § 1635(f) extends did not bring suit by April 2009, the district court properly dis- the right to rescind to three years. missed her case as untimely. On appeal, McOmie-Gray argued that because she gave

Journal of Consumer & Commercial Law 115 RECENT DEVELOPMENTS

DEBT COLLECTION

NON-DEBTOR MAY BE A CONSUMER UNDER THE FTC Staff Commentary states, “[Section 1692] is intended to FAIR DEBT COLLECTION PRACTICES ACT assist the consumer when a debt collector inadvertently contacts the wrong consumer at the start of [its] collection efforts.” Dunham v. Portfolio Recovery Assocs., LLC, 663 F.3d 997 (8th Cir. 2011). AN ASSIGNEE OF A DEBT THAT WAS NOT IN DEFAULT WHEN ASSIGNED IS NOT A “DEBT COLLECTOR” UN- FACTS: Debt collection agency Portfolio Recovery Associates DER THE FAIR DEBT COLLECTION PRACTICES ACT (“PRA”) purchased debt portfolios of payment obligations from lenders who had been unable to collect. In 2008, PRA purchased Joyner v. MERS, 451 Fed. Appx. 505 (6th Cir. 2011). a debt portfolio that included a payment obligation that a “James Dunham” owed. FACTS: In 2006, Joyner, a Michigan resident, took out a home PRA sent a form letter to James Dunham (“Dunham”), mortgage loan from Pathway Financial LLC (“Pathway”), and the named plaintiff, requesting payment. Dunham did not be- its nominee, MERS. Sometime later the note was assigned to lieve the debt was his and sent a dispute letter to PRA demanding CitiMortgage, Inc. After that, Pathway went out of business validation of the payment obligation. PRA responded by sending and had not properly assigned the note to CitiMortgage, and Dunham additional information related to the payment obliga- Joyner, believing he was no longer obligated to pay his mort- tion, including the debtor’s name and address, the last four digits gage, stopped making payments. Foreclosure proceedings of the debtor’s social security number, and the date of the pay- were initiated. Joyner then filed suit in 2010 against Pathway, ment obligation. In compiling this information, PRA examined Pathway’s former president, the CFO of CitiMortgage, and only its own files, and did not attempt to contact the original the law firm that handled the foreclosure (collectively, “Defen- creditor. It did not provide the original amount of the debt, the dants”), alleging violations of the Fair Debt Collection Prac- date upon which the debt was incurred, or the goods or services tices Act (“FDCPA”) and the Truth in Lending Act (“TILA”). for which it was incurred. He sought to have Defendants declare the loan paid in full, Dunham never responded to PRA’s letter. Instead, al- refund all payments made, and pay him treble damages. The most a year later, he commenced a class action in district court. district court granted Defendants’ motions to dismiss all claims. Dunham claimed that PRA’s letter violated 15 U.S.C. § 1692g, HOLDING: Affirmed. the Fair Debt Collection Practices Act’s (“FDCPA”) debt-valida- REASONING: After finding that the complaint was properly tion provision, because it failed to include information that PRA dismissed as to Pathway and its former president, as to the CFO verified with the original creditor. The district court concluded of CitiMortgage, and as to the law firm for different procedural that because PRA never alleged that the plaintiff James Dunham reasons, the court discussed the complaint as to MERS and Citi- owed a payment obligation, but rather alleged that a different Mortgage, finding that the complaint was equally deficient as to “James Dunham” owed the payment obligation, the plaintiff these two defendants. A creditor is not a debt collector under the Dunham was not a “consumer” under the FDCPA, and therefore FDCPA. MacDermid v. Discover Fin. Servs., 488 F.3d 721, 734- lacked standing to bring the action. 35 (6th Cir. 2007). Nor is an assignee of a debt that was not in HOLDING: Affirmed on other grounds. default when assigned. Wadlington v. Credit Acceptance Corp., 76 REASONING: On appeal, Dunham argued that the district F.3d 103, 106 (6th Cir. 1996). Wadlington relied on the text of court erred in finding that he was not a “consumer” under the the FDCPA and its legislative history, which conclusively show FDCPA because he was not the intended recipient of PRA’s com- that an assignee of a debt is not a debt collector under the Act munications. First, the court looked at the ordinary meaning of as long as the debt was not in default at the time of assignment. the FDCPA’s plain language to determine the meaning of “con- Although Joyner alleged that the debt had never been properly sumer.” The FDCPA defines “consumer” as “any natural per- assigned to CitiMortgage, Defendants submitted a copy of the son obligated or allegedly obligated to pay any debt.” 15 U.S.C. note showing the assignment. Additionally, any claim asserted § 1692a(3). The court indicated that whether Dunham was a under TILA would be time-barred. “consumer” under the FDCPA turned on the proper reading of the phrase “allegedly obligated to pay.” PRA argued that because LAW FIRM DID NOT VIOLATE FAIR DEBT COLLEC- it erroneously contacted the wrong “James Dunham,” it did not TION PRACTICES ACT “allege” that plaintiff Dunham was “obligated to pay any debt.” However, the court found that PRA’s interpretation too narrowly UNDER FDCPA MISREPRESENTATIONS DO NOT constricted the plain meaning of “alleged.” Because PRA contact- HAVE TO BE MADE DIRECTLY TO CONSUMER ed Dunham in an attempt to seek payment, they alleged, albeit mistakenly, that he owed the debt. The court stated, “a mistaken Hemmingsen v. Messerli & Kramer, P.A., 674 F.3d 814 (8th allegation is an allegation nonetheless.” Therefore, court held that Cir. 2012). “consumer,” as defined by the FDCPA, includes individuals who are mistakenly dunned by debt collectors. FACTS: George Hemmingsen (“George”) opened a Discover In support of its conclusion, the court noted that the Bank (“Discover”) credit card account in 2002 and married Federal Trade Commission Commentary supports its reading. Heather Hemmingsen (“Ms. Hemmingsen”) one month later.

