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UNIVERSITY OF HOUSTON LAW CENTERCENTER FOR CONSUMER LAW

VOLUME 18, NUMBER 1, FALL 2014Journal of

&Commercial LawConsumerOFFIC IAL PUBLICATION OF THE CONSUMER & COMMERCIAL LAW SECTION OF THE STATE BAR OF TEXAS

Where Does the VulnerableSouth African Consumer Fit In?

A Comparative Analysis.

Recent Developments

Consumer Alerts

ReassessingPayday Lenders

University of Houston Law Center2014-2015 Editorial Board

Student Editor-in-ChiefAshley Ellerin

Chief Managing EditorCharlie Pendergraft

Chief Articles EditorJeff Kirk

Chief Recent Developments EditorMegan Roper

Senior EditorsBarira MunshiLeigh Ann ResslerViana HodgeArshin FaridifarGreer KurasJosh CooperKyle Rafferty

Contributing EditorsSami SiddiquiIsabela BelchiorNazanin SalehiHannah YoungNick BrownHee Jin ChangJon WerlangJ.T. ReinertGrace MurphyCaroline KuipersCatherine FigueirasCrispin ClarkeRachel PaceElizabeth HenriksonRaenesha Jackson

State Bar of TexasConsumer & Commercial Law Section

OFFICERS COUNCIL

CHAIRPERSONMelanie Hessler PhippsKustoff & Phipps, LLP4103 Parkdale St.San Antonio, TX 78229210-614-9444210-614-9464 (Fax)[email protected]

CHAIR-ELECTMichael O’ConnerLaw Offices of Dean Malone, P.C.900 Jackson St, Ste. 730Dallas, TX 75202214-670-9989214-670-9904 (Fax)[email protected]

TREASURERJessica LesserLaw Offices of Craig Zimmerman15443 Knoll Trail Dr Ste 100Dallas, TX 75248-3453214-855-9355214-855-9389 (Fax)[email protected]

SECRETARYAndrew E. SattlerJohn Dwyre & Associates, PLLC4207 Gardendale St Ste 104BSan Antonio, TX 78229-3142 214-736-1772 [email protected]

IMMEDIATE PAST-CHAIRD. Esther ChavezOffice of the Attorney GeneralConsumer Protection DivisionP.O Box 12548Austin, TX [email protected]

EDITOR-IN-CHIEF OF THE JOURNAL OF CONSUMER & COMMERCIAL LAWProfessor Richard M. Alderman Dwight Olds Chair in LawUniversity of Houston Law Center100 Law Center Houston, Texas 77204-6060713-743-2165 713-743-2131 (Fax) [email protected]

Board AdvisorLance Sharp

Alternate Board AdvisorRobert Aldrich

TERMS EXPIRE 2015Philip K. Maxwell Law Offices of Philip K. Maxwell Plaza One, Suite 300 901 S. Mopac Expy Austin, TX [email protected]

David J. Fisher Orgain, Bell & Tucker560 South Fourth Street Silsbee, TX 77656 409-386-0386409-386-0900 (Fax)[email protected]

S. David Smith McGlinchey Stafford1001 McKinney St, Suite 1500 Houston, TX 77002713-335-2136713-520-1025 (Fax)[email protected]

TERMS EXPIRE 2016Dana KarniKarni Law Firm, P.C.4635 Southwest Freeway, Suite 715713-552-0008713-454-7247 (Fax)Houston, [email protected]

Tracey WhitleyTexas Rio Grande Legal Aid4920 N IH 35Austin, TX [email protected]

Stephen E. LevineAutoStar Solution1300 Summit Avenue, Suite 800Fort Worth, TX 76102(817) 439-6150, ext [email protected]

TERMS EXPIRE 2017Mark E. SteinerSouth Texas College of Law1303 San JacintoHouston, TX [email protected]

Chad BaruchThe Law Office of Chad Baruch3201 Main StreetRowlett, TX 75088972-412-7192972- 412-4028 (Fax)[email protected]

Jerry JarzombekThe Law Office of Jerry Jarzombek, PLLC855 Texas Street, Suite 140Fort Worth, TX 76102(817) 348-8325(817) 348-8328 (Fax)[email protected]

Journal of Consumer & Commerical LawVolume 18, Number 1

Fall 2014

Ricco GarciaCourtney CoxHenry UbelakerDanielle DaryNimroz AliArianna BarkerBianca LopezRobert DenzerSameen AliAmmaar JoyaJames HuTracie HallCatherine CartwrightJustin Wright

Editor-in-ChiefRichard M. AldermanDwight Olds Chair in LawDirector, Center for Consumer LawUniversity of Houston Law Center713-743-2165713-743-2131 (Fax)[email protected]

Journal of Consumer & Commercial Law 1

VOLUME 18, NUMBER 1, FALL 2014

Journal of

&Commercial LawConsumer

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

Manuscripts should be forwarded to:Richard M. AldermanUniversity of Houston Law Center100 Law CenterHouston, Texas [email protected]

ArticlesWhere Does the Vulnerable South AfricanConsumer Fit In?A Comparative Analysis.By Jacolien Barnard 2

Reassessing Payday Lenders in the Wake of Their Most Negative Court Holding to DateBy Joshua Cooper 15

Consumer News Alert-Recent Decisions 19

Deceptive Trade Practices Act 22

Consumer Credit 23

Debt Collection 25

Arbitration 27

Insurance 30

Miscellaneous 31

The Last Word 32

Recent Developments

TERMS EXPIRE 2015Philip K. Maxwell Law Offices of Philip K. Maxwell Plaza One, Suite 300 901 S. Mopac Expy Austin, TX [email protected]

David J. Fisher Orgain, Bell & Tucker560 South Fourth Street Silsbee, TX 77656 409-386-0386409-386-0900 (Fax)[email protected]

S. David Smith McGlinchey Stafford1001 McKinney St, Suite 1500 Houston, TX 77002713-335-2136713-520-1025 (Fax)[email protected]

TERMS EXPIRE 2016Dana KarniKarni Law Firm, P.C.4635 Southwest Freeway, Suite 715713-552-0008713-454-7247 (Fax)Houston, [email protected]

Tracey WhitleyTexas Rio Grande Legal Aid4920 N IH 35Austin, TX [email protected]

Stephen E. LevineAutoStar Solution1300 Summit Avenue, Suite 800Fort Worth, TX 76102(817) 439-6150, ext [email protected]

TERMS EXPIRE 2017Mark E. SteinerSouth Texas College of Law1303 San JacintoHouston, TX [email protected]

Chad BaruchThe Law Office of Chad Baruch3201 Main StreetRowlett, TX 75088972-412-7192972- 412-4028 (Fax)[email protected]

Jerry JarzombekThe Law Office of Jerry Jarzombek, PLLC855 Texas Street, Suite 140Fort Worth, TX 76102(817) 348-8325(817) 348-8328 (Fax)[email protected]

2 Journal of Consumer & Commercial Law

In search of the “ordinary consumer” and information in plain language in a multilingual, multi-

cultural South Africa.


I. INTRODUCTION

Although consumer protection is not a new concept in South African law, the Consumer Protection Act 68 of 2008 (CPA) now provides for a much more comprehensive and encompassing mechanism to protect consumers. This is primarily done in three ways: a) Protecting consumers not only in the provision of goods and services, the conclusion of contracts but also in the promotion and marketing thereof; b) Providing from the outset of the CPA (starting with the preamble to the Act) special protection to a particular type of consumer which is the vulnerable consumer. In terms of section 3 of the CPA the vulnerable consumer includes low-income, illiterate, young and elderly consumers. It also includes consumers from low-density populated areas; and c) For the first time in the history of South African law, the consumer is provided with eight core fundamental con-sumer rights.

This article focuses on the consumer’s fundamental right to disclosure and information. Section 22 of the Consumer Protection Act provides that a consumer has a right to information in plain and understandable language. It also provides that the yardstick by which to assess whether information is in plain language; that is whether, “an ordinary consumer of the class of persons for whom the information is intended, with average literacy skills and minimal experience as a consumer could be expected to understand the information.”1

Who should be regarded as an “ordinary consumer” in a South African context? Providing a realistic answer is complicated by the fact that South Africa has eleven official languages and quite a large group of the population falls under the concept of a “vulnerable consumer” qualified by section 3 of the CPA. What therefore is the role of the vulnerable consumer in assessing plain language in consumer agreements?

Section 22 and the plain language requirement governed therein are mentioned throughout the Act. In the case of South Africa, the requirement for notices, documentation and visual representations to be in plain language goes much further than unfair terms in consumer contracts or even unfair trading. The plain language requirement forms part of, for example the con-sumer’s cooling-off right (section 16), exemption notices and clauses (section 49), written consumer agreements (section 50) and trade description guidelines. Any further comparative discussion is also interpreted from this viewpoint. Note should also be taken of the fact that, due to the fairly recent nature of the CPA, no South African case law interpreting the provisions of section 22 has been handed down.

In an attempt to find appropriate answers to the questions posed above the position in the United Kingdom is assessed. This jurisdiction was chosen due to its historic links rooted in the common law of South Africa as a source of law as well as the similar wording between the CPA and the relevant consumer legislation in the UK (The Consumer Protection Act 1987, Unsolicited Goods and Services Act 1971 and the Consumer Protection from Unfair Trading Regulations of 2008 for example). It is acknowledged that the Consumer Rights Bill 2013to2014 is serving in the UK Parliament for final consideration and com-ments. The Bill attempts to combine and align some of the scattered consumer legislation within the UK but because it was not in force at the time of conducting this research, the current legal position is discussed.

It should be noted that, in the case of plain language, the EU Unfair Commercial Practices Directive deserves discussion as an introduction to the position in the UK due to the fact that the Consumer Protection from Unfair Trading Regulations of 2008 (CPUT Regulations) are an almost verbatim implementation of the above EU Directive.

What would be the relevance of this contribution to the legal reader in Texas and the United States? Apart from the fact that International Consumer Law provides an important broader viewpoint of international trends and attitudes towards con-sumer protection, it is perhaps also important to determine whether plain language plays (or should play) any role in consumer contracts. It could also be relevant to establish if “vulnerable consumer groups” exist in the United States Consumer Protection Framework and whether such groups need additional protection.

Where does the vulnerable consumer fit in?

A comparative analysis.By Jacolien Barnard *

“If you talk to a man in a language he understands, that goes to his head. If you talk to him in his language, that goes to his heart.” – The late president Nelson Rolihlahla Mandela (1918 – 2013)


II. SOUTH AFRICA: PLAIN AND UNDERSTANDABLE LANGUAGE

A. Section 22 of the CPA: The consumer right to information in plain and understandable language

If one were to give a “one-line” summary regarding the appli-cation of the CPA, it would be that the CPA is applicable where a supplier supplies goods and or services to a consumer in the ordinary course of the suppliers business for consideration. Each of these concepts has their own particular definition in terms of section 1 of the CPA. In the supply of such goods and services the consumer is provided with (as mentioned above) eight core fundamental rights one of which is the right to disclosure and information which includes section 22: the right to plain and un-derstandable language.

In terms of section 22, the producer of a notice, document or visual representation that is required to be produced, provided or displayed to a consumer must produce, provide or display that notice, document or visual representation in the form prescribed in terms of the CPA or any other legislation, if any, for that no-tice, document or visual representation;2 or in plain language, if no form has been prescribed for that notice, document or visual representation.3

Section 22(2) provides that a notice, document or visual rep-resentation is in plain language if it is reasonable to conclude that an ordinary consumer of the class of persons for whom the notice, document or visual representation is intended, with average literacy skills and minimal experience as a consumer of the relevant goods or services, could be expected to understand the content, significance and import of the notice, document or visual representation without undue effort. In determining whether a notice, document or visual representation is in plain language the following will also be con-sidered in terms of section 22(2): a) The context, comprehensiveness and consistency of the notice, document or visual representation; b) The organization, form and style of the notice, docu-ment or visual representation; c) The vocabulary, usage and sentence structure of the notice, document or visual representation; and d) The use of any illustrations, examples, headings or other aids to reading and understanding.

The National Consumer Commission (NCC) may publish guidelines for methods of assessing whether a notice, document or visual representation is in plain language.4

B. Plain language and the provisions of section 22 CPA: In-terpretation by legal writers Gordon and Burt argue correctly that the definition of plain

language in terms of section 22 not only speaks about grammar and wording but also about content, structure, design and style of the document.5 Not only must consumers understand what the document says, but also how the document applies to them and its effect.6

Stoop states that plain language is a valuable tool that can be applied in order to proactively promote procedural fairness in the law of contract and to protect consumers.7 A consumer can be placed in a better position in order to protect his own inter-ests.8 Plain language aims to address technical vocabulary, archaic words, overuse of passives, complex and long sentence and poor organization.9 After all, an informed consumer is central to the concept of consumer protection.10

Gouws defines plain language as direct and straightforward, designed to deliver its message to its intended readers clearly, ef-

fectively and without fuss or undue effort.11 He regards it as avoid-ing things like obscurity, inflated vocabulary, convoluted sentence construction and using only as many words as are necessary.12 It is understood by the audience the first time they read or hear it.13

Kirby14 is of the opinion that the scope and ambit of section 22 will in all likelihood be expanded upon and interpreted by the people who are tasked with enforcing the provisions of the CPA, including, but not limited to, the NCC.

