Posts Tagged ‘Consumer Protection’

CWAG Panel touches on the challenges of Privacy 3.0

Yesterday, the Conference of Western Attorneys General (“CWAG”) hosted a superb panel entitled “Privacy 3.0 – Emerging Enforcement & Policy Issues” at their annual meeting in Santa Fe, NM.  Featured on the panel were FTC Commissioner Julie Brill, Assistant AG Shannon Smith of the Washington Attorney General’s Office, Professor Chris Hoofnagle of UC Berkeley Law School and Professor Paul Ohm of the University of Colorado’s Law School.

The panelists discussed the enforcement approach to privacy and data security in the 1.0 (notice and choice) and 2.0 (harm-based analysis) eras – and how this approach may need to change in the current age given continuing challenges: the emergence of scholarship showing that “anonymization” is a fallacy, the continuing struggle to create clarity around key terms used in privacy, and the need to educate consumers about basic privacy concepts.  The panel also discussed the States’ approach to some of these developments – such as the Massachusetts data law.

You can view the full webcast on CWAG’s site.

Disclosure: I worked with CWAG to help pull this panel together.


The Fabulous Fab-FTC Connection

April 27, 2010 Leave a comment

Post updated @ 4:45 PDT

Today, all ears and eyes were on the Senate hearing (and interrogation) of Goldman Sachs executives, regarding questionable mortgage lending and investment practices at the investment bank.  The witnesses included Fabulous Fab aka Fabricio Tourre, the Goldman trader who deemed himself as the only survivor of certain “complex, highly-leveraged, exotic trades” that were created without his “fully understanding all of the implications of these monstrosities.”  Tourre was instrumental in creating and selling mortgage investments in the now famous “Abacus” transactions.  According to the SEC, he committed fraud by failing to disclose to Abacus investors a material fact: that the hedge fund that chose the mortgage-backed securities going into the Abacus investments, was the same hedge fund betting against that deal.  Ultimately, Paulson & Co., the hedge fund in question, made over $1 billion in profit when the sub-prime mortgage market collapsed.  The investors made nothing.  According to Senator Carl Levin, chair of the Senate Permanent Subcommittee on Investigations, such practices “contributed to the economic collapse” of 2008.

If the story of Fabulous Fab and his fellow Goldman traders strikes a nerve, it’s likely that the Democrats will eventually get the votes they need to halt debate and put financial reform legislation to a vote.  Despite Senate Republican efforts to block a vote on the bill (for two days in a row), the legislation appears to have widespread public support – a much-cited poll finds that two-thirds of Americans now support financial reform.

Even the little provisions in this bill could have an enormous impact.  For those of us following Internet regulation, I’m referring to the provisions in the financial reform bill that would expand the FTC’s civil penalty and rulemaking authority.  Since I first blogged about this issue last week, the lobbying effort aimed at removing these provisions from the final bill has intensified almost exponentially.  Here as with the financial reform bill, the US Chamber is at the forefront of an alliance that includes IAB as well as many online advertisers and businesses.  Their concerns are outlined in this letter, sent last Thursday, to Senators Harry Reid and Mitch McConnell, the majority and minority leaders of the Senate.

The question of whether financial reform is also the right vehicle to effect FTC reform looms large.  Will consumers – who overwhelmingly appear to support financial reform – also support an expansion in the FTC’s authority?  Is financial reform legislation the right place to grant expanded power to an agency that will lose its consumer financial protection authority under the proposed legislation anyway?

Whether the FTC provisions will prevail will depend on whose lobbying effort is better: business, (as represented by the Chamber and its alliance of internet advertising and marketing businesses), or the FTC (as represented by Senator Jay Rockefeller, chair of the Senate Commerce committee and FTC Chairman, Jon Leibowitz).  Leibowitz has argued that an expansion of FTC power is “critical” to protecting consumers on the internet; similarly Rockefeller has stated that the new Consumer Financial Protection Bureau and the FTC need the right tools to “stop bad actors and protect Americans from fraudulent financial services and practices.”  And at least one commentator – Jeff Chester of the Center for Digital Democracy – has argued that there is a link between financial reform and a stronger, more effective FTC.  “Online advertisers want the same kind of lax oversight that led to the financial crisis, Chester recently told Internet News.  “They are truly terrified that an FTC with normal rulemaking power will force the industry to treat consumers responsibly.”

Which takes us back to the Goldman Senate hearing and Fabulous Fab.  Could his testimony, along with that of his other colleagues earlier today, be the tipping point that drives greater public support – not just for financial reform but also for general consumer protection enforcement?