116 Journal of Consumer & Commercial Law RECENT DEVELOPMENTS

George added Heather to the account later in 2002. The couple rectly to a consumer debtor are never actionable under FDCPA. was divorced in 2005. Their Marital Termination Agreement The court preferred a case-to-case approach since debt collector listed the Discover account and recited that both parties owed lawyers rarely made representation “directly” to the consumer Discover for debt incurred for “living expenses,” and that George debtor, but make representations to debtors’ attorneys or in debt was responsible for the old debt and would hold Ms. Hemming- collection pleadings in a wide variety of situations. Such repre- sen harmless for the liability. sentations routinely come to the consumer’s attention and may Discover retained Messerli & Kramer (“M&K”) to re- affect his or her defense of a collection claim. Instead, the court cover the unpaid balance on the account in 2007. M&K com- concluded that the diverse situations in which potential FDCPA menced a collection action in state court and obtained a default claims may arise during the course of litigation, and that the judgment against George. Thereafter, M&K served Ms. Hem- Heintz Court’s caution that careful crafting may be required in mingsen, but she denied the claims and asserted that George was applying the statute’s prohibitions to attorneys engaged in litiga- “solely responsible for any debt owed.” In response to M&K tion, counsel against anything other than a case-by-case approach. interrogatories and admission requests, Ms. Hemmingsen denied In this case, the alleged false statements by M&K were applying for or opening the account, making charges or payments in in summary judgment pleadings filed long after the state court on the account, or receiving the benefits of account purchases. debt collection lawsuit began. The summary judgment memo- Her counsel requested that Discover “produce any documents randum and affidavit asserted nothing that Ms. Hemmingsen bearing” her signature, but M&K produced none. Both parties and her attorneys did not already know about Discover’s legal moved for summary judgment, and based on its finding that there position. The state court judge was not misled nor persuaded was no evidence she ever agreed to the terms of the account or by M&K’s summary judgment pleading, as it granted summary benefitted from use of the credit card, and because George was judgment in favor of Ms. Hemmingsen. Neither Ms. Hemming- responsible for the debt under the terms of the divorce decree, the sen nor her attorneys took any action in reliance on the accuracy state court granted Ms. Hemmingsen summary judgment. of M&K’s representation. The court found that that only finan- Ms. Hemmingsen then brought suit in federal court al- cial injury Ms. Hemmingsen was currently alleging was that she leging that M&K violated the Fair Debt Collection Practices Act incurred attorney’s fees to prevail in the state court litigation. Yet (“FDCPA” or “the Act”) by making false statements and mis- the state court denied her prayer for a fee award in that action, representations in a memorandum filed in the state court action and review of counsel’s time sheets suggested that a considerable in support of its motion for summary judgment. She also as- amount of the time claimed was spent preparing to commence serted state law claims for malicious prosecution, abuse of process, this FDCPA lawsuit. and the recovery of treble damages for attorney deceit. After the The court had no difficulty affirming the dismissal of complaint was served, Discover discovered a payment in 2003 the FDCPA claims on the merits. It was not false or mislead- made by a check written on the couple’s joint account, payable to ing to submit a client affidavit and legal memorandum arguing Discover, signed by Ms. Hemmingsen, and referencing the credit M&K’s legal position that Ms. Hemmingsen was liable for the card account number on the memo line. Ms. Hemmingsen did unpaid account balance, even if George was the only one who not recall but acknowledged the check in a subsequent deposi- used the card and made partial payments on the account, when tion. The District Court for the District of Minnesota granted Discover’s records reflected that George submitted the initial ap- M&K summary judgment. Ms. Hemmingsen appealed. plication and added Ms. Hemmingsen to the account by phone. HOLDING: Affirmed. Additionally, neither spouse questioned statements identifying it REASONING: Ms. Hemmingsen alleged that M&K violated the as a joint account, partial payments were made by checks from a FDCPA prohibitions on engaging in harassment or abuse, making joint account, and the Marital Termination Agreement signed by false or misleading representations, and using unfair practices. 15 Ms. Hemmingsen listed it as a joint obligation for the couple’s U.S.C. §§ 1692d, 1692e, and 1692f. The parties agreed, and the “living expenses.” The fact that the state court judge rejected the court found, that M&K was a debt collector under the FDCPA, contention, unaware that Ms. Hemmingsen had personally made pursuant to the Act’s application to attorneys who “regularly” en- at least one payment on the account, does not prove that those gage in consumer-debt collection activity, even when that activity assertions were false or misleading for purposes of section 1692e. consists of litigation. Heintz v. Jenkins, 514 U.S. 291, 299 (1995). Nor did Ms. Hemmingsen produce any evidence showing that The court found that the trial court dismissed Ms. Hemmingsen’s the state court judge – or anyone else – was misled, deceived, or FDCPA claims because it followed circuit precedent in Volden v. otherwise duped by M&K’s pleadings. Innovative Fin. Sys., 440 F.3d 947, 954 (8th Cir. 2006), which The court further agreed with the district court that held that false representations to a third party do not violate the M&K’s pleadings had more than enough basis in fact to defeat FDCPA when the false representations were not made directly to as a matter of law Ms. Hemmingsen’s claims that M&K had en- the plaintiff. The trial court dismissed the FDCPA section 1692e gaged in conduct “the natural consequence of which is to harass, claims because M&K made allegedly false representations only oppress, or abuse any person in connection with the collection of to the state court judge. Additionally, the trial court dismissed a debt,” 15 U.S.C. § 1692d, or used “unfair or unconscionable the sections 1692d and 1694f claims because the divorce decree means to collect or attempt to collect any debt.” 15 U.S.C. § “tied” Ms. Hemmingsen to the debt sufficiently to defeat allega- 1692f. That the state court granted Ms. Hemmingsen summary tions that M&K used abusive, unfair, or unconscionable means judgment was not evidence that M&K’s aggressive pursuit of of debt collection. Discover’s unpaid account in litigation violated statutory prohi- However, the Eighth Circuit was unwilling to adopt the bitions targeted at abusive pre-litigation practices. Therefore, the district court’s broad ruling that false statements not made di- court affirmed the judgment of the district court.

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TELEPHONE CONSUMER PROTECTION ACT CLAIMS that claims can “only” or “exclusively” be brought in state court MAY BE BROUGHT IN U.S. DISTRICT COURT further suggested that no congressional restriction was intend- ed. Congress had the option of granting exclusive jurisdiction, Mims v. Arrow Fin. Serv. LLC., 132 S.Ct. 740 (2012). and by choosing not to, it indicated that it did not intend that outcome. The Court noted that there was a deeply rooted pre- FACTS: Plaintiff Marcus Mims (“Mims”), a Florida resident, sumption of concurrent state court jurisdiction for cases arising alleged that Arrow Financial Services, LLC (“Arrow”), a debt- under federal law. This presumption is rebutted only by explicit collection agency, repeatedly used an automatic telephone dialing statutory directive, by unmistakable implication from legislative system to call Mims’s cellular phone without his consent. Mims history, or by a clear incompatibility between state court juris- brought suit against Arrow in the U.S. District Court for the diction and federal interests. Southern District of Florida, alleging numerous violations of Arrow also argued that giving state courts exclusive juris- the Telephone Consumer Protection Act of 1991 (“TCPA”), 47 diction over § 227(b)(3) claims would be in line with Congress’s U.S.C. § 227. Mims invoked federal question jurisdiction, and objective of enabling states the district court dismissed the complaint for lack of subject mat- to control telemarketers The lack of language in ter jurisdiction. The Eleventh Circuit affirmed. In finding that whose interstate operations the TCPA suggesting state courts have exclusive jurisdiction over TCPA suits, both evade state law. However, that claims can “only” courts relied on the TCPA’s provisions, which give private per- the court rejected this ar- sons the right to seek redress for TCPA violations “in an appro- gument, as the TCPA does or “exclusively” be priate court of [a] State,” “if [such action] is otherwise permitted not provide for the appli- brought in state court by the laws or rules of court of [that] State.” 47 U.S.C. §§ 227(b) cation of substantive state further suggested that (3), (c)(5). law. Rather, the TCPA set HOLDING: Reversed and remanded. out uniform federal sub- no congressional re- REASONING: Voluminous consumer complaints about abuses stantive prescriptions and striction was intended. of telephone technology as invasions of privacy prompted Con- envisioned regulation by a gress to pass the TCPA. Although over half the states had en- federal agency, namely the acted statutes restricting telemarketing, Congress determined FCC. Arrow further argued that the senator who sponsored the that federal law was needed because telemarketers, by operating TCPA made comments on the Senate floor regarding how the interstate, were escaping state-law prohibitions on intrusive nui- bill would make it easier for customers to initiate actions against sance calls. The Supreme Court granted certiorari to resolve a offenders in small claims court. Arrow contended that this sug- split among the Circuits as to whether Congress granted state gested state court primacy, but this argument too was rejected on courts exclusive jurisdiction over private actions brought under the grounds that the senator’s comments were not legally bind- the TCPA. ing on the courts, and his comments did not specifically mention Arrow argued that Congress vested exclusive jurisdic- federal court jurisdiction or otherwise suggest that §227(b)(3) was tion over TCPA actions to state courts, and the more specific intended to divest federal courts of authority over TCPA claims. TCPA statute displaces the more general federal jurisdiction The Court concluded that the TCPA is a federal law question statute of 28 U.S.C. § 1331. The Court disagreed and that both created the claim Mims brought and supplied the sub- held that claims arising under Federal law only lose their federal stantive rules that would govern the case. Mims’s TCPA claims jurisdiction under §1331 if Congress divests the federal courts plainly arose under federal law. The Court found no convincing of their §1331 adjudicatory authority, and that since this was reason to read into the TCPA’s permissive grant of jurisdiction to a rather high bar to meet, there was no reason to believe there state courts any barrier to the U.S. district courts’ exercise of the was congressional divesting of jurisdiction for TCPA suits. The federal-question jurisdiction they have possessed since 1875. It Court cited examples of other statutes restricting actions being held that federal and state courts have concurrent jurisdiction over brought under § 1331, and no similar language was present private suits arising under the TCPA. in the TCPA. The lack of language in the TCPA suggesting