A consumer must be able to understand a consumer docu-ment without undue effort in terms of section 22(2). Gordon and Burt state that if a consumer needs to consult a dictionary (or a lawyer) to understand the terms of a consumer agreement, the consumer’s understanding may well be considered to be with undue effort and not in plain language.15 Melville also suggests that “undue effort” would include difficulties regarding the trans-lation of documents and should be addressed by way of guidelines published in terms of the CPA.16 With regard to “undue effort,” Gouws states that the effort must be undue, excessive or unwar-ranted before it can be held that it is unreasonable to conclude that the ordinary consumer would understand the agreement.17 Whether the effort was “undue” remains a question of fact. It is submitted that the requirement of “effort” must be seen against the backdrop of the purpose of plain language, namely, that the consumer must be able to understand the content, significance and import of the agreement by merely reading the agreement.18

Kirby argues that the words “notice” and “document” do not have separate definitions in section 1 of the CPA.19 The result is that section 22(1) creates the first criterion in respect of plain and un-derstandable language, namely, that it applies to legally prescribed notices or visual representations (in other words the representation or document that is required to accompany goods or services when the consumer acquires or buys such goods or services).20

How and when the consumer reads the document also should be taken into account. The document must give as much as possible information regarding the consumer agreement and elements such as terminology should be consistent throughout.21 Monty and Hurwitz explain that the content should at all times be consistent with the context in which the notice, document or visual representation is intended and should include all aspects necessary and intended for that consumer.22

With regard to the requirement of form and style, the most important information should, for example, be at the top of the document and not hidden in the small print. Plain words and short sentences should be used and where possible (and relevant) illustrations should also be included to make the document more understandable.23 Melville discusses building blocks to plain language which include structure, writing, and design.24 Gouws comprehensively discusses plain language drafting techniques dividing it into techniques regarding vocabulary, grammar and style; structure and lastly improving readability.25 Newman distin-guishes between typographical and linguistic readability.26 Under typographic readability the writer remarks that quite often a con-tract is physically illegible because of font size or even the colors utilized and makes suggestions as to the font size, colors, layout and headings to conform to plain language.27 According to New-man linguistic readability deals with “legal matters” and the use of “legal language.”28 For the average consumer a “legal” grammati-cal formulation may be incomprehensible and is often the greatest deterrent to consumers reading contracts.29 The writer discusses the use of personal nouns, reduced sentence length, simplifica-tion of legal terms, passive verb usage and the avoidance of cross-references to assist in linguistic readability and plain language.30

I agree with Kirby that the application of the criteria in sec-tion 22(2) is complex because the terms used are not defined in law and it would, therefore, be difficult to advise precisely when


a particular notice, document or visual representation will have met these criteria.31 There is indeed a fine line between an over-load of information and sufficient information to protect a con-sumer rather than confuse him. It is clear that the facts of each particular case should be taken into account.

Guidelines or standards for the assessment of plain language have not been published in terms of the CPA. Stoop argues cor-rectly that because of the lack of objective assessment measures or guidelines, it is not clear whether the provisions of plain language have been implemented successfully in terms of the CPA.32 Such a piece of legislation should not only provide for plain language in consumer contracts but also guidelines for illustrations, ex-amples, headings and other aids as mentioned in section 22(2).33 Because the plain language provisions in the CPA begin with the reader, suppliers should conduct user testing to ensure that their documents comply with plain language requirements and docu-ments should be written with the consumer in mind.34

C. Ordinary consumer with average literacy skills and mini-mal experience

If a document is to be sent to consumers, it must be writ-ten in a way that consumers (not only lawyers or judges) can understand.35

With regard to literacy in South Africa, Gouws refers to the percentages released by Statistics South Africa in 2007 and states that the average level of education in South Africa equates to Grade 7.36 According to the South African Institute of Race Rela-tions, the average literacy rate since 2007 has not increased to a satisfactory level.37 The average literacy level in 2007 was 88.2% and increased slightly to 89% in 2012.38 Kirby correctly the re-marks that the threshold is low for the consumer but high for the supplier to meet in relation to the language used in the terms and conditions concerned.39

Gordon and Burt refer to UN statistics which determine that 82% of South Africans are functionally literate but also that so-called “functional literacy” is not enough to understand most business and legal documents.40

Kirby is of the opinion that the ordinary consumer with av-erage literacy skills must be viewed from the point of view of the officious bystander who is able to conclude reasonably, (that is, with reference to particular objective factors pertaining to the particular consumer concerned) that the consumer understood what he was buying and the terms and conditions in respect of which the transaction occurred.41 According to the writer the cri-terion is one of reasonableness.42 The result is that any person adjudicating a consumer complaint will therefore need to apply a test of objective reasonableness on whether or not the language in question is plain and understandable based on the particular characteristics of the consumer concerned.43

Section 22(2) also seems to distinguish between ordinary consumers with the inclusion of the passage “of the class of per-sons for whom the agreement is intended”. According to Gouws, this distinction seems based purely upon the type of agreement the consumer intends to conclude.44 The writer argues that if this is correct, the inclusion of the latter distinction was unnecessary and prone to lead to confusion because it presupposes different classes of ordinary consumers, the extent of which is limited only by the number of different types of agreements which a supplier and a consumer may conclude.45

Gouws criticizes the fact that the distinction further presup-poses ascribing an average literacy to the ordinary consumer be-longing to a particular class of consumers, which in all likelihood will vary from class to class. It would be more difficult to deter-mine the average literacy of a particular class of consumers as op-posed to determining the average literacy of a consumer in gen-

eral by relying on for example data from Statistics South Africa. What complicates the determination of an average consumer for a class or group of persons is the fact that a consumer is not restrict-ed to entering into one particular type of agreement. The result would be that a particular type of agreement which complies with the plain language requirement based on the average literacy of the consumers belonging to a particular class will suddenly fail to satisfy the section 22(2) requirement if a consumer from another class with a lower average literacy rate enters into an agreement intended for the former class.46 What is plain for one con-sumer is not nec-essarily plain for another con-sumer, and a dis-tinction between classes of con-sumers based on literacy would not support this. A distinction be-tween different classes of con-sumers is also contrary to what is envisaged in the preamble to the CPA, namely, eradicating the indifferences of consumers based on illiteracy and other forms of social and financial inequalities.

On the other hand, it might be argued that in the absence of any class distinction a situation may arise where a consumer with literacy skills that exceeds the average level of literacy of an ordinary consumer may escape contractual liability based on non-compliance with the plain language requirement. Gouws argues that this might be the case, especially because an agreement might be declared void for non-compliance with the plain language re-quirement in terms of section 52 of the CPA, and it remains to be seen how the courts and different forums will address this issue.47

D. The vulnerable consumerUpon analysis of the opinion of legal writers regarding sec-

tion 22 above, it becomes clear that the determination of an “or-dinary consumer” is not as simple as it seems. This becomes more apparent when one considers that, aside from the ordinary con-sumer of a group of consumers, there are also particular groups who need additional protection in terms of the CPA: Vulnerable consumers. Though section 22 does not mention the vulnerable consumer per se, the wording of section 3 of the Act compels an interpretation of section 22 that takes the purpose and policy of the CPA into account.

Section 3(1)(b) clearly states that the purpose of the CPA is to promote and advance the social and economic welfare of con-sumers in South Africa by reducing and ameliorating any disad-vantages experienced in accessing any supply of goods or services by consumers: a) Who are low-income persons or persons comprising low-income communities; b) Who live in remote, isolated or low-density popula-tion areas or communities; c) Who are minors, seniors or other similar vulnerable consumers; or d) Whose ability to read and comprehend any adver-tisement, agreement, mark, instruction, label, warning, notice or other visual representation is limited by reason of low literacy, vision impairment or limited fluency in language in which the representation is produced, published or presented.

It might be argued that in the absence of any class distinction a situation may arise where a consumer with literacy skills that ex-ceeds the average level of literacy of an ordinary con-sumer may escape contrac-tual liability based on non-compliance with the plain language requirement.


It therefore becomes necessary to establish where the concept of a vulnerable consumer fits in when considering whether or not documentation is in plain language in terms of section 22 and what the ordinary consumer of a particular group of consumers is. Perhaps an investigation into these concepts in the EU and the UK can provide some answers in the South African context.

III. EUROPE: EU UNFAIR COMMERCIAL PRACTICES DIRECTIVE (UCPD)

Ramsay48 remarks that the UCPD is regarded by many commentators as one of the most significant EU consumer direc-tives. The Directive attempts to protect consumers in an internal market but also strives to provide future direction for consumer protection throughout the European Union.49

The UCPD applies to unfair business to consumer com-mercial practices before, during and after the transaction in re-lation to a product.50 “Commercial practice” means any act, or omission, course of conduct, representation or communication including advertising and marketing by a trader51 directly con-nected to the sale or supply of goods and services.52

Article 5 deals with the prohibition of unfair commercial practices and lays down the “average consumer test.” rticle 5 is also referred to as the “grand general clause.”53 In general the UCPD is divided into the following:

a) General unfairness clause (article 5); b) Misleading commercial practices (section 1);c) Aggressive commercial practices (section 2); and ad) List of specific prohibited practices (annexure 1).

A. The average consumer testThough “average consumer” is not defined in the Directive,

it is referred to as part of the test for an unfair commercial practice in article 5. A commercial practice will be unfair if:

a) It is contrary to the requirements of professional dili-gence, and

b) It materially distorts or is likely to materially distort the economic behavior with regard to the product of the average consumer whom it reaches or to whom it is ad-dressed, or of the average member of the group when a commercial practice is directed to a particular group of consumers.

Recital 18 to the Directive further provides that it is appro-priate to protect all consumers from unfair commercial prac-tices. In the case of advertising, the EU Court of Justice found it necessary to examine the effect on a notional, typical consumer. Recital 18 further provides that in line with the principle of proportionality, and to permit the effective application of the protection contained in it, the UCPD takes as a benchmark the average consumer, who is reasonably well informed and reasonably observant and circumspect, taking into account social, cultural and linguistic factors. The Directive also contains provisions aimed at preventing the exploitation of consumers whose characteristics make them particularly vulnerable to unfair commercial prac-tices. Where a commercial practice is specifically aimed at a particular group of consumers, such as children, it is desirable that the impact of the commercial practice be assessed from the perspective of the average member of that group.54

The EU Commission published a working document in 2009 providing guidance on the implementation of the UCPD.55 In it, the commission explains that the “average consumer test” contained in article 5 of the Directive is not a statistical test.56 National courts and authorities will have to exercise their own faculty of judgment, having regard to the case law of the Court

of Justice, to determine the typical reaction of the average con-sumer in a given case. The Directive adopted this notion to strike the right balance between the need to protect consumers and the promotion of free trade in an openly competitive market.57 This not only suggests that, for instance, a national measure pro-hibiting claims that might deceive only a very credulous, naïve or cursory consumer would be disproportionate to the objectives pursued and create an unjustified barrier to trade but also suggests a high level of consumer protection.58

As suggested by Recital 18 and to achieve proportionality, various specific factors that complement the average consumer test should be taken into account.59 Factors such as cultural, lin-guistic and social factors which warrant a different assessment of the unfair character of a commercial practice should be con-sidered.60 Other relevant factors could also include the circum-stances in which products are sold, the information given to consumers, the clarity of such information, the presentation and content of advertising material, and the risk of error in rela-tion to the group of consumers concerned.61

The remarks by the commission regarding the adaptation of the average consumer test when the interests of specific groups of consumers are at stake (article 5(2)(b) of the Directive) should be noted. The commission explains that:62

“when the commercial practice is addressed at a specific group of consumers, be they children or rocket scientists, national authorities and courts must assess its impact from the perspective of the average member of the relevant group.”

B. The UCPD and vulnerable consumersArticle 5(3) of the UCPD states that commercial practices

that are likely to materially distort the economic behavior only of a clearly identifiable group of consumers who are particularly vulner-able to the practice or the underlying product because of their mental or physical infirmity, age or credulity in a way which the trader could reasonably be expected to foresee, shall be assessed from the perspective of the average member of that group. This is with-out prejudice to the common and legitimate advertising practice of making exaggerated statements or statements which are not meant to be taken literally (commonly known as “puffing”).

Recital 19 to the UCPD further provides that where age, physical or mental infirmity or credulity make consumers par-ticularly susceptible to a commercial practice or to the underlying product and the economic behavior only of such consumers is likely to be distorted by the practice in a way that the trader can reasonably foresee, it is appropriate to ensure that they are adequately protected by assessing the practice from the perspec-tive of the average member of that group.