If so, we may be looking at an FTC with expanded authority within the month.

Categories: Legislation Tags: ,

State CPAs: Experiment or Risk to the Federal Scheme?

March 10, 2010 Leave a comment

It was Supreme Court Justice Louis Brandeis who first introduced us to the idea that experimentation by individual States – “in things social and economic” – might be a good thing. In his 1932 dissent of the majority’s decision in New State Ice Co. v. Liebman, he wrote:

“To stay experimentation in things social and economic is a grave responsibility .. [I]t is one of the happy incidents of the federal system that a single courageous state may, if its citizens choose, serve as a laboratory; and try novel social and economic experiments without risk to the rest of the country.”

Thus began one of the more enduring metaphors in modern federalism – state and local governments as “laboratories of democracy,” legislating innovative approaches to address the social and economic problems that confront their citizens (according to Wikipedia, the phrase “defines” our unique system of federalism).   Of course, this formulation of federalism has an important limitation – an individual state’s approach to a problem, no matter how innovative, cannot pose risks to the larger, federal scheme.  But what happens if a majority of states engage in experiments with a similar approach that no longer mirrors the federal scheme?

This is the intellectual tension that dominates the discussion around the efficacy of state consumer protection laws – as evidenced in this groundbreaking report analyzing private litigation under state consumer protection acts or “CPAs.”  The report, by the Civil Justice Institute at Northwestern Law’s Searle Center for Law, Regulation & Economic Growth, examines the differences between state consumer protection law (as interpreted by state courts), and the federal consumer protection standard (as applied by the FTC).  And it arrives at a startling conclusion: nearly 40% of the claims brought under state consumer protection laws between 2000 and 2007 would not constitute illegal conduct under federal or FTC standards.

The Searle report aims to answer an important question: why are there differences between consumer protection enforcement under CPAs vs. the FTC standard?  To answer this question, the report engages in a particularly rigorous analysis. Since this was the first time a comprehensive look of CPAs was being undertaken, an initial step was to gather the data from which to conduct the research.  An enormous database of over 17,000 federal and state appellate decisions issued between 2000 and 2007 was assembled; then a random sample of cases was “coded” using general characteristics of state consumer protection acts.  The results were reviewed by a “Shadow FTC” of individuals with “substantial” consumer protection and FTC experience, as well as a Consumer Protection Task Force, led by Professor Joshua Wright of George Mason University.

The report’s conclusions are quite remarkable:

  • Between 2000 and 2007, CPA litigation increased by 119% – a rate of increase that was higher than that of tort litigation during the same period.  Litigation was most active in states with “vague statutory definitions” of prohibited conduct, and in states whose statutes provide for expanded recoveries by consumers.
  • CPAs allow consumers to bring actions in state courts alleging conduct that would not be considered illegal under the FTC standards for consumer protection.  So, to the extent that CPAs are intended to be complements to FTC action, they “appear to overshoot the mark.”
  • The Shadow FTC found illegal conduct in only 22% of the randomly generated cases, and about 62% of the successful cases.  This means that based on the report’s random sampling, nearly 40% of actions brought under state CPAs did not allege conduct that would have been considered illegal under the FTC standard.
  • The Shadow FTC also found that only 12% of the randomly generated CPA cases and 23% of successful CPA cases would result in FTC enforcement.  This finding gives some support to the theory that CPAs allow litigants to file cases that approximate FTC enforcement actions, but might not warrant FTC resources.

Surprisingly, the report does not separate out actions brought by state Attorneys General from those brought by private class counsel.  Many state statutes empower the Attorney General or other state agency to investigate and bring actions based on CPA violations on behalf of state consumers. Attorneys General also have primary responsibility for enforcement of their states’ consumer protection law, and AG actions can differ considerably from private litigation brought by class counsel.  For these reasons, the report’s methodology should separate cases brought by AGs from those brought by private counsel.

In fact, I would urge the report’s authors to go a step further and differentiate between private individual actions and private class actions under CPAs.  Perhaps this could be a collaborative project between the Searle Civil Justice Institute and its sister effort, the Searle AG Education Program.   The revised data will better reveal a snapshot of general trends, e.g. whether most States follow a unified approach to address certain consumer protection violations in AG, class and private individual actions.  The exercise will also provide valuable insight into how best to harmonize state and federal consumer protection enforcement – a move that Justice Brandeis, with his commitment to progressive causes, would probably appreciate. In this way, the Searle report will be better able to assess the impact of state legislative “experiments” and determine if they are really a risk to national consumer protection efforts.