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ARBITRATION

NLRB RULES WORKERS CANNOT BE BARRED FROM Board found that the NLRA and FAA were not in conflict. The JOINING OR MAINTAINING A CLASS ACTION FAA only protects the right of parties to agree to resolve statu- tory claims through arbitration as long as a party does not waive D. R. Horton, Inc., 357 N.L.R.B. 184 (2012). the substantive rights afforded by the statute. Additionally, the purpose of the FAA was to prevent courts from treating arbitra- FACTS: D. R. Horton, Inc. is a homebuilder, which, in 2006, tion agreements less favorably than other private contracts. To began requiring each new and current employee to sign a Mutual require that an arbitration agreement yield when it conflicts with Arbitration Agreement (“MAA”) as a condition of employment. the NLRA is to treat it no differently than any other private con- The MAA provided that all employment-related disputes would tract. The FAA also provides that arbitration agreements “may be be settled exclusively by final and binding arbitration, and that invalidated in whole or in part upon any grounds as exist at law the right to a judicial forum was waived. It also provided that or in equity for the revocation of any contract.” the arbitrator would “hear only Employee’s individual claims,” The Board further found that even if the statutes did would “not have the authority to consolidate the claims of other conflict, refusing to enforce the MAA represented an appropriate employees,” and did “not have authority to fashion a proceeding balance of the policies underlying the two statutes. The NLRA as a class or collective action or to award relief to a group or class manifests a strong federal policy in favor of protecting employees’ of employees in one arbitration proceeding.” Thus, the MAA rights to engage in concerted action, and a policy against agree- required employees to waive their rights to pursue collective or ments to waive those rights as a condition of employment. The class litigation in any forum. policy associated with the FAA is to ensure the enforcement of Charging Party Michael Cuda (“Cuda”) was employed arbitration agreements. The Board claimed that because the aver- by D. R. Horton as a superintendent. Cuda’s continued employ- age class size for cases affected by its ruling would be small, the ment was conditioned on his signing the MAA, which he did. intrusion on FAA policy would be minimal. The Board thus de- Cuda retained an attorney, who notified D. R. Horton of his in- termined that public policy favored an invalidation of the MAA, tent to initiate arbitration on behalf of a class of similarly situated and reversed the finding that the class-action waiver did not vio- superintendents. The class asserted that D. R. Horton misclas- late the NLRA. sified its superintendents as exempt from protections of the Fair Labor Standards Act (“FLSA”). D. R. Horton responded that SUBSTITUTE ARBITRATOR CAN HEAR CONSUMER Cuda’s attorney had failed to give an effective notice of intent to CASE WHEN NAF IS DESIGNATED AS ARBITRATION arbitrate, because the class action was barred by the MAA. Cuda FORUM then filed an unfair labor practice charge, alleging violations of sections 8(a)(1) and (4) of the National Labor Relations Act Khan v. Dell Inc., 669 F.3d ____ (3rd Cir. 2012). (“NLRA”). The administrative law judge found that the MAA violated sections 8(a)(1) and (4) because its language would lead FACTS: Plaintiff Raheel Ahmad Khan (“Khan”) purchased a employees reasonably to believe that they were prohibited from Dell computer through Dell’s website. Khan was required the filing unfair labor practice charges with the National Labor Re- check a box stating “I AGREE to Dell’s Terms and Conditions of lations Board (“NLRB” or the “Board”). However, the judge Sale” to complete the purchase. The Terms and Conditions in- dismissed the allegation that the class-action waiver violated Sec- cluded a binding arbitration provision that stated that all disputes tion 8(a)(1). shall be “resolved exclusively and finally by binding arbitration HOLDING: Reversed in part. administered by the National Arbitration Forum” (“NAF”). The REASONING: The NLRA has long been held to protect the col- Terms and Conditions incorporated the Federal Arbitration Act lective pursuit of workplace grievances, including class action ar- (“FAA”) but the arbitration provision did not designate a replace- bitration. The Board found that the MAA prohibited the exercise ment forum in the event that NAF was unavailable. of these substantive rights, and was unlawful and unenforceable. Subsequently, a design defect caused the computer to The Board asserted that it had previously invalidated, with uni- overheat and destroyed the motherboard. Khan replaced the form judicial approval, employer-imposed individual agreements motherboard multiple times. After the third replacement, Dell to waive class-action rights, and cited the Supreme Court for sup- refused to issue another replacement, claiming the warranty had port, which has also held that agreements to waive the right to expired. The computer suffered from other design defects that collective grievances were unenforceable. also prevented it from functioning properly. Section 7 of the NLRA provides that employees shall Khan filed a putative consumer class action suit against have the right “to engage in . . . concerted activities for the pur- Dell on behalf of himself and other similarly situated purchas- pose of collective bargaining or other mutual aid or protection ers of Dell’s computers. At the time the suit was filed, the NAF . . . .” 29 U.S.C. § 157. Section 8(a)(1) of the Act makes it an had been barred from conducting consumer arbitrations due unfair labor practice for an employer “to interfere with, restrain, to engaging in various deceptive practices. The record showed or coerce employees in the exercise of the rights guaranteed in” that Dell was not aware of these practices at the time that it se- Section 7. § 158(a)(1). D. R. Horton argued that the Board lected the NAF as the arbitral forum. Dell moved to compel had a duty to accommodate the Federal Arbitration Act (“FAA”) arbitration by appointing a substitute arbitrator. Khan asserted by dismissing the class-action waiver allegation. However, the that the arbitration provision was unenforceable and the parties

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should proceed to litigation because the NAF was no longer per- ing individual arbitration and a waiver of Brewer’s right to class mitted to conduct consumer arbitration. Khan contended, and arbitration. Brewer filed a class action petition against Missouri the district court agreed, that the NAF’s designation was integral Title Loans alleging violations of numerous statutes, including to the arbitration provision, and because NAF was barred from the Missouri merchandising practices act. Missouri Title Loans performing its function of consumer arbitration, the arbitration filed a motion to dismiss and, in the alternative, to stay the claims provision should not be enforced. The district court believed that and to compel Brewer to arbitrate her claims individually. The the parties’ intent was to arbitrate exclusively before a particular trial court entered a judgment finding the class arbitration waiver arbitrator, not simply to arbitrate generally. The district court in the loan agreement unconscionable and unenforceable. The denied Dell’s motion to compel arbitration and stay claims. Dell court ordered the claim to proceed to arbitration to determine appealed. whether it was suitable for class arbitration. Missouri Title Loans HOLDINGS: Vacated and remanded. appealed. REASONING: The question on appeal was whether the desig- HOLDING: Reversed in part, and remanded. nation of the NAF was an integral part of the arbitration agree- REASONING: Missouri Title Loans raised three points on ap- ment, thus precluding the appointment of a substitute arbitrator. peal: that the Federal Arbitration Act (“FAA”) preempted the trial Arbitrability is governed by the FAA, which reflects a liberal fed- court’s decision; that the class arbitration waiver was not uncon- eral policy favoring arbitration. Section 5 of the FAA provides a scionable; and that waiver was valid under Missouri law. The mechanism for a court to substitute an arbitrator when the des- FAA provides that valid arbitration agreements that affect inter- ignated arbitrator is unavailable. The court found that only if state commerce must be enforced unless an exception applies. A the choice of forum is state law defense of unconscionability may invalidate elements of Because the language an integral part of the an arbitration agreement without violating the FAA. was not clear whether agreement to arbitrate, In Stolt-Nielsen v. AnimalFeeds Int’l Corp., 130 S. Ct. rather than an “an- 1758 (2010), the Supreme Court held that where an arbitration the designation of NAF cillary logistical con- agreement is silent with respect to class arbitration, the parties was an ancillary or in- cern,” will the failure cannot be compelled to submit the dispute to class arbitration. tegral part of the arbi- of the chosen forum The Court premised its holding on the notion that arbitration preclude arbitration. is a matter of consent, and an arbitrator’s authority over claims tration provision, the The parties must have and parties is limited by the scope of the arbitration agreement. court was obligated to unambiguously ex- Therefore, class arbitration cannot be compelled unless there is a resolve the ambiguity in pressed their intent not contractual basis for it. Because the parties had reached no agree- to arbitrate when the ment on the issue of class arbitration, there was no contractual ba- favor of arbitration. designated arbitral fo- sis for concluding there was consent to class arbitration. Without rum is unavailable. consent, the arbitrator lacked the authority to act. Here, unlike The court viewed the language in the arbitration provi- in Stolt-Nielsen, the contract between Brewer and Missouri Title sion as ambiguous because “exclusively” could be read to modify Loans was not silent with respect to class arbitration; rather, the “binding arbitration,” “the national arbitration forum,” or both. class arbitration waiver was a central aspect of the contract. To There were conflicting interpretations of this language by vari- strike the clause would have resulted in an agreement that was ous courts. The court found that the Eleventh Circuit and the silent as to class arbitration. The court found that because arbitra- Eastern District of Michigan recently addressed the issue in other tion is a matter of consent, a contract silent as to class arbitration cases, and determined that “exclusively” modified “binding arbi- would preclude Missouri Title Loans from being forced to submit tration.” The court also cited, but declined to follow, a case in to class arbitration. which the parties’ selection of the NAF was found to be integral However, the conclusion that Missouri Title Loans to the arbitration agreement. could not be compelled to participate in class arbitration did not Here, the court followed the liberal federal policy in fa- mean that Brewer must submit to individual arbitration. The vor of arbitration. Because the language was not clear whether trial court severed what it found to be an unconscionable clause the designation of NAF was an ancillary or integral part of the (the class arbitration waiver) from the otherwise enforceable ar- arbitration provision, the court was obligated to resolve the ambi- bitration contract, and ordered the case to proceed to arbitration guity in favor of arbitration. Because the contract’s language did for a determination of whether class arbitration was appropriate. not indicate the parties’ unambiguous intent not to arbitrate their The court found, however, that class arbitration was not an op- disputes if NAF was unavailable, Section 5 of the FAA required tion because Missouri Title Loans expressly withheld its consent the court to address the unavailability by appointing a substitute to class arbitration. For this reason, simply invalidating the class arbitrator. waiver would not remedy the unconscionable aspects of the arbi- tration contract because were the class waiver simply invalidated ARBITRATION CLAUSE UNENFORCEBALE UNDER and severed from the remainder of the arbitration contract, Brew- STATE LAW er would be required to submit to individual arbitration. The court noted the trial court’s opinion that on the facts of the case, Brewer v. Missouri Title Loans, Inc., 323 S.W.3d 18 (Mo. 2010). individual arbitration was not economically practical or feasible because the amount in controversy was so small in relation to the FACTS: Beverly Brewer (“Brewer’) borrowed $2,215 from Mis- risks and costs involved that a reasonable attorney would not take souri Title Loans. The loan agreement included language requir- the case. It further noted that this difficulty could be avoided only