The Commission therefore confirms that the Directive is based on the idea that it is appropriate to protect all types of consumers including consumers whose characteristic make them particularly vulnerable to unfair commercial practices.63

C. Criteria for assessing vulnerable consumersIt is clear from article 5(3) of the Directive that the criteria to

assess vulnerable consumers are an assessment of their:a) Mental or physical infirmity, b) Age; or c) Credulity.

The Commission notes that the reasons (criteria) mentioned by a rticle 5 as the basis to establish the vulnerability of a specific category of consumers is listed indicatively and cover a wide range of situations.64

Mental or physical infirmity includes sensory impairment, limited mobility and other disabilities.65 Examples are given such as consumers who need to use wheelchairs might be a vul-


nerable group in relation to advertising claims about ease of ac-cess to a holiday destination or entertainment venue, or those with a hearing impairment may be a particularly vulnerable group in relation to advertising claims about ‘hearing aid com-patibility’ in a telephone advertisement.

The Commission discusses three categories of consum-ers who may also qualify as vulnerable consumers in certain instances because of the age criterion.66 Broadly speaking, it would be the perspective of an older or younger consumer. Elderly consumers may be more intimidated by for example pressure selling or aggressive door-to-door selling. The elderly might also be particularly vulnerable to practices connected to certain products, such as burglar alarms. Children and teenag-ers are also vulnerable consumers due to their age. The com-mission state that a trader could reasonably foresee that certain advertisements may have an impact on a vulnerable category of consumers such as children. For example, the compatibil-ity of a videogame with a specific device may be sufficiently clear to an adult consumer but, due to the way the informa-tion is provided, it may still confuse children. Teenagers rep-

resent another category of consumers who are often targeted by rogue trad-ers. An example of this is promoting products which are particularly ap-pealing to teenagers in a way which exploits their

lack of attention or reflection due to their immaturity. For example, an advertisement for mobile phone services convey-ing the message that by subscribing to a particular loyalty plan you can easily make and maintain friends is likely to be taken more literally by teenagers.67

Credulity covers groups of consumers who may more readily believe specific claims. Although the Commission re-gards the term “credulity” as neutral, the effect is to protect members of a group who are for any reason open to be influ-enced by certain claims.68 An example might be members of a group who, because of particular circumstances, might believe certain claims more readily than others.

The vulnerable consumer test applies if the practice af-fects the economic behavior of a vulnerable group of consum-ers “in a way which the trader could reasonably be expected to foresee.” According to the Commission this criterion adds an element of proportionality in assessing the effects of a com-mercial practice on vulnerable consumers and the professional diligence which reasonably can be expected from a trader.69 It aims at holding traders responsible only if the negative impact of a commercial practice on a category of vulnerable consum-ers is foreseeable. The aim of the provision is to capture cases of dishonest market practices (e.g. outright frauds or scams) which reach the majority of consumers, but in reality are de-vised to exploit the weaknesses of certain specific consumer groups.70

Micklitz (and others) explain that the reference in recital 18 to vulnerable groups of consumers has a normative com-ponent as it purports to evaluate the particular measure used by the trader.71 The yardstick of control will also vary.72 The writers argue that it must be differentiated whether a trader could reasonably be expected to foresee that the commercial practice can materially distort the economic behavior not of all consumers taken as a whole, but only of a clearly identifi-able group of consumers who are particularly vulnerable.73

IV. THE UNITED KINGDOM

A. Plain and understandable languageMarus remarks that plain language has been widely support-

ed throughout the United Kingdom.74 The National Consumer Council (which was formed in the mid-seventies) promotes plain language in all consumer-related interactions.75

Regulation 7(1) and (2) of the Unfair Terms in Consumer Contract Regulations 1999 (UCTA Regulations) require a trader or business to ensure that any written term of a contract is ex-pressed in plain and intelligible language and stipulate that if there is any doubt about the meaning of a written term, the interpre-tation which is most favorable to the consumer should prevail. Stoop is of the opinion that these provisions are not proactive and do not provide objective guidelines on how plain language should be assessed.76

Ervine states that regulation 7 which compels terms to be in “plain and intelligible language” makes it unclear what standard it attempts to impose.77 The writer argues that it would seem the standard is language that the average person finds intelligible.78 The consumer should be given the opportunity to examine all the terms and this envisages that if an average person reads the contract, he will find it plain and intelligible.79 This is also the ap-proach of the Office of Fair Trading (OFT) which states that the standard of plainness and intelligibility of contract terms must nor-mally be within the understanding of ordinary consumers without legal advice.80

Micklitz (and others) explain that two standards are created, namely, plainness and intelligibility which need to be assessed dif-ferently.81 Plainness refers to the legal effect of a term including its consequences.82 The consumer needs to know what to expect and ambiguous formulations must not put the trader in a position that improves his legal position at the consumer’s expense.

Intelligibility according to Micklitz et al, refer to legibility, in that it purports to eliminate “small-print” from the contract which consumers do not readily understand.83 The result is that the drafter is required to design standard business conditions plainly from both an editing and optical point of view. The writ-ers make the important remark that intelligibility also entails a qualitative requirement in that information needs to be provided by the trader. Terms must not mislead the consumer about the scope of his (the consumer’s) rights and obligations.84

B. Consumer Protection from Unfair Trading Regulations (CPUT Regulations) of 2008

The CPUT Regulations is and almost verbatim implementa-tion of the EU UCPD and in particular article 5 of the Directive. The CPUT Regulations 2008 define an “average consumer”85 as one to whom the commercial practice is addressed or whom the commercial practice reaches. If the unfair commercial practice is directed at a particular group of consumers, it will be the average member of that group that is relevant.86

Ervine gives the following examples to illustrate this point.87 Firstly, the example of children in case of television advertisements during children’s programs (in which case the standard would be that of the average child)88 and secondly, the example of a group of readers of a soccer magazine in which case the test would be that of the average soccer fan.89

Ramsay90 poses the question whether one of the core objec-tives of the Regulations should be the protection of the vulnerable consumer in particular and asks how should this be done? The writer argues that under broader equitable conceptions of sub-stantive fairness one of the objectives might also be protecting the vulnerable and the poor, maintaining integrity in marketing and furthering values of risk-sharing and loss-distribution.91

The vulnerable con-sumer test applies if the practice affects the economic behavior of a vulnerable group of consumers.


In its 2013 Report,92 the EU Commission discusses the pro-tection of vulnerable consumers and notes the opinion of the UK in this regard.93 The Report states that although the UK is not calling for a revision of the vulnerable consumer test (in terms of article 5 of the Directive) in its current form, it is remarked that, if the Directive were to be reviewed, then it may be worth add-ing provisions to specifically protect also the elderly from certain aggressive practices. With regard to the average consumer test and the criteria for assessing the vulnerable consumer (infirmity, age and credulity), Ervine correctly criticizes the above list of charac-teristics as being very limited.94 The writer argues that factors such as ethnic origin, education and economic circumstances should also have been included.95 A vulnerable group of consumers could cover various people.96 Ervine further refers to the elderly who are more vulnerable to claims about home security, for example or young people who would be more vulnerable on account of their inexperience.97 The elderly as vulnerable consumers were also confirmed in the case of Crimea Price v Cheshire East Borough Council.98

Collins states that the concept of an “average consumer” provoked considerable controversy in the UK.99 The writer argues that since rogue traders may prey upon vulnerable groups, the ques-tion arises whether the concept should represent an average person who would not be influenced by suspicious and misleading practices or should the law protect the gullible? (When one takes groups such as the young and the elderly in consideration as well as the concept of “credulity”, it seems that the Directive as well as the CPUT Regulations may very well attempt to protect the “gullible.” Taking into account of course that specific circumstances apply which include that the consum-er should in the first instance be identified as a vulnerable consumer.)

On the other hand, Collins states that one welcome aspect of the average consumer test and the rules contained therein may be to place a curb on some of the emotive advertising techniques aimed at children and young people, who do not yet have the experience to know that if it sounds too good to be true, it is.100 The concept of the “average consumer” seems sufficiently precise to achieve a high level of uniformity, because the legislators have sensibly built on and articulated further the notions, rather than starting afresh.101

After the implementation of the CPUT Regulations of 2008 it became more and more apparent that particular groups of vulnerable consumers needed additional and specific legisla-tive protection against unfair commercial practices. The two most prominent groups that were identified were young people and the elderly. The Consumer Protection from Unfair Trading (Amend-ment) Regulations was published in August of 2013. In a nutshell the amendments to the CPUT Regulations attempt to provide new powers to protect vulnerable (and elderly) consumers against rogue traders. This is done by for example:

a) Giving consumers 90 days to cancel a contract and re-ceive a full refund if they have been misled or bullied into agreeing it;102

b) Giving consumers new rights to recover payments made to traders who mislead or bullied them into paying money which was not owed;103

c) Giving consumers the right to claim compensation for any alarm or distress caused by these practices.104

Even prior to the implementation of the CPUT Regulations of 2008, the courts in the UK gave guidelines as to what a typical consumer might be. In the case of Director General of Fair Trad-ing v First National Bank105 it was held that where the court is considering a collective challenge to the fairness of the terms in a consumer contract, it is necessary to consider the position of typi-cal parties and the effects of typical relationships between them.106 The court remarked that there is not always a direct dispute be-

tween the consumer and the other contracting party and therefore the relevance of particular circumstances affecting a contractual relationship must also be taken into account.107 One of these cir-cumstances should be taking into account the effects of contem-plated or typical relationships between the contracting parties.108

In the case of The Office of Fair Trading v. Ashbourne Man-agement Services Limited and others109 the OFT alleged that the defendants have engaged in practices which contravene the Con-sumer Credit Act 1974, the Unfair Terms in Consumer Contracts Regulations 1999 as well as the CPUT Regulations of 2008. The alleged misleading and aggressive commercial practices involved the business of recruiting members for gym and health and fitness clubs (collectively “gym clubs”), providing standard form agree-ments for their use and collecting payments from members under those agreements.110

The court remarked that the concept of a typical or average consumer is generally assumed to be a person who is reasonably well informed and reasonably observant and circumspect, and who is assumed to have read the relevant documents and to seek to understand what is being read.111 Be that is it may the court added that the standard is a variable one and must take color from the context.112 The court gave the example that consumers who are financially sophisticated may be expected to bring to bear a greater understanding of the meaning and implications of the terms of a contract than consumers who are vulnerable as a result of their naivety or credulity. More importantly, the court stated that, such a typical consumer is relevant not only to the assessment of fairness but also the consideration of whether a particular term is expressed in clear intelligible language.113

In OFT v Ashbourne, the parties identified three issues re-garding the application of the CPUT Regulations of 2008: first, whether the term imposing a minimum membership period falls within the scope of regulation 6(2)(a); second, whether the term is in plain intelligible language; and third, whether the term is fair.114 For purposes of this discussion attention will be given to the issue of plain intelligible lan-guage.115 In this case the question whether a particular term is expressed in plain intelligible language was considered from the perspective of an average consumer being a member of the public interested in using a gym club which was not a high end facility and who may have been attracted by the relatively low monthly subscriptions.116

There was, according to the court, a difference in the ter-minology used on the front of many of the agreements and that used in the body of the terms and conditions on the reverse. In this regard, it is plainly desirable that there is consistency in the terminology used in any agreement. However, despite the inconsistency the court still found the language used plain and intelligible and assumed that the average consumer could have read each agreement reasonably carefully.117

With regards to the “average consumer”, the court found that the defendants’ business model was designed and calculat-ed to take advantage of the naivety and inexperience of the aver-age consumer using gym clubs at the lower end of the market.118 As the many complaints received by the OFT showed, the defendants’ standard form agreements contained a trap into which the average consumer was likely to fall.119 Ultimately, the court found that various aspects of the trader agreements were unfair and that they engaged in unfair commercial prac-tices contrary to the CPUT Regulations of 2008.120

In OFT v Creative Industries121 the court referred to both the CPUT Regulations of 2008 as well as the UCPD and held that the requirement to assume that the consumer is reasonably well informed, observant and circumspect reflects the com-mon sense proposition that the UCPD exists to protect from


being misled consumers who take reasonable care of themselves, rather than the ignorant, the careless or the over-hasty consumer. It is submitted that the court made this remark and did not deal with the vulnerable consumer in particular due to the fact that no particular so-cial or economic (or other) class of consumer was targeted.122

V. UNITED STATES: PLAIN LANGUAGE AND THE VULNERABLE CONSUMER

A. A model plain language law It is interesting to note that as far back as

1981, the need for a model plain language law that required consumer contracts to be written so that an average consumer could understand them was recognized.123 Bernard Black, in his journal article entitled A Model Plain Language Law, describes the problems with standard con-sumer contracts and the fact that nearly all consumer contracts are based on mass-produced, nonnegotiable forms.124 Black cor-rectly argues that consumers do not read the contracts they sign, and would not understand them if they did. Furthermore con-sumers often have no real alternative to signing such contracts.