120 Journal of Consumer & Commercial Law RECENT DEVELOPMENTS

by permitting litigation of the matter as part of a class action. As of the accounts, which greatly reduced the advertised credit limit. there was no affirmative agreement to class arbitration, the class The credit card applications included a binding arbitration agree- action must proceed in court. The court made a point of saying ment in the event of any claim or dispute arising from or relating that it was not holding that an arbitration agreement was always to the account. The District Court denied CompuCredit’s mo- unconscionable merely because there was no agreement to class tion to compel arbitration, concluding that Congress intended arbitration. Instead, it is only when the practical effect of forc- CROA claims to be non-arbitrable. The Ninth Circuit affirmed. ing a case to individual arbitration is to deny the injured party a The United States Supreme Court granted certiorari. remedy that a requirement for individual arbitration would be HOLDING: Reversed and remanded unconscionable. REASONING: The Federal Arbitration Act (“FAA”) establishes An unconscionable arbitration provision in a contract a liberal federal policy favoring arbitration agreements. The lan- will not be enforced. Under Missouri law, unconscionability can guage requires courts to enforce agreements to arbitrate unless be procedural, substantive, or a combination of both. The court the FAA’s mandate has been overridden by a contrary congressio- found that the evidence supported the trial court’s determination nal command. Respondents argued that CROA, which regulates that the class arbitration waiver was unconscionable. With re- the practices of credit repair organizations, contains such a com- spect to procedural unconscionability, there was evidence that the mand. In their argument, Respondents focused on the CROA’s loan agreement was non-negotiable and difficult for the average disclosure and nonwaiver provisions. The disclosure provision consumer to understand, and that Missouri Title Loans was in a requires that credit repair organizations provide a statement to superior bargaining position. Brewer also introduced substantial consumers, prior to the ex- evidence of substantive unconscionability. He presented expert ecution of a contract, that The Court rejected testimony from three consumer lawyers who testified that it was informs consumers of the unlikely that a consumer could retain counsel to pursue individual “right to sue a credit repair the argument that by claims. The court found that the inability to retain counsel leaves organization that violates providing consumers the consumer with no meaningful avenue of redressing compli- the [CROA].” 15 U.S.C. § the “right to sue,” the cated statutory and common law claims. The court determined 1679c(a). The nonwaiver that the net result of the class arbitration waiver in this case in- provision states, “Any waiver disclosure provision volving such a small amount was that Brewer effectively forfeited by any consumer of any pro- provides them with a legal counsel in any claim that arose under the loan agreement. tection provided by or any right to bring an ac- To hold otherwise would allow lenders to continue unfair lend- right of the consumer under ing practices, as their customers would have no practical remedy this subchapter: (1) shall be tion in a court of law. to bring an end to the conduct. Furthermore, because Brewer treated as void; and (2) may proved that the class arbitration waiver was unconscionable, the not be enforced by any Federal or State court or any other per- unavailability of class arbitration under the FAA means that the son.” 15 U.S.C. § 1679f(a). entire arbitration agreement was rendered unconscionable. The The Court rejected the argument that by providing court concluded that the only way to remedy the unconscionabil- consumers the “right to sue,” the disclosure provision provides ity in this case was to strike the entire arbitration agreement. them with a right to bring an action in a court of law. Rather, The court affirmed the trial court’s judgment finding it imposes an obligation on credit repair organizations to supply the class arbitration waiver unconscionable. However, it reversed consumers with the specific statement, set forth in the statute, the judgment to the extent that it severed the class arbitration indicating that they have the right to sue a credit repair organiza- waiver and required an arbitrator to determine the propriety of tion that violates the Act. The only consumer right it creates is class arbitration. Given the FAA’s prohibition of class arbitration the right to receive the statement, which is meant to describe the under the facts of the case and the fact that the unconscionable consumer protections that CROA elsewhere provides. aspects of the arbitration contract were as a result of the class ar- The Court also rejected the argument that the CROA’s bitration waiver, the court held that the appropriate remedy was civil-liability provision demonstrates that the Act provides con- to strike the arbitration agreement in its entirety. sumers with a “right” to bring an action in court. It found that it is commonplace for statutes that create civil causes of action to SUPREME COURT HOLDS CONSUMERS MAY BE describe the details of those causes of action in the context of a FORCED TO ARBITRATE CLAIM UNDER CREDIT RE- court suit. The Court opined that if the mere formulation of the PAIR ACT cause of action in a standard fashion were sufficient to establish the “contrary congressional command” overriding the FAA, valid CompuCredit Corp. v. Greenwood, 132 S. Ct. 665 (2012). arbitration agreements covering federal causes of action would be rare. It referenced previous holdings that contractually required FACTS: In 2008 a class-action complaint was filed by individuals arbitration of claims satisfies the statutory prescription of civil (collectively, “Respondents”) who applied for and received credit liability in court. The Age Discrimination in Employment Act cards marketed by CompuCredit. The complaint was filed in the (“ADEA”), Racketeer Influenced and Corrupt Organizations Act District Court for the Northern District of California, and al- (“RICO”), and the Clayton Act all have provisions with language leged violations of the Credit Repair Organizations Act (“CROA” similar to that found in the CROA, and the Court has enforced or “the Act”). The claims involved CompuCredit’s allegedly mis- arbitration agreements in all three cases. Although none of the leading representation that the credit card could be used to rebuild other statutes contain nonwaiver provisions like that in CROA, poor credit and their assessment of multiple fees upon opening the Court found that the waiver of initial judicial enforcement

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is not the waiver of a “right of the consumer.” It found that it It did so in 1999, to include a mandatory arbitration clause, would be a considerable stretch to regard the nonwaiver provi- which contained a class action waiver of any claims brought “in sion as a “congressional command” that the FAA shall not apply. a representative capacity or as a member of any class of claimants Contractually required arbitration of claims satisfies the statutory pertaining to any claim subject to arbitration.” prescription of civil liability in court. The availability of judicial In 2006, the United States District Court of the South- action under CROA may be limited to compelling or review- ern District of New York granted Defendants’ motion to compel ing initial arbitral adjudication, and parties remain free to specify arbitration pursuant to the Federal Arbitration Act (“FAA”), and such matters so long as the guarantee of the legal power to impose Federal Rule of Civil Procedure 12(b). The district court held liability is preserved. that all of plaintiffs’ substantive claims, including whether the The Court pointed out that arbitration clauses were class action waivers were enforceable, were subject to arbitration. common enough in 1996 when the CROA was enacted, so that Plaintiffs appealed and the Second Circuit found that the issue of if Congress had meant to prohibit them, it would have done with the class action waiver’s enforceability was a matter for the court, more clarity, as it has in other contexts. The Court found it un- not the arbitrator, and that the class action waiver was unenforce- likely that Congress would have sought to prohibit arbitration able “because enforcement of the clause would effectively pre- clauses in the CROA through combination of the nonwaiver pro- clude any action seeking to vindicate the statutory rights asserted vision with the “right to sue” phrase in the disclosure provision by the plaintiffs.” Defendants sought review, the Supreme Court and the references to “action” and “court” in the description of granted Amex’s writ for certiorari and vacated and remanded for damages recoverable. The Court held that because the CROA is reconsideration in light of its decision in Stolt-Nielsen S.A. v. Ani- silent on whether claims under the Act can proceed in an arbitral malFeeds Int’l Corp., 130 S. Ct. 1758 (2010). forum, the FAA requires the arbitration agreement to be enforced On remand, the Second Circuit again reversed the dis- according to its terms. It reversed the judgment of the Ninth trict court’s decision and remanded for further proceedings. On Circuit and remanded the case. April 11, 2011, the court placed a hold on the mandate in this second decision in order for Amex to file a petition seeking a CLASS ACTION ARBITRATION WAIVER OF RIGHTS writ of certiorari. While the mandate was on hold, the Supreme UNDER FEDERAL ANTI-TRUST STATUTES UNEN- Court issued its decision in AT&T Mobility LLC v. Concepcion, FORCEABLE 131 S. Ct. 1740. HOLDING: Reversed and remanded. In re American Express Merchants Litigation, 634 F.3d 187 (2d RATIONALE: The only issue before the court was the narrow Circ. 2011). question of whether the class action waiver provision contained in the CAA between the parties should be enforced. FACTS: Plaintiffs sought to represent a class of “all merchants In its original decision, the court first decided that the that have accepted American Express charge cards, and have thus issue of the class action waiver’s enforceability was a matter for been forced to agree to accept American Express credit and debit the court, not the arbitrator. In re American Express Merchants’ cards . . . .” Plaintiffs’ dispute with American Express and Ameri- Litigation, 554 F.3d 300, 310 (2d Cir. 2009) (“Amex I”). Neither can Express Travel Related Services Company (together, “Amex” party took issue with that holding, and the court found that it or “Defendants”) rests upon the distinction between “charge survived Stolt-Nielsen and Concepcion. As to whether the class cards” and “credit cards.” The former requires the holder to pay action waiver in the CAA was enforceable, the court followed the the full outstanding balance at the end of a standard billing cycle, analysis in Green Tree Fin. Corp.-Alabama v. Randolph, 531 U.S. while the latter allows the holder to pay only part of the bal- 79 (2000), where the Supreme Court held that a party seeking ance at the close of the billing cycle, subject to interest charges. to invalidate an arbitration agreement due to prohibitive costs Plaintiffs alleged that Amex charged high “merchant discount bears the burden of showing the likelihood of incurring those fees,” which are the fees a card issuer withholds as a percentage of costs. The Second Circuit found that the district court erred in each purchase made with its card at the merchant’s establishment. ruling that the plaintiffs had failed that burden when it ignored Plaintiffs averred that the charge card fees are higher than those the Clayton Act statutory protections. The court reasoned that if applicable to mass-market credit cards. They alleged that Amex the CAA’s class action waiver were enforced, no small merchant leveraged its market power in charge cards to compel merchants could afford to challenge Amex’s scheme under antitrust laws. to accept “its new revolving credit card products at the same el- Furthermore, to enforce the CAA’s provisions would grant Amex evated discount rate [as the charge cards], which vastly exceeded de facto immunity from antitrust liability by removing Plaintiffs’ the rate for comparable [mass-market credit card] products.” only feasible means of recovery. The basic contractual relationship between Amex ap- Finally, the court held that its analysis did not violate pears in the Card Acceptance Agreement (“CAA”), a standard the FAA. Even with the FAA’s strong presumption in favor of form contract issued by Amex for more than 25 years. The CAA arbitration, the court found that it does not require every arbitra- contains an “Honor All Cards” provision, wherein merchants tion agreement to be per se enforceable. If grounds exist for the contract to accept “any card . . . issued” by Amex. Plaintiffs as- revocation of any contract in law or equity, an arbitration agree- serted that this provision resulted in merchants having a choice ment may be held unenforceable. 9 U.S.C. § 2. Thus, the court to pay fees above competitive levels on Amex’s new mass-market revoked the CAA’s class action waiver on the grounds that Plain- products, or losing significant sales from traditional affluent indi- tiffs would not be able to exercise their federal statutory rights if vidual and corporate users of Amex charge chards. In the CAA, it was enforced. Amex also reserves the right to change the Agreement at any time. On remand from the Supreme Court, in In re Ameri-

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can Express Merchants’ Litigation, 634 F.3d 187 (2d Cir. 2011) tion. The court also citedAmchem Prods., Inc. v. Windsor, which (“Amex II”), the Second Circuit considered the Amex I facts in stated that class action policy allows plaintiffs to “overcome the light of Stolt-Nielsen. In that case, the Supreme Court found problem that small recoveries do not provide the incentive for any that the arbitration panel “imposed its own policy choice,” rather individual to bring a solo action in prosecuting his or her rights.” than “identifying and applying a rule of decision derived from the 417 U.S. 156, 617 (1997). Finally, in Mitsubishi Motors Corp. v. FAA or either maritime or New York Law,” and “thus exceeded its Soler Chrysler-Plymouth, Inc., the Supreme Court qualified arbi- powers.” 130 S. Ct. at 1770. Instead, the Court found that the tration as an effective vehicle for a claim, but only “so long as the FAA controlled, and that the purpose of giving effect to an arbi- prospective litigant may effectively vindicate its statutory cause of tration agreement between parties is to give effect to the intent action in the arbitral forum.” 473 U.S. 614, 632 (1985) (emphasis of the parties. The Supreme Court concluded, “a party may not added). In dicta, the Mitsubishi Court noted that should clauses be compelled under the FAA to submit to class arbitration unless in a contract operate “as a prospective waiver of a party’s right to there is a contractual basis for concluding that the party agreed to pursue statutory remedies for antitrust violations, we would have do so.” Id. at 1775. little hesitation in condemning the agreement as against public Amex urged that the Second Circuit’s original decision policy.” Id. at 637. While dicta, the principle stems from a settled could not stand in the wake of Stolt-Nielsen, reading the Supreme policy that waiver of any future liability for antitrust violations, Court’s decision as emphasizing that courts must enforce – not even partial immunity, is against the public interest, and such a just construe – the parties’ arbitration agreement in the absence waiver would be void under the Court’s decision in Lawlor v. Nat’l of class procedures. The court disagreed, finding that it does not Screen Serv. Corp., 349 U.S. 322, 329 (1955). follow that a contractual clause barring class arbitration is per se The court then addressed the Supreme Court’s applica- enforceable. It maintained its prior holding that focused not on tion of Mitsubishi in Gilmer v. Interstate/Johnson Lane Corp., 500 whether the plaintiffs’ contract provides for class arbitration, but U.S. 20 (1991), where the Court permitted the arbitration, rather on whether the class action waiver was enforceable when it would than litigation, of a plaintiff’s Age Discrimination in Employment effectively strip plaintiffs of their ability to prosecute alleged an- Act (“ADEA”) claim. The Court concluded that the plaintiff in titrust violations. The court found that Amex failed to present that case could effectively vin- evidence to rebut a finding that Plaintiffs would incur prohibitive dicate his asserted rights in the The court con- costs through individual actions. Instead, the record reflected arbitral forum. Because it was cluded that there that the cost of bringing the claims was not economically viable as “clear that statutory claims may was no indication individual actions as the CAA required, and that Plaintiffs would be the subject of an arbitration not be able to enforce their statutory rights. agreement,” the arbitration in Stolt-Nielsen or Shortly after the Second Circuit’s opinion in Amex II, clause was enforceable “unless Concepcion that the Supreme Court handed down its opinion in Concepcion, 131 Congress itself has evinced an S. Ct. at 1740, which held that the FAA preempted a California intention to preclude a waiver the Supreme Court law barring the enforcement of class action waivers in consumer of judicial remedies for the stat- intended to over- contracts. The parties submitted supplemental briefs discuss- utory rights at issue.” Gilmer at turn either Green ing the impact, if any, of Concepcion on its previous decisions, 26. The Second Circuit found and the court found oral argument unnecessary. Amex argued that the conclusion in Gilmer Tree or Mitsubishi. that Concepcion required reversal of Amex II. The court began its that where the plaintiff’s statu- analysis by addressing the holding in Concepcion. Because Con- tory rights could effectively be vindicated through arbitration did cepcion dealt with FAA preemption of California law which held not affect the case before it, because Plaintiffs had demonstrated class action arbitration waivers per se unconscionable, the holding that their statutory rights could not be vindicated through indi- fell beyond the issue before the court. In Concepcion, California vidual arbitration. It again cited Green Tree, where the Supreme required class-wide arbitration in consumer contracts. However, Court acknowledged that “the existence of large arbitration costs this was found to be inconsistent with the FAA, and states were could preclude a litigant . . . from effectively vindicating her feder- preempted from doing so. The Second Circuit held thatConcep - al statutory rights in the arbitral forum.” 531 U.S. 79, 90 (2000). cion and Stolt-Nielsen stand for the proposition that parties can- The Second Circuit maintained its previous finding that not be forced into class action arbitration, either by government Green Tree controlled “to the extent that it holds that when ‘a or each other. Instead, it is a matter of consent – parties must party seeks to invalidate an arbitration agreement on the ground agree to class action arbitration. The court further concluded that that arbitration would be prohibitively expensive, that party bears neither case requires all class action waivers be per se enforceable. the burden of showing the likelihood of incurring such costs.’” In support of its initial analysis under Green Tree, the Amex II, 634 F.3d at 197 (quoting Green Tree, 531 U.S. at 92). court discussed a line of Supreme Court decisions dealing with It noted that other circuits allow plaintiffs to challenge class ac- the availability of class-wide and collective action. Under Eisen tion waivers on the grounds that prosecuting such claims on an v. Carlisle & Jacquelin, the Supreme Court noted that in certain individual basis would be a cost prohibitive method of enforcing situations “[e]conomic reality dictates that [a plaintiff’s] suit pro- a statutory right. It found that in those other cases, the plaintiffs’ ceed as a class action or not at all.” 417 U.S. 156, 161 (1974). The attempts to avoid the waiver clause failed because they were un- Second Circuit found that Eisen stood for the proposition that able to demonstrate the class action waivers barred them from class actions are the only rational alternative when a large group vindicating their statutory rights. It further found that their fail- of individuals has suffered an alleged wrong, but the damages due ures spoke to the quality of the evidence presented, not the vi- to any single individual are too small to justify an individual ac- ability of the legal theory. They demonstrated that the evidentiary