Incomprehensible contracts are one of the main reasons con-sumers do not read contracts. Consumer contracts are incompre-hensible according to Black due to format (fine print, long lines and inadequate spacing), language (including to overuse of legal terms) and honesty (the contract is in a particular form to deceive consumers and confuse them).125

The fact that consumers are unable to negotiate terms in standard consumer contracts takes away the incentive for con-sumers to try to read and understand the contracts they sign. Black goes further to argue that even if the product is not a ne-cessity, consumers may sign a contract without a careful reading because they expect that nothing will go wrong or that the seller will not enforce the contract to the letter.126

Although, according to Black, there may be costs involved in rewriting consumer contracts, the tangible benefits to both con-sumers and businesses outweigh such costs.127

The benefits to consumers include consumers getting form contracts they are able to read and understand. As a percentage of the purchase price of consumer goods sold in terms of consumer contracts may be small in terms of individual contracts, the ag-gregate value of plain language to all consumers, spread over all transactions, become much more significant. On the other hand consumers who read and understand one-sided contracts may re-fuse to sign it and thereby creating pressure for fairer more com-plete contracts in the marketplace.128 If, for example prices reflect formerly hidden costs, consumers can make a more informed choice and as a result more competition between businesses.

Black also discusses the benefits for businesses to provide consumer contracts in plain language.129 Plain language increases business efficiency and the enforceability of contracts, and en-courages consumer trust in business. An important point made by Black is that plain language forms take employees of busi-nesses less time to understand and therefore also fewer mistakes and fewer complaints. The writer explains that procedural fairness brought about by plain language in consumer contracts may ben-efit businesses through greater consumer trust.130

The plain language model law proposed by Black covers all types of consumer transactions, includes the sale or lease of real or personal property; services; mortgages and credit. (This conforms to the South African position discussed earlier). The writer there-

fore proposes a general standard and all documents and forms which may form part of the contract should also conform to plain language.131

Black makes the very important statement that it would be impossible to define plain writing precisely as that would result in a vague standard and it will then be left to the courts to develop workable guidelines for compliance.132 There needs to be a balance between precision and vagueness. Black proposes that this be done by using a double structure being a general standard for “simple format” and a general standard for “plain language.” “Simple for-mat” attempts to provide standards organizing with clarity the contract (word size, preventing excessively long lines etc.)

As part of the general standard for “plain language”, consum-er contracts must be drafted in a way that the average person is likely to understand in context and also refers to reasonableness.133 When it comes to enforcement, a dispute should be resolved by litigation rather than administration and consumers should also have a private right of action which includes remedies such as actual damages, penalties and injunctions.134

B. The Pennsylvania Plain Language LawOn 23 June 1993, the Plain Language Consumer Contract

Act (PLCCA) was signed into law in Pennsylvania. This law re-quires many lenders, retailers and landlords to redraft their loan, sale, lease and other agreements.The objective of the PLCCA is to protect consumers from making contracts that they do not under-stand, as well as to aid consumers in better understanding their rights and duties under such contracts.

The Act, however, does not cover all transactions. Various transactions are excluded from coverage by the PLCCA. One of these principal exemptions exists in the real estate arena, cover-ing conveyance documents and contracts, deeds and mortgages, certificates of title and title insurance contracts. Other important exemptions include contracts with any federal or state regulated financial institutions or any of their affiliates, as well as contracts subject to examinations by the Pennsylvania Public Utility Com-mission or the Federal Energy Regulatory Commission. Addi-tional exceptions include: commercial leases; marital agreements; contracts involving amounts of more than $50,000; contracts to purchase securities; and insurance policies and contracts.

The PLCCA provides guidelines pertaining to design & style (what a consumer contract should look like) as well as a read-ability test.

A violation of PLCCA is also by definition violation of the Unfair Trade Practices and Consumer Protection Law (UTPCPL)


and this subjects the drafting entity to monetary sanctions. Any creditor, seller or landlord who violates the Act will face penalties and damages, including the following: any actual damages result-ing from a violation of the PLCCA; court costs; reasonable at-torney’s fees; statutory damages of up to $100; or any other relief ordered by the court.

It is important to recognize that a violation of the PLCCA does not invalidate what might otherwise be a valid contract -- it merely subjects the entity drafting the contract to monetary sanc-tions for its violation. Moreover, there can be no violation if all parties have finished what was required under the contract, and it is a valid defense if the creditor, seller or lessor made a “good faith and reasonable effort” to comply with the PLCCA (§ 2208). Where a consumer waives his or her rights under the PLCCA, such a waiver is void according to § 2210.

Unfortunately the PLCCA seems to be completely under-used in practice. The biggest reason for this is most likely the many exclusions in terms of the PLCCA itself and the danger of a too vague standard is set which is ultimately not used at all. There hasn’t been much litigation involving the PLCCA although there were a few cases involving releases found in small print on the back of admission tickets.135

C. Unfair and Deceptive Acts and Trade Practices Every state has a consumer protection law that prohibits de-

ceptive practices, and many prohibit unfair or unconscionable practices as well. These statutes, commonly known as Unfair and Deceptive Acts and Practices (or UDAP statutes), provide funda-mental protection for consumers.

Carolyn L. Carter argues that these statutes constitute the main lines of defence in protecting consumers from predatory, deceptive, and unscrupulous business practices.136 Unfortunately the initial purpose for such legislation has been widely and fre-quently breached and according to the writer, in almost all states significant gaps or weaknesses undermine the promise of UDAP protection for consumers.137

UDAP laws prohibit deceptive practices in consumer trans-actions and, in many states, also prohibit unfair or unconscio-nable practices. Yet despite their critical role in ensuring market-place justice and fairness, the effectiveness of UDAP laws varies widely from state to state. The holes are (according to Carter) glaring. Legislation or court decisions in dozens of states have narrowed the scope of UDAP laws (for example Michigan and Rhode Island) or granted sweeping exemptions to entire indus-tries (Louisiana, New Hampshire and Virginia). Other states have placed substantial legal obstacles in the path of officials charged with UDAP enforcement, or imposed ceilings as low as $1,000 on civil penalties (Colorado, Indiana, Nevada, North Dakota and Wyoming). Several states have stacked the financial deck against consumers who go to court to enforce the law themselves (Florida and Oregon).138

From the comparative discussion of Europe and the UK di-rectly above, it is clear that plain language and the test for the or-dinary (average) consumer is extremely important when it comes to the assessment of a business’s fair (or unfair) honest (or decep-tive) acts and trade practices.

A case for the inclusion of plain language in these types of statues has been made by writers in the States in the past (see for example Black’s arguments above).

An attempt has also been made to link plain language legisla-tion to deceptive and unfair trade practice statues (as is the case in Pennsylvania and the PLCCA). Unfortunately the effect thereof seems to be very minimal providing insufficient protection for consumers.

Perhaps the explanation by Black why even plain language

has its limits may provide some light on the subject.139 He ex-plains that even with a proper plain language system in place, the reality is that consumers will not understand consumer con-tracts completely no matter how clearly they are written. Many plain language contracts will still go unread and although plain language encourages fairer contracts, the consumer will not nec-essarily be able to negotiate the terms thereof.

Despite the limit to plain language, “consumers have a right to understand the contracts they sign. They are entitled to contracts in simple language and readable format, contracts that state the rights and duties of both parties clearly. If plain language fits common notions of justice and can be achieved at reasonable cost, that is reason enough to justify it.”140

Based on the above arguments it would perhaps be advis-able for State Legislators to rethink plain language policy and take it into account when assessing deceptive and unfair trade practices.

D. Possible examples of vulnerable consumers in the United States Consumer Protection Framework

Is it possible to determine the average consumer in a con-sumer group for a particular type of consumer contract in the United States? Are there particular groups of consumers who are more vulnerable to deceptive trade practices and need ad-ditional protection?

The U.S. Department of Education’s National Institute of Literacy published a research document on 28 April 2013 in which it is estimated that 32 million adults can’t read where-as 21% of U.S. adults are only able to read below a 5th grade level.141 Surely many of these adults conclude consumer agree-ments during their lifetimes? Surely these adults (consumers) are more vulnerable to deceptive practices and dishonest dealings due to their language deficiencies? When the international posi-tion is assessed consumers in America who are elderly can also be classified as vulnerable consumers.

Another group of consumers in the United States who may also be vulnerable are consumers who are not proficient in English, as it is not their first language. In this regard Steven W. Bender makes out a case for consumer protection for Lati-nos to overcome language fraud and the difficulties surround-ing English-only in the marketplace.142 The writer states that existing consumer protection regulation too often assumes that consumers are proficient in English or, at least accompanied by an interpreter but in actual fact this gap has made some Latinos and other language minorities the victims of choice for unscru-pulous merchants who prey on their inability to understand the terms of the bargain.143

To safeguard consumers most vulnerable to unfair and de-ceptive trade practices, Bender contemplates a comprehensive strategy of reform that involves all relevant role-players (legis-latures, courts and merchants themselves). Reform regarding statutory consumer protection is proposed to place more re-sponsibility on businesses when they deal with language minor-ity consumers. This could be done for example by including language fraud specifically under UDAP fraud.144

It is apparent that even in the United States particular groups of consumers are more vulnerable and need additional consumer protection due to for example their age or language proficiency. There are however many other scenarios where the vulnerability of a consumer (and the exploitation of consumers due to this fact) will play a role. Legislation should be reformed to conform to this reality.


VI. CONCLUSION AND RECOMMENDATIONS TAK-ING INTO ACCOUNT COMPARATIVE ANALYSIS

A. Plain and understandable languageMelville states:“Plain language plays an important role in the Consumer Protection Act. After all, if one party in a relationship can-not understand what he or she is agreeing to, that person is disempowered. For a truly balanced relationship, both par-ties need to have equal access to understanding their rela-tionship and how their relationship is to be governed.”145

Although it may seem ironic that the term “plain language” can be interpreted in many ways, the point is that the term in-cludes all aspects regarding a notice, document or visual repre-sentation.146 It is important to remember that section 22 does much more than merely requiring the use of plain and under-standable language; it elevates the plain language requirement to a fundamental consumer right.147

This becomes relevant when one takes into account the comparative analysis with the EU, and the UK. In the latter two instances the whole concept of plain and intelligible language, the average (“ordinary”) consumer as well as the vulnerable con-sumer are assessed with regard to unfair commercial practices and unfair trading. In the South African context the consumer has a particular fundament right to fair and honest dealing (Part F of the CPA) which include unconscionable conduct (s 40) and false, misleading or deceptive representations (s 41). However, the consumer’s right to disclosure and information and his right to information in plain and understandable language is a right that goes much further than the assessment of unfair dealing and unconscionable conduct: It is elevated to a fundamental right applicable to all aspects of the supply of goods and services where any notice, document or visual representation is involved. In this way the South African position gives broader protection to con-sumers and a stricter duty on suppliers.

Unfortunately, the provisions of section 22 as it is current-ly worded, are not sufficient. I agree with Stoop that the plain language provisions in the CPA, are not pro-active and do not provide objective guidelines on how the use of plain language should be assessed.148 This is especially so in the absence of guide-lines or standards which have not been published in terms of the abovementioned legislation. Therefore, the courts will have to decide whether a document complies with plain language re-quirements.149 The broad definition of plain language in terms of section 22 is subject to discretion and interpretation and can in fact not be applied proactively.150 Stoop rightly argues that be-cause of the lack of objective assessment measures or guidelines, it is not clear whether the provisions of plain language have been implemented successfully in terms of the CPA.151

Plain language requirements are part of an effort to balance power between the parties to a contract and while bargaining powers between parties may once have been equal, it is certainly no longer so.152 Gordon and Burt suggest that suppliers set up their own evaluation methods for assessing whether or not a doc-ument is in plain language and warns that this should be done before suppliers embark on any large-scale rewriting project.153 The writers suggest research and user testing throughout the re-write process, a phased approach, working steadily towards best practice and terminology tools to ensure consistency.154

The criteria in terms of section 22(2) of the CPA are de-signed to be as flexible as possible in order to take into account every possible relationship between a consumer and a supplier in respect of goods and services.155 A great deal of discretion is therefore left to persons tasked with enforcing the provisions of

Melville states:“Plain language plays an impor-tant role in the Consumer Protec-tion Act. After all, if one party in a relationship cannot understand what he or she is agreeing to, that person is disempowered. For a truly balanced relationship, both parties need to have equal access to understanding their re-lationship and how their relation-ship is to be governed.”

the CPA to determine what is or is not, in any particular circum-stances, plain and understandable language.156 It is hopeful that section 22 will compel suppliers to redraft their contracts to meet the plain language requirements and that consumers may look forward to more user-friendly agreements and representations.

The provisions of section 112 of the CPA are a reminder of the seriousness of non-compliance with the plain language re-quirement and breaching of the consumer’s fundamental right to plain language.157 It provides that the National Consumer Tribu-nal may impose an administrative fine in respect of prohibited or required conduct to the amount of either ten per cent of the supplier’s annual turnover during the preceding year but not more than R1 million.158 The fine payable must be paid into the Na-tional Revenue Fund.159

In the EU and the UK the requirements for plain language are referred to as “plain and intelligible language” rather than “plain and understandable language” as is the case in the CPA in South Africa. It is submitted, however, that the interpretation remains the same.