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record necessary to avoid a class action arbitration waiver was not The court noted that its holding was subject to certain easily assembled, and that courts are capable of the scrutiny such caveats. Its decision did not rely on the status of Plaintiffs as arguments require. “small” merchants, but on the need for Plaintiffs to have the op- The court concluded that there was no indication in portunity to vindicate their statutory rights. It also did not hold Stolt-Nielsen or Concepcion that the Supreme Court intended to that class action waivers are per se unenforceable in the context of overturn either Green Tree or Mitsubishi, and that both cases re- antitrust actions. Rather, it held that each waiver must be con- tained their binding authority. It found that the evidence pre- sidered on its own merits, based on its own record, and governed sented by Plaintiffs established, as a matter of law, that the cost with a healthy regard for the fact that the FAA manifests a liberal of Plaintiffs’ individually arbitrating their disputes with Amex federal policy favoring arbitration agreements. would be prohibitive, effectively depriving them of the statutory As to proceedings going forward, because Plaintiffs protections of the antitrust laws. It found that expert testimo- could not pursue their allegations of antitrust violations as class ny demonstrated that the only economically feasible means for arbitration, they could either pursue them as a judicial class ac- Plaintiffs to enforce their statutory rights was via a class action. tion, or not at all. If they were not permitted to proceed in a judi- It again held that Amex had “brought no serious challenge to cial class action, then, they would have been effectively deprived [Plaintiffs’] demonstration that their claims cannot reasonably of the protection of the federal antitrust law. The defendant be pursued as individual actions, whether in federal court or in would have immunized itself against all such antitrust liability arbitration.” Amex I, 554 F.3d at 319. To enforce the class ac- by the expedient of including in its contracts of adhesion an arbi- tion waiver would ensure “that no small merchant may challenge tration clause that does not permit class arbitration, irrespective American Express’s tying arrangements under the federal antitrust of whether the prohibition explicitly prohibits class arbitration. laws.” Id. The court found that eradicating the private enforce- Therefore, the court concluded that the arbitration clause was un- ment component from the antitrust law scheme could not have enforceable. It remanded to the district court with the instruc- been what Congress intended when it included strong private tion to deny Amex’s motion to compel arbitration. enforcement mechanisms and incentives in the antitrust statutes.

LANDLORD AND TENANT

AFTER FORECLOSURE, TENANT MAY BE AT WILL court rendered judgment on the jury’s verdict, and Coinmach OR SUFFERANCE vacated the property. However, Coinmach filed a motion for new trial, which was granted. Aspenwood filed a motion for partial Aspenwood Apartment Corp. v. Coinmach, Inc., 349 S.W.3d summary judgment, arguing that the original lease was termi- 621 (Tex. App.—Hous. [1st Dist.] 2011). nated by foreclosure and that, because there was A tenant-at-will is one FACTS: Plaintiff, Aspenwood Apartments (“Aspenwood”), was no communication be- who is in lawful pos- the purchaser of an apartment complex. Defendant Coinmach, tween Coinmach and the session of premises Inc. (“Coinmach”), leased laundry rooms in apartment complex- post-foreclosure owner es in which it installed coin-operated laundry equipment, ser- – negating a continued by permission of the viced the equipment, and collected revenues generated from the relationship – a month- owner or landlord for machines. Coinmach entered into a lease to provide its laundry to-month tenancy arose services with the original owners of Garden View Apartments in between the parties that no fixed term. 1980, and later extended the lease to end in 1999. In 1994, the was governed by the same complex was sold at a foreclosure sale to the original financier, material terms as the original lease. Coinmach countered with and then sold to Aspenwood in April of that year. Aspenwood’s its own motion for partial summary judgment seeking to estab- efforts in court to remove Coinmach from the laundry rooms lish that it was a tenant at sufferance of PPR after the foreclosure were unsuccessful, and Coinmach remained on the property for terminated its original lease. several years. During this time, Aspenwood sent notices to va- The trial court ruled that foreclosure terminated Coin- cate and complained to Coinmach regarding the condition of mach’s lease, and that Coinmach was a tenant at sufferance as the laundry rooms, failure to pay rent, and failure to provide an a matter of law. The court denied Aspenwood leave to file its accounting for its receipts from the laundry rooms. Aspenwood breach of lease claim in its amended petition, striking all such never cashed any of the checks it received from Coinmach. claims, and held that Aspenwood was entitled to no relief. As- In 1998, Aspenwood filed suit seeking a declaratory penwood appealed. judgment that Coinmach had “no rights to possession” and that HOLDING: Affirmed in part and reversed in part. it did not “have a leasehold interest in the property.” Aspenwood REASONING: The court held that when no new lease is formed alleged numerous causes of action including trespass to try title. and a tenant continues in possession of land covered by a prior While this suit was still pending in the trial court, the 1999 lease but is omitted from a succeeding lease, that tenant is either termination date in the lease agreement passed, and Coinmach a tenant-at-sufferance or a tenant-at-will. refused to vacate the laundry rooms. In 2000 the case went A tenant-at-will is one who is in lawful possession of to trial and the jury found in favor of Aspenwood. The trial premises by permission of the owner or landlord for no fixed term.

124 Journal of Consumer & Commercial Law RECENT DEVELOPMENTS

The tenant has no certain or sure estate, and the lessor may put to treat Coinmach as a tenant holding under a lease. By refusing him out at any time. A tenant-at-will possesses the property with to cash Coinmach’s checks, demanding that it vacate, and then the owner’s consent. By contrast, a tenant-at-sufferance occupies instituting this lawsuit, Aspenwood made clear that Coinmach the property “wrongfully” and without the owner’s consent. It was in possession of the property without Aspenwood’s consent. is usually created and exists where a person who has entered as Because Aspenwood did not consent to Coinmach remaining on a tenant for a term holds over after the expiration of the term. the premises, there was no “actual or implied contractual land- Because the original lease did not govern the parties and did not lord-tenant relationship.” The court held that Coinmach was a address the status of a tenant holding over beyond its terms, the tenant-at-sufferance of Aspenwood as a matter of law and thus court was required to examine the post-foreclosure conduct of could not be liable to Aspenwood for breach of lease. the parties to determine Coinmach’s tenancy status. The court further held that the trial court erred in hold- The court found that Coinmach was a tenant-at-will ing that its status as tenant-at-sufferance conferred upon Coin- for the three months after the foreclosure and became a tenant- mach possessory interests. Coinmach’s status as a tenant-at-suf- at-sufferance after Aspenwood purchased the property. The ulti- ferance did not prevent Aspenwood from trying its claims for mate inquiry was whether Aspenwood’s actions manifested intent trespass, trespass to try title, and the resulting damages.

MISCELLANEOUS

AUTOMATIC STAY FOR BANKRUPT PARTY DOESN’T suit to solvent co-defendants. Fortier v. Dona Anna Plaza Part- APPLY TO CO-DEFENDANTS ners, 747 F.2d 1324, 1329-30 (10th Cir. 1984). The Fortier court reasoned that extending the stay to co-defendants would not ad- Bradberry v. Carrier, ____ So.3d ____ (Ala. 2011). vance either of the legislative goals behind the Bankruptcy Act: to permit the creditor to organize his or her affairs without credi- FACTS: Bradberry and Jones (“Plaintiffs”) brought a wrongful tor harassment; and to allow orderly resolution of all claims. The death action against Carrier Corporation and multiple other de- Fortier holding has been consistently applied in the context of fendants (“Defendants”) in 2003, alleging that their decedents asbestos-related litigation. Therefore, the court concluded that had died after exposure to asbestos in their work environments. § 362 stayed only the action against Leslie Controls, and had no In 2007, defendants moved effect against the remaining solvent defendants in the suit. Courts have consis- for summary judgment. In tently held that the 2010, Leslie Controls, one ELEMENTS OF STATUTORY FRAUD AND COMMON automatic-stay pro- of the defendants, filed a LAW FRAUD ARE ESSENTIALLY IDENTICAL EX- notice of bankruptcy and CEPT THE STATUTE DOES NOT REQUIRE PROOF OF vision does not act petitioned that Plaintiffs’ KNOWLEDGE OR RECKLESSNESS to stay proceedings action against it be auto- against a debtor’s matically stayed. When Lindley v. McKnight, 349 S.W.3d 113 (Tex. App.—Fort Worth the trial court entered an 2011). solvent codefen- order setting all summary- dants. judgment motions for a FACTS: Nan Daws (“Daws”), deceased, owned stock in Throck- hearing, Plaintiffs filed a morton Bancshares, Inc. (Throckmorton) and Olney Bancshares notice of status stating that the case should be stayed as to all de- of Texas, Inc. (“Olney”), both of which sought to convert to fendants until the resolution of Controls’ pending bankruptcy. Subchapter S corporations. J. Ross McKnight (“McKnight”), The trial court refused to allow the stay to apply to all the defen- president of both companies, sent a letter to all shareholders, in- dants. In early 2011, the trial court entered orders granting the cluding Daws, which stated in part that in order to elect Sub- solvent defendants’ motions for summary judgment. Plaintiffs chapter S treatment, all shareholders and their spouses had to asked the trial court to alter, amend, or vacate its 2011 orders agree in writing to the election. McKnight also enclosed a Share- and to reset the remaining defendants’ motions for summary holders’ Agreement to be signed by all shareholders and their judgment. The trial court denied the motion. spouses. Daws signed both corporations’ Shareholders’ Agree- HOLDING: Affirmed. ments, which were designed to protect the subchapter S election REASONING: Section 362 of the Bankruptcy Code makes no by preventing the transfer of stock to unqualified shareholders. reference to a stay of judicial actions against a debtor’s solvent When Daws died, she was the largest shareholder of co-defendants. Courts have consistently held that the automat- Throckmorton’s stock, and a minority shareholder in Olney. Her ic-stay provision does not act to stay proceedings against a debt- will named her niece, Elizabeth Ann Lindley (“Lindley”), as the or’s solvent co-defendants. The court discussed older case law independent executor and bequeathed all of the residuary estate that held the automatic stay provision does not affect a party’s to her. Under the terms of the Shareholders’ Agreement Daws right to proceed against solvent co-defendants. It agreed with signed, death constituted an involuntary transfer of her stock, and the Court of Appeals for the Tenth Circuit that extending au- the companies had the sole discretion to approve or disapprove tomatic stay protections to solvent co-defendants would work a the attempted transfer. Throckmorton and Olney disapproved hardship on plaintiffs by giving an unwarranted immunity from the transfer of stock shares from Daws to Lindley. Lindley, in

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her capacity as independent executor of Daws’s estate, brought AHA moved to strike Bullock’s jury demand based upon a jury action against McKnight, Throckmorton, Olney, and the re- waiver provision present in the Agreement. The trial court grant- maining appellees (collectively, “Appellees”) asserting claims for ed the motion. It also granted AHA’s later motion for summary common law fraud and statutory fraud. The trial court granted judgment on all issues except attorney’s fees. After a bench trial summary judgment in favor of Appellees and Lindley appealed. on the fees, the court signed final judgment in favor of AHA. HOLDING: Affirmed. HOLDING: Affirmed. REASONING: Lindley contended Appellees committed com- REASONING: Bullock asserted that AHA failed to establish mon law fraud and statutory fraud because McKnight know- that the waiver of a jury trial was knowing and voluntary. The ingly misrepresented the necessity and legal effect of the Share- court responded to this assertion by explaining that there is no holders’ Agreement with the intent to obtain Daws’s signatures presumption against jury waivers that places a burden on the on them. The court found that a party commits common law party seeking enforcement to prove the waiver was executed fraud by: (1) making a false, material misrepresentation; (2) that knowingly and voluntarily. In re Bank of America, N.A., 278 the party either knows to be false or asserts recklessly without S.W.3d 342, 346 (Tex. 2009). Instead, it found that a conspicu- knowledge of its truth; (3) with the intent that the misrepresen- ous jury waiver provision is prima facie evidence of a knowing tation be acted upon; (4) and the person to whom the misrepre- and voluntary waiver, and it shifts the burden to the opposing sentation is made acts in reliance upon it; (5) and is injured as a party to rebut it. In re General Elec. Capital Corp., 203 S.W.3d result. The court explained that the elements of statutory fraud 314, 316 (Tex. 2006). are “essentially identical to the elements of common law fraud The court reasoned that the jury waiver provision in except that [statutory fraud] does not require proof of knowl- the Agreement was sufficiently conspicuous. The provision was edge or recklessness for the recovery of actual damages. Brush v. in a separate paragraph and appeared in boldface type. There Reata Oil & Gas Corp., 984 S.W.2d 720, 726 (Tex. App.—Waco was an underlined introductory heading entitled “Waiver of Jury 1998). The court agreed with Appellees that the competent Trial,” and the language describing the waiver was not exces- evidence failed to raise a genuine factual issue on reliance. It sively wordy. Furthermore, Bullock took two weeks to review did find that portions of McKnight’s letter to shareholders might the Agreement and consulted with her attorney before signing establish a genuine factual dispute as to the misrepresentation it. The court held Bullock’s signature to be crucial because Texas that the agreements were required to achieve the corporations’ courts have always presumed that a party who signs a contract conversion to Subchapter S entities, rather than simply recom- knows its contents. In re Bank One, N.A., 216 S.W.3d 825, 826 mended. However, Lindley did not provide evidence to prove (Tex. 2007). that Daws relied on or was induced by the misrepresentation Because the jury waiver provision was conspicuous, when she signed the agreement. Because the evidence did not Bullock had the burden of establishing that she did not agree to raise a genuine factual dispute as to whether Daws relied on the provision knowingly or voluntarily. Bullock failed to address McKnight’s statements when she signed the Shareholders’ Agree- whether she had met that burden, therefore, the court found no ments, the court held that the trial court did not err by granting error by the trial court. Appellees’ no-evidence motion on Lindley’s fraud and statutory fraud claims. CLASS IMPROPERLY CERTIFIED

A CONSPICUOUS JURY WAIVER IS PRIMA FACIE EVI- Mazza v. American Honda, 666 F.3d. 581 (9th Cir. 2012). DENCE OF A KNOWING AND VOLUNTARY WAIVER FACTS: A California district court certified a nationwide class Bullock v. American Heart Assoc., 360 S.W.3d 661, (Tex. of persons who purchased or leased Acura RLs equipped with a App.—Dallas 2012). Collision Mitigation Braking System (“CMBS”) during a three- year period. The CMBS detected the proximity of other vehicles, FACTS: Carole Bullock (“Bullock”) was discharged from her assessed the equipped car’s speed, and implemented a three-stage employment with the American Heart Association (“AHA”) as process of warning the driver, engaging the brakes and tighten- part of a departmental reorganization that eliminated her po- ing the front seat belts, and strongly braking to minimize the sition. Upon her termination, Bullock received a Separation damage from rear-end collisions. These measures were intended and Release Agreement (“Agreement”). Bullock reviewed the to occur in sequence as the possibility for collision grew larger. Agreement with her attorney before she signed and returned it In some circumstances, however, the CMBS would not have time to AHA two weeks later. Pursuant to the Agreement, three pay- to apply each measure sequentially, but would apply all three si- ments were to be deposited into Bullock’s bank account. The multaneously. Under certain driving conditions, such as bad deposits were made, but AHA mistakenly deposited five addi- weather, the system was designed to automatically shut itself off. tional payments into Bullock’s account. Several months later, The plaintiffs claimed that various marketing materi- AHA requested that Bullock return the amount it had overpaid. als, television commercials, and magazine ads which touted the Responding through her attorney, Bullock refused to return the CMBS failed to inform the potential buyer of the system’s limita- overpayments claiming she was the victim of various unlawful tions and that class members suffered actual harm because they employment practices and demanded an additional monetary paid more for the cars than they otherwise would have. The settlement. AHA initiated suit to recover the overpayments. system added about $4,000 to the price of a new Acura. Honda Bullock responded by asserting various claims and counterclaims appealed from the district court’s decision to certify the class. against AHA and several of its officers and demanded a jury trial. HOLDING: Reversed and remanded.