The views of Micklitz (and others) are supported in their ex-planation that two standards are created, namely, plainness and intelligibility which need to be assessed differently.160

In the UK, the consumer should be given the opportunity to examine all the terms of a consumer agreement and as this envis-ages an ordinary person reading the contract, the kind of language used by the trader must therefore be such that he will find it plain and intelligible.161 This seems to be similar to the test suggested by South African writers.162

Ultimately it seems that the plain language requirement can only be properly assessed if a consumer agreement is in written form. The courts will have the final word on the matter. It would be unfair to apply an objective guide to all consumer agreements across the board as every transaction will be based on its own mer-its and circumstances.

Perhaps the Department of Trade and Industry (DTI) could publish general guidelines which could be adjusted to fit into a specific industry code (the motor industry for example). Where the industry guidelines do not conform to the general guidelines suggested by the DTI, the courts will have the final word on the matter.

B. The ordinary (average) consumer: Where does the vulner-able consumer fit in?Kirby describes the averagely literate and minimally experi-

enced consumer as a “new animal” in South African law.163 The ex-perience of this consumer will dictate whether or not a particular supplier is able to achieve the obligations imposed on him by sec-tion 22(2) of the CPA. Kirby also argues that this consumer will further determine the degree to which particular language (which is to form the basis of the transaction) is plain and understandable


and whether or not it is sufficient to protect both the interests of the consumer and the supplier.164

Where does the vulnerable consumer fit in? Should the or-dinary consumer be assessed taking into account the vulnerable consumer for each type of consumer transaction or agreement; or should each type of vulnerable consumer as set out in section 3(1)(b) of the CPA be regarded as a separate group of consumers

which means that the ordinary vulnera-ble consumer of each vulnerable group of consumers should be assessed?

Business and legal writers must now write for the person with mini-mal experience; in

other words, a first-time user of goods and services.165 Clearly the protection of such consumers also underscores the necessity for plain language.166

According to Kirby the level of intelligence and education of a particular consumer may very well inform what is plain and what is understandable in any particular circumstances.167 Section 22(2) further assumes that all consumers have average literacy skills and minimal experience as consumers of the relevant goods and services.168

The EU and UK can provide guidance in the assessment of both the ordinary consumer as well as the vulnerable consumer. In the EU (in terms of the UCPD) and the UK (CPUT Regula-tions 0f 2008) the term “average consumer” rather than “ordinary consumer” is used. This distinction becomes important to deter-mine the average consumer in a particular group of consumers. It is recommended that the term “ordinary consumer” in the CPA be substituted with the term “average consumer” to bring South Africa more in line with international provisions.

The “average consumer test” is not without controversy in the EU or the UK but is a good foundation upon which the ordi-nary “average” consumer in South Africa (section 22 CPA) could be determined. With regard to the vulnerable consumer, the posi-tion in South African is simplified by giving particular examples of vulnerable consumers who need additional protection as part of the application of the CPA (section 3(1)(b)). Similarly to the EU and UK position young people and the elderly are also in-cluded but goes further to make specific mention of low-income and illiterate consumers as well. Ervine correctly argues that fac-tors such as ethnic origin, education and economic circumstances should be included in the test for the average consumer and in my opinion is a paramount inclusion in case of South African consumers.169

It is submitted that, in the case of South Africa (in terms of the CPA), the vulnerable consumer should be included in any assessment as to the “ordinary consumer of the class or group of persons for which the particular goods or services are supplied to” rather than be dealt with separately. In this regard the interpreta-tion of the criteria to assess vulnerable consumers in the UK could be helpful.

It could be argued that comparing the ordinary consumer in South Africa to the ordinary (average) consumer in the UK (or even to the position in the United States) is to compare apples with oranges. Surely it would be unfair to compare consumers in a developing country such as South Africa to a first world country such as for instance the UK? But even in the United States the protection of vulnerable consumer groups is something that needs to be addressed.

It must be ensured that vulnerable consumers are protected from the risks deriving from the effects of the economic crisis, the ageing of the population, and the increased com-plexity of digital markets.

The fact of the matter is that the world is becoming a global community and countries are moving “closer” together in terms of communication, technology and, more importantly, trade. People from third world or developing countries often immigrate or obtain working permits in search of a better life in first world countries. This shift in the global paradigm can no longer be ig-nored as it clear from the recognition of vulnerable consumers and the need to protect them.

Ultimately, it must be ensured that vulnerable consum-ers are protected from the risks deriving from the effects of the economic crisis, the ageing of the population, and the increased complexity of digital markets, together with the difficulty some consumers may encounter in mastering the digital environment.

* LLB (UP), LLM (UNISA), LLD (UP), Senior lecturer, Univer-sity of Pretoria, Attorney of the High Court of South Africa.

1 S 22(2) CPA. The Sotuh African Consumer protection Act may be found at, http://www.saflii.org/za/legis/num_act/cpa2008246.pdf. 2 S 22(1)(a) CPA.3 S 22(1)(b) CPA.4 S 22(3) CPA.5 Gordon F & Burt C “Plain Language” 2010 (April) Without Preju-dice 59-60 at 60 (hereinafter referred to as Gordon & Burt). See also Stoop PN “Plain Language and Assessment of Plain Language” in Private Law: Rights, Duties and Conflicts (2010) International Association of IT Lawyers 636-648 at 639 (hereinafter referred to as Stoop (2010)).6 Gordon & Burt at 60.7 Stoop (2010) at 636.8 Id.9 Id. See also Gouws M “A Consumer’s Right to Disclosure and Infor-mation: Comments on the Plain Language Provisions of the Consumer Protection Act” 2010 South African Mercantile Law Journal 79-94 at 81 (hereinafter referred to as Gouws).10 Preamble to the CPA.11 Gouws at 81.12 Id.13 Id.14 Kirby N “Clearly clear? Plain and understandable language in terms of the Consumer Protection Act?” August 2011 Legal Brief: Werksmans Attorneys http://bit.ly/Vt1uCw, (accessed on 19/05/2014) at 22. (Herein-after referred to as Kirby 2011).15 Id. See also Monty S & Hurwitz D “Avoiding the sesquipedalian trap” 2012 (February) Without Prejudice at 58 (hereinafter referred to as Monty & Hurwitz).16 Melville NJ The Consumer Protection Act Made Easy (2010) at 165 (hereinafter referred to as Melville).17 Gouws at 88.18 Gouws at 88-89.19 Kirby 2011 at 22.20 Id.21 Id.22 Monty & Hurwitz at 58. See also Melville at 163-164.23 Gordon & Burt at 60.24 Melville at 166-170.25 Gouws at 91-93.26 Newman S “The influence of plain language and structure on the readability of contracts” 2010 Obiter 735-745 at 745 (hereinafter re-ferred to as Newman).27 Newman at 738-741.28 Newman at 741.29 Id.30 Newman at 741-745.

http://www.saflii.org/za/legis/num_act/cpa2008246.pdf

http://bit.ly/Vt1uCw,%20(accessed%20on%2019/05/2014


31 Kirby 2011 at 23.32 Stoop (2010) at 641.33 Id.34 Id. See also Melville at 162.35 Gordon & Burt at 60.36 Gouws at 87.37 Mail & Gaurdian, article by staff reporter “SA adults lag behind in global literacy stakes” -http://bit.ly/XeZSOw (accessed on 17/05/2014).38 Id.39 Kirby 2011 at 23.40 Gordon & Burt at 60. See also Melville at 161.41 Kirby 2011 at 23.42 Id.43 Id.44 Gouws at 88.45 Id.46 Id.47 Id.48 Ramsay I, Consumer Law and Policy (2012) 3rd ed at 156. Hereinaf-ter referred to as Ramsay (2012).49 Ramsay (2012) at 156-15750 Reg 2 UCPD. 51 For purposes of this discussion “supplier” in terms of the CPA (South Africa) and “trader” in terms of the EU and UK position will be regarded as the party who supplies goods and services to the consumer in the ordinary course of their (the “supplier” or “traders”) business.52 Reg 2 UCPD.53 Ramsay (2012) at 164.54 Recital 18 UCPD.55 “Guidance on the implementation/application of Directive 2005/29/EC on unfair commercial practices” SEC (2009) 1666. Here-inafter referred to as Guidance UCPD (2009)56 Guidance UCPD (2009) at 25.57 Id.58 Guidance UCPD (2009) at 26.59 Id.60 Id.61 Guidance UCPD (2009) at 27. See also Case C-313/94 F.lli Graf-fione SNC v Ditta Fransa [1996] ECR I-06039, para 26.62 Guidance UCPD (2009) at 28.63 Guidance UCPD (2009) at 29.64 Guidance UCPD (2009) at 30.65 Id.66 Id.67 Id. This is a particular problem in the South African context.68 Guidance UCPD (2009) at 30.69 Guidance UCPD (2009) at 31.70 Id.71 Micklitz HW (and others) (Gen eds) Understanding EU Consumer Law (2009) at 88 (hereinafter referred to as Micklitz (and others) (2009)). 72 Id.73 Id.74 Marus L “Gobbledygook has got to go” 2010 (November) Enter-prise Risk at 24 (hereinafter referred to as Marus).75 Id.76 Stoop (2010) at 638.77 Ervine WCH Green’s Consumer Law in Scotland (2008) 4th ed at 216 (hereinafter referred to as Ervine 216).78 Id.79 Id.80 Ervine at 216.81 Micklitz (and others) (2009) at 136.82 Id.83 Id.84 Id.

85 Reg 2 CPUT Regulations 2008.86 Ervine at 231.87 Id.88 Id.89 Id.90 At 152.91 Id.92 “Report from the Commission to the European Parliament, The Council and the European Economic and Social Committee” COM (2013) 139 Final at 13.93 Id.94 Ervine at 232.95 Id.96 Id.97 Id.98 [2012] EWHC 2927 (Admin) par 8.99 Collins, H “Harmonisation by Example: European Laws against Unfair Commercial Practices” Modern Law Review (2010) (Vol 73) 89–118 at 99. Hereinafter referred to as Collins MLR (2010).100 Collins MLR (2010) at 100.101 Id.102 Reg 27E CPUT (Amendment) Regulations 2013.103 Reg 27H CPUT (Amendment) Regulations 2013.104 Reg 27J CPUT (Amendment) Regulations 2013.105 [2001] UKHL 52.106 Par 20. 107 Par 33.108 Par 33.109 [2011] EWHC 1237 (Ch).110 Par 1.111 Par 128.112 Par 128.113 Par 128.114 Par 140.115 Par 158.116 Par 161.117 Par 173. 118 Par 173.119 Par 173.120 Par 240.121 [2011] EWHC 106 (Ch) par 62.122 Par 128.123 Bernard Black A Model Plain Language Law 33 Stan. L. Rev. 255-300, (1981).124 At 255.125 Black at 256.126 At 258.127 At 259.128 At 261.129 263-264.130 At 264.131 272.132 273.133 282.134 286-292.135 See for example Beck-Hummel v. Ski Shawnee, Inc., 902 A. 2d 1266 - Pa: Superior Court 2006.136 Carolyn L. Carter A 50-State Report on Unfair and Deceptive Acts and Practices Statutes National Consumer Law Centre Inc. (February 2009) http://www.consumerlawcentre.org accessed on 17/06/2014.137 Report138 See Report Summary.139 See Black at 265-267.140 Black at 259.141 http://www.statisticbrain.com/ accessed on 17/06/2014.

http://onlinelibrary.wiley.com/doi/10.1111/mlr.2010.73.issue-1/issuetoc

http://www.consumerlawcentre.org

http://www.statisticbrain.com/


142 Steven W. Bender Consumer Protection for Latinos: Overcoming Lan-guage Fraud and English-Only in the Marketplace 45 Am. U. L. Rev. 1027-1109.143 Bender at 1029,1030. See also FN 201 where the writer refers to other minority groups to include: American Indians, Asian Americans and Alaskan Natives.144 See 1069.145 Melville at 157.146 Melville at 158.147 Gouws at 85.148 Stoop (2010) at 638.149 Stoop (2010) at 640.150 Id.151 Stoop (2010) at 641.152 Id.153 Gordon & Burt at 60.154 Id.155 Kirby 2011 at 22-23.156 Id.157 Marus at 24. See also Marus L “Has the gobbledygook gone yet?” 2011 (March) Enterprise Risk at 32.158 An estimated 69,920.00 EUROS.159 S 122(5).160 Micklitz (and others) (2009) at 136.161 Id.162 See Melville at 158; Stoop (2010) at 638; Gouws at 85; Gordon & Burt at 59; Kirby 2011 at 22-23. 163 Kirby 2011 at 22-23.164 Id. The purpose of the CPA in terms of s 3 should also be taken into account: Ultimately aiming to protect the vulnerable consumer. 165 Gordon & Burt at 60.166 Gouws 8at 2.167 Kirby 2011 at 22-23.168 Id.169 Ervine at 232.