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REASONING: The district court concluded that Plaintiffs met The second step of the governmental interest test is, in their burden as to all four requirements of Rule 23, but Honda the event of a difference, to examine each jurisdiction’s interest only challenged the finding of commonality. Honda argued: (1) in the application of its own law under the circumstances of the that Plaintiffs failed to satisfy Federal Rule of Civil Procedure particular case to determine whether a true conflict exists. The 23(a)(2)’s commonality requirement; (2) that common issues court found that each of the 44 states had a strong interest in of law did not predominate because there were material differ- applying its own consumer protection laws to the transactions. ences between California law and the consumer protection laws Each state has an interest in balancing the range of products and of the 43 other jurisdictions in which class members purchased prices offered to consumers with the legal protections afforded to or leased their Acura RLs; (3) that common issues of fact did them. Each state also has an interest in being able to assure that not predominate because resolution of the claims required an limitations on liability in that jurisdiction’s law will be available individualized inquiry into whether consumers were exposed to, in the event an individual or business is faced with litigation. and actually relied on, various advertisements; and (4) that some The court held that the district court erred by discounting or members of the proposed class lacked Article III standing be- not recognizing each state’s valid interest in shielding out-of- cause they were not injured. state businesses from what the state may consider to be excessive The court deferred submission pending the U.S. Su- litigation. preme Court’s decision in Wal-Mart Stores, Inc. v. Dukes, U.S. The third step of the three-step governmental interest 131 S. Ct. 2541 (2011), which emphasized that commonality test goes to which state interest is most impaired if its policy requires that the class members’ claims “depend upon a common were subordinated to contention” such that “determination of its truth or falsity will the policy of the other Commonality requires resolve an issue that is central to the validity of each [claim] in state, when there is that the class members’ one stroke.” Honda contended that Plaintiffs did not meet their a true conflict. The burden under Wal-Mart affirmatively to demonstrate that there court found that the claims “depend upon is a common question of fact or law that can resolve important district court did not a common contention” issues “in one stroke.” It argued that the “crucial question” of adequately recog- such that “determina- “which buyers saw or heard which advertisements” is not suscep- nize that each foreign tible to common resolution. The court disagreed, finding that state has an interest tion of its truth or falsity commonality only required a single significant question of law or in applying its law to will resolve an issue fact. It held that Plaintiffs satisfied their limited burden under transactions within that is central to the Rule 23(a)(2) to show that there were “questions of law or fact its borders and that, common to the class.” if California law were validity of each [claim] As to a plaintiff’s Rule 23(b) burden, it must demon- applied to the entire in one stroke.” strate the superiority of maintaining a class action and show class, foreign states “that the questions of law or fact common to class members would be impaired in predominate over any questions affecting only individual mem- their ability to calibrate liability to foster commerce. It looked to bers.” Honda contended that California’s consumer protection the Class Action Fairness Act, which reinforces the importance statutes may not be applied to a nationwide class with members of federalism when applying choice of law principles to class in 44 jurisdictions. It further contended that common issues of action certification. The district court’s reasoning elevated all fact did not predominate because the court impermissibly relied states’ interests in consumer protection to a superordinate level, on presumptions that all class members were exposed to the al- while ignoring or giving too little attention to each state’s inter- legedly misleading advertising, that they relied on misleading est in promoting business – a mode of analysis that the Class information in making their purchasing decision, and that they Action Fairness Act was aimed at stopping. were damaged as a result. As to the predominance of common factual questions, As to the first point, the court agreed with Honda that Honda contended that common issues of fact did not predomi- the district court misapplied the three-step governmental inter- nate because the case involved an individualized determination est test and erroneously concluded that California law could be as to whether class members were exposed to misleading adver- applied to the whole class. The first step is to determine whether tisements and whether they relied on those advertisements in the relevant law of each of the potentially affected jurisdictions purchasing or leasing cars with a CMBS. It further argued that is the same or different. The court found that the district court presuming common exposure and reliance swept in class mem- abused its discretion in certifying a class under California law bers who did not suffer an injury in fact, and thus did not have that contained class members who purchased or leased their cars standing. The court held that California class members had Ar- in different jurisdictions with materially different consumer pro- ticle III standing but that the district court abused its discretion tection laws. For example, some jurisdictions –not California in finding that common issues of fact predominated because the – require proof of scienter. California also requires plaintiffs to small scale of the advertising campaign did not support a pre- demonstrate reliance, while some other states’ consumer protec- sumption of reliance. In the absence of a massive advertising tion statutes do not. Different states provide different remedies, campaign, the relevant class must be defined in such a way as to which sometimes depend on the willfulness of the defendant’s include only members who were exposed to advertising that is conduct. The court was persuaded that there were material dif- alleged to be materially misleading. The relevant class must also ferences in the relevant state laws, and that they were not trivial exclude those members who learned of the CMBS’s allegedly or wholly immaterial. omitted limitations before they purchased or leased the CMBS

Journal of Consumer & Commercial Law 127 RECENT DEVELOPMENTS

system. The court agreed with Honda that the misrepresenta- ate this lawsuit. Subsequently, Salling sued Budget in federal tions at issue did not justify a presumption of reliance, primar- district court as an individual and putative class representative, ily because it was likely that many class members were never claiming that the charge was a breach of his contract with Bud- exposed to the allegedly misleading advertisements, insofar as get. Salling argued that the contract stipulated that he could advertising of the challenged system was very limited. The prod- avoid the fee if he drove fewer than 75 miles and refilled the gas uct brochures and commercials fell short of the “extensive and tank. Budget argued that Salling would also have had to submit long-term [fraudulent] advertising campaign” required to create a receipt to avoid the charge. In addition to the breach of con- a presumption that consumers had been exposed to them. In Re tract claim, Salling also made claims for fraud and unjust enrich- Tobacco II cases, 207 P.3d 20 (Cal. 2009). One commercial aired ment. Budget moved for summary judgment on all three claims for several months, but other materials were more limited in and the district court granted dismissal. In the reply brief to its scope and Honda ceased mass-market advertising of the CMBS own motion for summary judgment, Budget raised the voluntary system after less than one year. In contrast, the commercials in payment doctrine as a defense. The district court considered the the Tobacco II cases aired nationally for ten years. defense in its opinion and determined that it precluded Salling’s The court concluded that Honda’s objection that state unjust enrichment claim. Salling appealed the breach of con- law gives a right to monetary relief to a citizen suing under it tract claim to the Sixth Circuit. without a more particularized proof of injury and causation HOLDING: Affirmed. was not enough to preclude class standing. However, the court REASONING: Ohio law recognizes the voluntary payment found that the district court certified a class that included all doctrine as articulated by the Ohio Supreme Court: “in the ab- persons who purchased or leased an Acura RL with the CMBS sence of fraud, duress, compulsion or mistake of fact, money, between August 2005 and class certification, and that the class voluntarily paid by one person to another on a claim of right to was overbroad. The court vacated the class certification order, such payment, cannot be recovered merely because the person holding that the district court erred when it concluded that Cali- who made the payment mistook the law as to his liability to pay.” fornia law could be applied to the entire nationwide class, and Salling did not claim duress or compulsion, and his fraud claim that all consumers who purchased or leased the Acura RL could was dismissed and not appealed. The circuit court also found be presumed to have relied on Honda’s advertisements. that Salling made no mistake of fact because he paid the fee in anticipation of filing suit. It thus held that the payment was VOLUNTARY PAYMENT RULE BARS CLASS ACTION voluntary, and Salling was precluded from asserting breach of contract. Salling argued that the voluntary payment doctrine Salling v. Budget Rent-A-Car Sys., Inc., 672 F.3d 442 (6th Cir. does not apply when a party breaches a provision of a written 2012). contract, and so it should not have been applied in this case. The court rejected this argument, finding that a payment made FACTS: Plaintiff Michael Salling rented a car from Defendant pursuant to the mistaken construction of contract terms is a mis- Budget Rent-A-Car (“Budget”) at an airport in Cleveland. He take of law, not a mistake of fact, and so cannot be recovered drove the car 64 miles, refilled the gas tank, and returned the if made voluntarily. The court affirmed Budget’s defense under car. In addition to rental fees, he was charged a $13.99 fuel the voluntary payment doctrine, and did not need to address the service fee which he paid, but later disputed. Salling paid the fee contract interpretation issue. believing that the payment would grant him standing to initi-

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Journal of Consumer & Commercial Law 129 THE LAST WORD

elcome to the electronic version of the Journal of Consumer and Com- mercial Law. This issue is the second one published online, distributed electronically. It has arrived a little later than usual because we are still working on getting out the bugs that arise when using links within Wthe article. One of the benefits of an electronic version of the Journal is the ability to provide you with links to the cases discussed, and to keep it updated as the law changes. Unfortunately, taking advantage of current technology is taking a little more time than expected. On the other hand, the delay allows a little different perspective on the CFBP discussion, which took place late 2011. Once you have a chance to read this issue, I welcome your feedback about what we can do to improve the Journal even more. Email me your comments or suggestions at [email protected]. As always, I also encourage you to submit an article or comment for publication. While we prefer “Blue Book” form, we will consider everything, and have no requirements regarding format.

Richard M. Alderman Editor-in-Chief

130 Journal of Consumer & Commercial Law Journal of Consumer & Commercial Law 131 STATE BAR OF TEXAS NON-PROFIT ORGANIZATION P.O. Box 12487 U.S. POSTAGE Austin, Texas 78711-2487 PAID PERMIT NO. 1804 AUSTIN, TEXAS

132 Journal of Consumer & Commercial Law