Reassessing Payday Lenders in

the Wake of Their Most Negative

Court Holding to Date

On June 26th, 2014, the New Mexico Supreme Court held, in State ex rel. King v. B&B Investment Group, Inc., that loans issued by so-called “payday lenders” may be deemed unconscionable even if a loan’s contractual terms are within the scope of codified law. The decision is the first issued by a

state’s highest-level court to hold that payday loans, even if technically “legal” under state law, may nonethe-less be deemed unconscionable under the aggregate circumstances of a given situation. While the payday loan industry has largely evaded significant scrutiny in courts of law, the New Mexico court’s holding in B&B could reflect a broader shift in beliefs that the controversial industry is long overdue for substantive oversight – particularly in Texas, where payday loans remain entirely unregulated at the state level.

INTRODUCTION

By Joshua Cooper*


CASEDefendant B&B Investments was a subprime lender from

Illinois that opened storefront lending operations in three New Mexico cities in the early 2000s.1 Although most of the loans it issued during its first years of operation were traditional payday loans, in 2006 B&B introduced a new lending instrument called a “signature loan.”2 Unlike its payday loans, which typically ma-tured in 35 days or fewer, B&B’s signature loans matured over the course of a full year.3 Even though borrowers’ principal amounts were generally small, in some cases as little as $50, B&B none-theless charged effective annual percentage rates (APRs) of up to 1,500 percent.4

Further, the company targeted its loans to financially unsophisticated, low-income, and often-desperate consumers.5 In an example cited by the court, Henrietta Charley, a medical assistant and single mother of three, worked 32 hours a week at a pay rate of $10.71 per hour. Although her take-home pay was approximately $615 every two weeks, her monthly expens-es exceeded $1,000 – not including food and gas.6 When her ex-husband failed to pay his court-stipulated child support on a regular basis, Charley found herself in need of a loan simply to pay for groceries and gas.7 She visited a B&B storefront and took out a signature loan for a mere $200. By the time the loan matured, however, the total finance charge due was $2,160.64.8

After receiving numerous consumer complaints alleg-ing unfair business practices on B&B’s part, the New Mexico Attorney General brought suit alleging that the company’s

lenders created and marketed loan in-struments that were procedurally and substantively uncon-scionable and violat-ed the New Mexico Unfair Practices Act (UPA).9 While the trial court found that the defendant’s loans

were procedurally unconscionable, they declined to hold them substantively unconscionable on the basis that the New Mexi-co legislature had explicitly refrained from issuing any regula-tions or guidance concerning caps on payday-loan APRs.10 The New Mexico Supreme Court disagreed and, in reversing the lower court’s ruling, stated that “[c]ourts are not prohibited from deciding whether a contract is grossly unreasonable or against public policy simply because there is not a statute that specifically limits contract terms.”11 The court further noted that, “ruling on substantive unconscionability is an inherent equitable power of the court, and does not require prior legis-lative action.”12

ANALYSIS Payday lending has emerged as of late as a topic of na-tional interest. A consumer advocacy group called National Peo-ple’s Action, for instance, recently placed ads on the Discovery Channel’s popular “Shark Week” programming comparing the predatory lending practices of payday lenders to literal sharks, and in August 2014 the HBO late-night series “Last Week To-night with John Oliver” dedicated a majority of an episode to the topic, advising Americans to “literally do anything else” other than borrow from a payday lender.13 Furthermore, the CFPB is currently considering promulgating national rules such as man-datory-disclosure requirements and across-the-board interest-rate caps to rein in payday lenders.14 Negative attitudes concerning

High-interest, short-term lending vehicles such as payday and auto-title loans have been matters of controversy among state regulators and con-sumer-protection groups for quite some time.

payday lenders appear to be considerably on the rise, and at least the inklings of a national movement to put an end to their unjust practices seems to be emerging. Still, high-interest, short-term lending vehicles such as payday and auto-title loans have been matters of controversy among state regulators and consumer-protection groups for quite some time. In addition to their generally-astronomical interest rates, numerous studies have shown that these types of loans con-sistently target America’s most vulnerable consumers. In particu-lar, payday lenders’ most prolific customers are people with low incomes, no formal bank accounts, and little access to traditional types of loan collateral; those who have recently suffered setbacks such as loss of employment or illness of an immediate family member; and consumers who have never finished high school, let alone college, and are largely ignorant of the repercussions payday loans often entail.15

In addition to charging high interest rates, payday lend-ers have come under fire for their aggressive targeting of minority consumers, as well as their equally aggressive collection tactics. In Texas, the CFPB recently took enforcement action against Irving-based ACE Cash Express for using, “unfair, deceptive and abusive” practices to collect payday-loan debts.16 The increasingly ubiquitous presence of payday and other short-term loan outlets in areas with large minority populations, coupled with advertis-ing that deceptively makes them appear to be an “easy way” of obtaining “fast cash,” only serve to worsen an already troubling situation.17

These practices have not gone unnoticed, however, and a number of states have put regulations in place to regulate the playing field between lenders and consumers. Florida and Vir-ginia, for instance, mandate a waiting period of at least one day after a loan is repaid before a lender can make another, separate loan to the same borrower.18 19 Other states have passed interest rate caps on payday loans: New York limits them to 25 percent,20 and Virginia has a statewide cap of 36 percent.21

While Texas once capped payday-loan interest rates at 10 percent, pursuant to its usury laws, payday lenders figured out a way to skirt the regulation. Using laws originally designed for companies that repair credit, payday lenders began refashion-ing themselves as “credit service organizations” (CSOs).22 The moniker stems from the state’s Credit Service Organization Act of 1987, which allows companies to register with state authorities and provide fee-based services for the purpose of helping custom-ers improve their credit rating. CSOs can also help consumers obtain loan extensions through third-party lenders.23 In essence, the CSO functions as a broker between the lender and borrow-er, charging a fee for the service of “connecting” the two. In the hands of a payday lender, however, this CSO “fee” is not counted as interest, so the lender effectively avoids paying the 10 percent cap required under Texas usury laws.24

In 2004, however, a case involving the exploitation of CSO loopholes made it all the way to the Fifth Circuit. In Lovick v. Ritemoney Ltd., the court concluded that CSO fees did not con-stitute “interest” per se, and were thus not subject to Texas usury laws. 25 The plaintiff, Betty R. Lovick, had obtained a $2,000 auto-title loan from a broker that utilized the lending services of the defendant, Ritemoney. Lovick’s loan was set at an ostensible APR of 10 percent, but on top of that amount she agreed to pay a $1,500 fee to the broker for “loan brokerage or other credit ser-vices.”26 Lovick’s claim was dismissed on summary judgment by the trial court before the Fifth Circuit Court of Appeals accepted it for adjudication. Although the circuit court noted that, “to say the least, a $1,500 fee for a $2,000 loan is more than question-able,”27 it ultimately affirmed the case’s dismissal, concluding that “[since] the Texas Legislature has not restricted the amount of a


CSO service fee in proportion to the services provided[,] we can-not substitute our judgment.”28

The question to be asked, then, is why the Texas leg-islature has failed to engage in any substantive action to regu-late payday loans. A likely answer lies in the significant lobbying power of the payday-lender industry. During the 2013 Texas leg-islative session alone, payday loan companies spent over $4.4 mil-lion on lobbyists advocating their cause.29 Further, the industry’s campaign contributions to members of the legislature doubled between 2008 and 2012, with House Speaker Joe Straus receiving a substantial $312,000.30 When Sen. Wendy Davis tried to initi-ate meaningful reforms in 2011, lawmakers outright rejected her proposal and instead backed a much weaker package sponsored by then-House Financial Services Committee Chair Vicki Tru-itt. In a turn of events unlikely to surprise an astute observer of Texas politics, Truitt left office and is now employed as a lobbyist for payday lender ACE Cash Express.31 Further, Texas Finance Commission Chairman William White has repeatedly resisted attempts to regulate payday lenders via legislative means. A rea-sonable observer might question whether White’s objections have something to do with the identity of his employer when the legis-lature is not in session: Cash America, a leading payday lender.32 On the brighter side, the Texas Senate managed to pass its first-ever payday-loan regulation bill with actual teeth, SB 1247, dur-ing its 2013 session. The bill capped payday-lender interest rates at 36 percent, among other reforms, and would have likely in-

flicted a substantial blow to the payday-lending juggernaut in Texas.33 Alas, the Texas House ulti-mately killed the bill, with Rep. Charles “Doc” An-derson – himself a recipi-ent of $25,000 in payday lobby money – opining, “[payday lending] allows

individuals to exercise their freedom.”34 One wonders how the broader goal of “freedom” is achieved when hard-working Ameri-cans are stuck with an albatross of a loan with a 1,000 percent interest rate. If anything, such consumers have significantly less freedom of choice while between a rock and a hard place paying off high-interest loans. As a result of the legislature’s failure to pass meaning-ful payday-loan reform, Texas cities have taken to regulating the industry at the municipal level.35 The city of Houston passed a reform package that went into effect on July 1, 2014.36 Payday loan principals are now capped at 20 percent of a borrower’s gross monthly income, and auto-title loans are restricted to 3 percent of a consumer’s gross annual income or 70 percent of the car’s value, whichever is lower.37 Additionally, single-payment payday loans

may only be refinanced a total of three times, while installment loans are restricted to no more than four payments.38 Further, the principal owed must fall by at least 25 percent with each install-ment or refinancing of the loan.39 Houston’s new regulations are similar to ones already passed by city officials in Austin, Dallas, El Paso, and San Antonio.40 Of Texas’ six largest cities, only Fort Worth still lacks any regulations on payday and auto-title lend-ing.41 Unsurprisingly, industry lobbyists have vowed to challenge the ordinances in court.42

CONCLUSION The New Mexico Supreme Court’s holding in State ex rel. King v. B & B Investment Group reflects an evolving national sentiment in regard to payday-lending practices—they prey upon some of the nation’s most vulnerable consumers and charge inter-est rates that were once upon a time associated solely with the illegal practice of loan-sharking. As a result of the court’s decision, consumers may have the weapon of unconscionability claims against payday lenders at their potential disposal. It is entirely likely that other state courts – and, possibly, federal courts – may follow New Mexico’s lead in bringing much-needed judicial over-sight of the industry. Payday lenders and their supporters-cum-enablers are not likely to take such challenges lightly, however, and will almost certainly aim to maintain the status quo, particu-larly in the minority of states with no payday-industry regulations of any kind. For the time being, payday lenders are likely to con-tinue seeking any exploitable legal loopholes they can find.

*Joshua Cooper is a third-year law student at the Univ. of Houston Law Center.

1 State ex rel. King v. B&B Inv. Grp, Inc., 329 P.3d 658, 662 (N.M. 2014).2 Id.3 Id.4 Id.5 Id.6 Id. at 664.7 Id.8 Id.9 Id.; see also N.M. Stat. Ann. § 57-12-2.10 Id. at 662-63.11 Id. at 670.12 Id. citing the landmark case of Williams v. Walker-Thomas Furniture Co., 350 F.2d 445 (D.C. Cir. 1965).13 The John Oliver segment may be found at, http://www.youtube.com/watch?v=PdylgzybWAw. See also Mandi Woodruff, The Reign of Payday Lenders May Soon Be Over, Yahoo Fin. (Aug. 13, 2014), http://finance.yahoo.com/news/the-reign-of-payday-lenders-may-soon-be-over-201715917.html.14 Heather S. Klein, CFPB Payday Loan Rulemaking is Imminent and Will Target Repeated Borrowing, CFPB Monitor (Mar. 25, 2014), http://www.cfpbmonitor.com/2014/03/25/cfpb-payday-loan-rulemaking-is-imminent-and-will-target-repeated-borrowing/.15 See, e.g., Kathleen Burke et al, CFPB Data Point: Payday Lending, CFPB Office of Research (March 2014), http://files.consumerfinance.gov/f/201403_cfpb_report_payday-lending.pdf.16 CFPB Takes Action Against ACE Cash Express for Pushing Payday Borrowers Into Cycle of Debt, CFPB Office of Research (Jul. 10, 2014), http://www.consumerfinance.gov/newsroom/cfpb-takes-action-against-ace-cash-express-for-pushing-payday-borrowers-into-cycle-of-debt/.17 Id.18 Fla. Stat. § 560 et seq.19 Va. Code Ann. § 6.2-1816.20 NY CLS Penal § 190.40.

As a result of the legis-lature’s failure to pass meaningful payday-loan reform, Texas cities have taken to regulat-ing the industry at the municipal level.

http://www.youtube.com/watch?v=PdylgzybWAw

http://www.youtube.com/watch?v=PdylgzybWAw


21 Va. Code Ann. § 6.2-1817.22 Better Business Bureau of Metropolitan Dallas, The Payday Loan Industry of Dallas, Texas, BBB of Metropolitan Dallas (Jan. 2012), http://www.texasfairlending.org/wp-content/uploads/2013/01/BBB-Dallas-on-Payday-Loan-Industry.pdf23 Id. at 3.24 Id.25 Lovick v. Ritemoney Ltd., 378 F.3d 433 (5th Cir. 2004).26 Id. at 436.27 Id. at 438.28 Id.29 Patricia Kilday Hart, Payday Lenders Continue Spending Spree on Lobbyists, Hous. Chron. (May 2, 2013), http://blog.chron.com/texaspolitics/2013/05/payday-lenders-continue-spending-spree-on-lobbyists/.30 Texans for Public Justice, Payday-Funded Pols Push Tepid Loan Re-forms, Lobby Watch (Mar. 18, 2013), http://info.tpj.org/Lobby_Watch/pdf/PayDay2013.pdf.31 Id.32 Forrest Wilder, How the Payday Loan Industry Works Regulators from the Inside, Texas Observer (Jan. 8, 2014), http://www.texasob-server.org/how-texas-payday-loan-industry-works-regulators-inside/.33 Senate Bill No. 1247, 83rd Legislative Session, found at http://www.capitol.state.tx.us/tlodocs/83R/billtext/html/SB01247I.htm.34 Forrest Wilder, A Last-Ditch Effort to Rein in Payday Loans, Texas Observer (May 8, 2013), http://www.texasobserver.org/a-last-ditch-effort-to-rein-in-payday-loans/.35 See, e.g., Editorial Board, Cities Are Picking Up the Fight Against Payday Lenders, The Dallas Morning News (Apr. 10, 2014), available at http://www.dallasnews.com/opinion/editorials/20140410-editorial-cities-are-picking-up-the-fight-against-payday-lenders.ece.36 Houston Code of Ordinances § 28, Art. XV.37 Id. at Sec. 28.502.38 Id.39 Id.40 Forrest Wilder, Houston Could Become Fifth Major Texas City to Crack Down on Payday Loans, Texas Observer (Nov. 25, 2013), http://www.texasobserver.org/houston-become-fifth-major-texas-city-crack-payday-loans/.41 Id.42 Corrie MacLaggan, Fight Over Payday Loans, From Capitol to Campaign Trail, The Texas Tribune (Jan. 15, 2014), http://www.texas-tribune.org/2014/01/15/payday-lending/.


Consumer News AlertRecent Decisions

Since October 2006, the Center for Consumer Law has published the “Consumer News Alert.” This short newsletter contains everything from consumer tips and scam alerts, to shopping hints and financial cal-culators. It also has a section just for attorneys, high-lighting a recent decision. The alert is delivered by email three times a week. Below are some of the cases

highlighted during the past few months. To view the full opinion, click on the link; or if that does not work, copy the link and paste it to your browser. To subscribe and begin receiving your free copy of the Consumer News Alert in your mailbox, visit the Center for Consumer Law, http://www.uhccl.org.

CIRCUIT COURTS

Dispute was outside scope of arbitration clause. The Third Circuit held that a dispute over a let-ter sent to doctors was outside the scope of a clause requiring arbitra-tion of disputes “regard-ing the performance or interpretation of the Agreement.” The court found that “whether CIGNA performed its

obligations under the Agreement has no bearing on whether it harmed the [device company] by providing physicians with mis-leading information” about their services. The Third Circuit also found that derivative claims were outside the scope of the Agree-ment’s arbitration provision. The court found that the underlying claims did not concern the “performance or interpretation of the

Agreement” and therefore the claims would not have been arbitra-ble even if the device company brought them directly. CardioNet, Inc. v. Cigna Health Corp., 751 F.3d 165 (3d Cir. May 6, 2014). http://www.gpo.gov/fdsys/pkg/USCOURTS-ca3-13-02496/pdf/USCOURTS-ca3-13-02496-0.pdf

Consumer filing claim under FDCPA does not have to first dispute the debt. The district court held that the consumer could not bring suit challenging the information contained in a debt collector’s let-ter without having first disputed the validity of the debt pursuant to the FDCPA’s validation procedure. The Third Circuit reversed, finding the statute’s text provides no indication that Congress in-tended to require debtors to dispute their debts under § 1692g before filing suit under § 1692e, and in fact, the statutory lan-guage suggests the opposite. The court noted that the language of § 1692g indicates that disputing a debt is optional. McLaughlin v. Phelan Hallinan & Schmieg, LLP, 756 F.3d 240 (3d Cir. Jun. 26, 2014). http://docs.justia.com/cases/federal/appellate-courts/ca3/13-2015/13-2015-2014-06-26.pdf

Fair Debt Collection Practices Act does not require consumer dispute a debt to sue under the Act. The Fourth Circuit rejected the argument that a debtor must avail herself of the dispute provision in order to enjoy the FDCPA’s other protections. Russell v. Absolute Collec-tion Services, 2014 WL 3973792 (4th Cir. Aug. 15, 2014). http://caselaw.findlaw.com/us-4th-circuit/1675505.htmlCompany does not violate the Fair Credit Reporting Act when it ob-tains a “consumer report” in the name provided by an imposter in order to verify a consumer’s identity and eligibility. The Sixth Circuit held that a company that attempts to verify a customer who is using a stolen identity is not liable to the true holder of the social security number provided by the thief. “We reject the contention that a company, dealing with an imposter purporting to be the consumer, should be held liable when the company attempts in

The court found that the underlying claims did not concern the “performance or interpretation of the Agreement” and therefore the claims would not have been arbitrable even if the device company brought them directly.

http://www.uhccl.org

http://www.gpo.gov/fdsys/pkg/USCOURTS-ca3-13-02496/pdf/USCOURTS-ca3-13-02496-0.pdf


http://docs.justia.com/cases/federal/appellate-courts/ca3/13-2015/13-2015-2014-06-26.pdf


http://caselaw.findlaw.com/us-4th-circuit/1675505.html



good-faith to verify the consumer’s identity and eligibility for commercial services.” As the court noted, “This is a case about identity theft and apparently reflects the axiom that no good deed should go unpunished.” Bickley v. Dish Network, LLC, 751 F.3d 724 (6th Cir. May 13, 2014). http://www.ca6.uscourts.gov/opin-ions.pdf/14a0098p-06.pdf

Government is not immune from suits under FCRA. FRCPA applies to paper receipts not emails. The Seventh Circuit held that the FCRA does waive the U.S.’s immunity from suit for damages. The court held that this conclusion follows easily from FCRA’s text. The Court of Appeals then turned to the alleged FCRA violation: Does the FCRA prohibit an email receipt that includes both the last four digits and the expiration date? The court held that the relevant statutory provision addresses only paper receipts given to a consumer at the point of sale, not to email receipts. Bormes v. United States, 2014 WL 3583937 (7th Cir. Jul. 22, 2014). http://docs.justia.com/cases/federal/appellate-courts/ca7/13-1602/13-1602-2014-07-22.pdf

Tribal arbitration agreement is unconscionable. The Seventh Circuit found that a class of borrowers did not have to proceed with ar-bitration conducted by the Cheyenne River Sioux Tribe (“Tribe”) in South Dakota “because the arbitral mechanism specified in the agreement is illusory.” The agreements provided that any disputes would be resolved by arbitration “conducted by the Cheyenne River Sioux Tribal Nation by an authorized representative in ac-cordance with its consumer dispute rules.” The arbitrator would be a Tribal Elder or members of the Tribal Council. The agree-ment also provided it was governed by the laws of the Tribe. The Seventh Circuit reversed the district court, conclud-ing that the plaintiffs’ claims should not have been dismissed. It reached that conclusion based on applying two different analy-ses. First, it applied the rule that forum selection clauses (like the one here selecting arbitration by the Tribe) are enforceable unless

“unreasonable under the circumstances.” The court found the forum selection was illusory and therefore unreasonable because the Tribe “does not authorize Arbitration…does not in-volve itself in the hiring of …arbitrator[s], and [] does not have consumer dispute rules.” Second, the Seventh

Circuit considered the enforceability of the arbitration agree-ment under Illinois law (which applied if the agreement’s choice of Tribal law was invalid). Under Illinois law, the court found that the arbitration agreement was unconscionable. It found it was procedurally unconscionable (despite the plaintiff’s having the right to opt out) because the plaintiffs could not have found out about the dispute resolution process and rules, since there were none. It was substantively unconscionable because the dis-pute resolution mechanism did not exist and any arbitrator was likely to be biased. The court also noted that its finding of un-conscionability was not preempted by the decision in Concepcion. Jackson v. Payday Financial, LLC, __ F.3d __, 2014 WL 4116804 (7th Cir. Aug. 22, 2014). http://caselaw.findlaw.com/us-7th-cir-cuit/1676414.html

When a party reads FACTA in an objectively reasonable manner, court does not have to consider facts related to subjective intent to as-sess willfulness. The Eighth Circuit held that a membership whole-saler who printed more than the last five digits of the customer’s

credit card, labeled “membership number,” did not willfully vio-late FACTA. The court found the retailer reasonably could have assumed the statue prohibits printing more than the last five digits of the credit card, so labeled. Hammer v. Sam’s East Inc., 754 F.3d 492 (8th Cir. Jun. 5, 2014). http://caselaw.findlaw.com/us-8th-circuit/1668979.html

Website’s terms of use unenforceable when consumer lacks reasonable notice. The Ninth Circuit held that a website user was not bound by terms available via a link at the bottom of a website, where the user was not required to check a box agreeing to the terms and was not given reasonable notice that the terms were there. The court rejected an argument that the “terms” link was “close enough” to other key content that the user should have clicked on it, the court held:

[W]here a website makes its terms of use available via a conspicuous hyperlink on every page of the website but otherwise provides no notice to users nor prompts them to take any affirmative action to demonstrate as-sent, even close proximity of the hyperlink to relevant buttons users must click on—without more—is insuffi-cient to give rise to constructive notice. . . . [C]consum-ers cannot be expected to ferret out hyperlinks to terms and conditions to which they have no reason to suspect they will be bound.

Nguyen v. Barnes & Noble Inc., 2014 WL 4056549 (9th Cir. Aug. 18, 2014). http://cdn.ca9.uscourts.gov/datastore/opin-ions/2014/08/18/12-56628.pdf

Debt collectors letter does not violate FDCPA. The Eleventh Circuit found that although a collector’s letter was an “initial commu-nication,” it did not violate the Act. The court found that the alleged error, using the term creditor instead of debt collector in the validation notice in the letter, was not misleading. The court found this error would not mislead the sophisticated consum-er. Caceres v. McCalla Raymer, LLC, 755 F.3d 1299 (11th Cir. Jun. 26, 2014). http://media.ca11.uscourts.gov/opinions/pub/files/201312450.pdf

STATE COURTS

Cancellation of satellite television contract ten days into a twelve-month contract is “immediate cancellation.” The Arkansas Supreme Court held that a consumer was not bound by an arbitration clause because she did not accept the terms of the contract when she cancelled the agreement. Although the defendant argued that she “terminated” the agreement by her continued use, the court held nine or ten days of us in a twelve-month contract was clos-er to “immediate termination.” DIRECTV, Inc. v. Murray, 423 S.W. 3d 555 (Ark. Oct. 4, 2012). http://caselaw.findlaw.com/ar-supreme-court/1613759.html

Payday loan is substantively and procedurally unconscionable. The New Mexico Supreme Court held that notwithstanding the fact that the interest charged did not violate other state lending laws, the payday lenders loan was unconscionable. The court stated, “We hold that loans bearing interest rates of 1,147.14 to 1,500 percent contravene the public policy of the State of New Mex-ico, and the interest rate term in Defendants’ signature loans is substantively unconscionable and invalid.” State of New Mexico v. B&B Inv. Group, Inc., 329 P.3d 658 (N.M. Jun. 26, 2014). http://statecasefiles.justia.com/documents/new-mexico/supreme-court/2014-34-266.pdf?ts=1403871449

It was substantively unconscionable be-cause the dispute reso-lution mechanism did not exist and any arbi-trator was likely to be biased.

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http://statecasefiles.justia.com/documents/new-mexico/supreme-court/2014-34-266.pdf?ts=1403871449


Unconscionability is a question of law, and unconscionable provision may be severed from an arbitration agreement. The Texas Supreme Court held that a provision in an arbitration clause waiving the Deceptive Trade Practices Act was unconscionable, but the clause was otherwise enforceable. The unconscionable provision could be severed from the arbitration clause. Venture Cotton Coop. v. Free-man, 435 S.W.3d 222 (Tex. Jun. 13, 2014). http://www.supreme.courts.state.tx.us/historical/2014/jun/130122.pdf

Implied warranty of merchantability runs to subsequent purchasers. The Texas Supreme Court held that a subsequent buyer may sue the manufacturer for breach of the implied warranty of merchant-ability. For procedural reasons the court did not discuss the issue of whether the warranty was properly disclaimed, and what af-fect a disclaimer would have on subsequent purchasers. MAN En-gines & Components, Inc. v. Shows, 434 S.W.3d 132 (Tex. Jun. 6, 2014). http://statecasefiles.justia.com/documents/texas/supreme-court/2014-12-0490-0.pdf?ts=1402190454

http://www.supreme.courts.state.tx.us/historical/2014/jun/130122.pdf


http://statecasefiles.justia.com/documents/texas/supreme-court/2014-12-0490-0.pdf?ts=1402190454

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DECEPTIVE TRADE PRACTICES AND WARRANTIES

IMPLIED WARRANTY OF MERCHANTABILITY RUNS TO SUBSEQUENT PURCHASERS

MAN Engines & Components, Inc. v. Shows, 434 S.W.3d 132 (Tex. 2014).http://www.supreme.courts.state.tx.us/historical/2014/jun/120490.pdf

FACTS: Respondent, Doug Shows (“Shows”), purchased a used yacht with engines manufactured and sold by Petitioner, MAN Engines & Components (“MAN”). Shows received a letter stat-ing the engines had a two-year express warranty “on everything” and a three-year warranty “on major components” issued by MAN. A certificate connected with the purchase expressly noted the yacht was sold “as is.” After purchase, the engine failed; the two-year warranty had expired, but the three-year protection had not. Shows filed a warranty claim, but the parts involved were not considered covered “major components.” A year later, the same engine failed for the same reason, and Shows sued MAN for breach of express and implied warranties.

The jury found MAN liable for breach of implied war-ranty of merchantability, but the trial court granted MAN’s mo-tion for judgment notwithstanding the verdict and issued a take-nothing judgment. The trial court reasoned that Shows could not prevail on an implied warranty theory due to either: (1) lack of privity, as Shows was a subsequent purchaser; or (2) disclaimer, because MAN disclaimed any implied warranty at the time of sale. The court of appeals reversed, holding that a subsequent buyer may still rely on an implied warranty from the manufac-turer. MAN appealed.HOLDING: Affirmed.REASONING: The Court first addressed MAN’s argument of disclaimer and determined it was inapplicable because it was an affirmative defense that was not raised in pleadings. The court then noted that Texas law holds privity need not exist between an upstream defendant and a downstream plaintiff to recover on an implied warranty claim. The court reasoned that a downstream purchaser of used goods who seeks recovery of economic loss un-der an implied warranty theory only seeks to hold the merchant accountable for the state of the product when the first purchaser took possession.

The Court concluded when a merchant failed to pro-vide merchantable goods a downstream purchaser who suffered economic loss as a result of the defect had a right of recovery under an implied-warranty theory. Even though the goods were purchased used, the manufacturer, was bound by its implied war-ranty of merchantability.

BUYER MUST GIVE SELLER AND MANUFACTURER NOTICE OF BREACH OR BE BARRED FROM RECOV-ERY

McKay v. Novartis Pharm. Corp., 751 F.3d 694 (5th Cir. 2014). https://casetext.com/case/mckay-v-novartis-pharm-corp#.U_zD-FoCwK9Z

FACTS: Plaintiffs, Thomas and Leticia McKay (the “McKays”), brought suit against Novartis Pharmaceutical Corporation (“No-vartis”). Thomas McKay took two drugs manufactured by No-vartis allegedly causing him to develop osteonecrosis of the jaw (ONJ). The two drugs had warning labels approved by the FDA. Mr. McKay alleged that Novartis breached its warranty and failed to warn that this medical condition could manifest from taking these two drugs. The McKays originally brought suit in the Western District of Texas but it was transferred to the Judicial Panel on Multidistrict Litigation (“MDL”) in Tennessee as part of ongoing litigation involving the two drugs. The MDL decided that Texas law applied to the McKays’ case, and that §82.007(a) of the Texas Civil Practice & Remedies Code provided Novartis a rebuttable presumption against liability for failing to warn, precluding the McKays’ failure to warn claims.

On remand, the district court held that while §82.007(a) did not preclude the McKays breach of warranty claims, the McKays did not comply with Texas statutory notice requirements by failing to notify Novartis of the warranty breach before filing suit. The McKays appealed. HOLDING: Affirmed. REASONING: The McKays argued that they satisfied the notice requirement because: (1) Dr. Leibowitz, Mr. McKay’s doctor and agent, had notified Novartis; (2) a class action suit had been, of which Mr. McKay was a member, filed regarding the two drugs; and (3) Mr. McKay notified his doctor, an intermediate seller of the two drugs, serving as notification to Novartis. The Fifth Circuit rejected all three of these arguments. First, the court stated that although Dr. Leibowitz did notify Novartis of the problems his patients were experiencing with the drugs, he did not notify No-vartis that Mr. McKay in par-ticular had suffered an injury. The Texas Court of Appeals has held that a manufacturer must be made aware of a particular product causing a problem on a particular buyer.

Second, the court held that commencement of a suit does not satisfy the notification requirement because the requirement must be satisfied prior to the suit’s commencement. A notice prior to filing suit allows the manufacturer to remedy the defect or inspect the product to as-certain if a defect even existed.

Third, the court held that the McKays must have no-tified Novartis, the manufacturer, in addition to the intermedi-ate seller. The court noted that the majority of Texas Courts of Appeals have held that a buyer must notify both the intermedi-ate seller and the manufacturer. The court reasoned that if the manufacturer, in addition to the intermediate seller, is to be held responsible for the buyers’ problems, it too must be granted the protection of timely notice. Therefore, a buyer must give a seller, which includes the manufacturer, a notice of breach, or the buyer will be barred from recovery.

A buyer must give a seller, which in-cludes the manu-facturer, a notice of breach, or the buyer will be barred from recovery.




CONSUMER CREDIT

RECENT DEVELOPMENTS

TRUTH IN LENDING ACT PROHIBITIONS ON SEND-ING READY-TO-USE CREDIT CARDS DOES NOT APPLY TO SUBSTITUTION CARD

Acosta v. Target Corp., 745 F.3d 853 (7th Cir. 2014).http://law.justia.com/cases/federal/appellate-courts/ca7/13-2706/13-2706-2014-03-19.html

FACTS: Appellants, Richard Acosta and Jenifer Roman (“Acos-ta”), held credit cards from Appellee, Target Corporation (“Tar-get”). The credit cards, called Target Guest Cards (“Guest Cards”), could only be used at Target stores. Target began discontinuing and replacing Guest Cards with Target Visa Cards (“Visa Cards”), which were usable at any merchant that accepted Visa. Target notified cardholders that the Guest Cards would be deactivated and the account balance would be transferred to a new Visa Card account. The materials sent with the Visa Card notifications did not suggest keeping the Guest Card was an option, but customers could opt out of activating the Visa Card. The accompanying materials also documented the increased credit limit and more favorable APR of the Visa Card compared to the Guest Card.

Appellants filed suit in district court claiming Target vi-olated the TILA §1642 in mailing an unsolicited credit card. The court granted summary judgment in favor of Target, reasoning that the Visa Card was a permissible “substitution” of the Guest Card under TILA. Appellants appealed.HOLDING: Affirmed.REASONING: Section 1642 of the TILA forbids credit card issuers from sending ready-to-use cards to customers without receiving a request from the consumer unless the issuance is a “substitution” for an existing credit card. To determine if the is-suance met the exception, the court first looked to the commonly understood definition of “substitution”, which is “something that is put in place of something else or is available for use instead of something else.” On this meaning alone the court asserted that the Target Visas were a substitution because they took the place of the Guest Card and assume all of the Guest Card’s functions.

The court next looked to guidance from the Federal Re-serve Board, which explained that a “substitution encompasses the replacement of one card with another because the underly-ing account relationship has changed in some way-such as when the card issuer has...changed the credit or other features available on the account.” The Visa Card differed from the Guest Card in its availability for use anywhere and its increased credit lim-its. Although the Visa Card was tied to the same original exist-ing account rather than a new account, the court reasoned that the underlying existing account relationship had been changed and thus a substitution had taken place. The court therefore held that the Visa Card did not violate TILA’s prohibition on sending ready-to-use credit cards under either the common meaning of “substitution” or under the Federal Reserve Board’s interpretation of the TILA.

COMPANY DOES NOT VIOLATE THE FAIR CREDIT REPORTING ACT WHEN IT OBTAINS A “CONSUMER REPORT” IN THE NAME PROVIDED BY AN IMPOSTER IN ORDER TO VERIFY A CONSUMER’S IDENTITY AND ELIGIBILITY

Bickley v. Dish Network, L.L.C., 751 F.3d 724 (6th Cir. 2014).http://www.ca6.uscourts.gov/opinions.pdf/14a0098p-06.pdf

FACTS: Plaintiff, Gregory Bickley’s (“Bickley”), social security number was stolen and used by an identity thief to request sat-ellite television service from Defendant, Dish Network, LLC (“Dish”). Dish requested and received a consumer report from credit reporting agencies using personal information given by the identity thief. The credit reporting agencies were unable to con-firm Bickley’s personal information, and Dish declined the new account.

Bickley subsequently filed a complaint, alleging that Dish violated the FCRA by requesting and using a credit report without a permissible purpose. On summary judgment, the dis-trict court ruled in favor of Dish. Bickley appealed.HOLDING: Affirmed.REASONING: The court first explained that in order to main-tain a claim for improper use of a credit report under the FCRA, 15 U.S.C. §1681b, a plaintiff must prove that a defendant acted with a specified level of culpability. Additionally, the plaintiff must satisfy three elements: (1) there was a consumer report as defined by the FCRA; (2) the defendant used or obtained it; and (3) the defendant did so without a permissible statutory purpose. The court found the first element was satisfied because the report Dish obtained measured Bickley’s credit worthiness. The second element was satisfied because Dish used Bickley’s credit worthi-ness information to determine his eligibility for an account.

The court found the third element was not satisfied be-cause under the FCRA, Dish “[had] a legitimate business need for the information in connection with a business transaction that [was] initiated by a consumer.” The court found that Dish’s conduct of verifying the credit thief ’s identities and assessing eli-gibility for service was a “legitimate business need” in connection with a business transaction. In addition, the court held that the business transaction was initiated by a consumer because Dish believed in good faith that Bickley requested service.

CREDIT TRANSACTION WAS CONSUMMATED FOR PURPOSES OF TRUTH IN LENDING WHEN CONSUM-ER PAID FIRST $100 OF A DOWN PAYMENT

Lea v. Buy Direct, L.L.C., 755 F.3d 250 (5th Cir. 2014).http://docs.justia.com/cases/federal/appellate-courts/ca5/13-20281/502661228

FACTS: Appellants, Angela and Darrel Lea (the “Leas”), joined Appellee’s, Direct Buy (“Direct Buy”), wholesale membership club. The Leas could not pay the required down payment initially, but instead paid $100 with the outstanding balance due at a later date. Then the parties executed a Membership Agreement, Retail

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Installment Contract, and Payment Agreement without further discussing the payment due dates. The Leas never paid Direct Buy the full down payment and, after attempting to charge the Leas’ credit card for dues, Direct Buy cancelled their membership.

The Leas filed suit, alleging that Direct Buy violated the TILA by failing to disclose the payment due dates. Direct Buy ar-gued that the TILA did not apply because the Leas never paid the full down payment and thus never consummated the transaction. The district court ruled in favor of Direct Buy. The Leas appealed. HOLDING: Reversed and remanded.REASONING: The court accepted the Leas’ argument that Di-rect Buy violated the TILA because consummation was complete at the time the consumer became contractually obligated on a credit transaction. For the court, consummation of the credit agreement occurred when the Leas’ obligations became fixed even though their performance was incomplete, declaring that post-consummation abandonment of a financing agreement generally will have no effect upon a creditor’s TILA liability.

The court reasoned that, although the Leas canceled their Direct Buy membership and sought to rescind the contract for credit before the down payment was paid in full, the contract was consummated under the letter of the TILA. The court held that the credit transaction was consummated for purposes of the TILA because the Leas paid $100, agreed to pay the remaining amount, and were contractually obligated on a credit transaction through the signed Membership Agreement and Retail Install-ment Contract.

GOVERNMENT IS NOT IMMUNE FROM SUITS UNDER FAIR CREDIT REPORTING ACT

ACCURATE CREDIT TRANSACTIONS ACT APPLIES TO PAPER RECEIPTS NOT EMAILS

Bormes v. United States, ____ F.3d ____ (7th Cir. 2014).h t t p : / / m e d i a . c a 7 . u s c o u r t s . g o v / c g i - b i n / r s s E x e c .pl?Submit=Display&Path=Y2014/D07-22/C:13-1602:J:Easterbrook:aut:T:fnOp:N:1384887:S:0

FACTS: Appellant, James Bormes (“Bormes”), brought suit against the United States (“U.S.”) alleging it violated the FCRA. Bormes, an attorney, tendered the filing fee for suit on viapay.gov-a site the federal courts utilize to facilitate electronic payments-

and was sent an email receipt with the last four digits of his credit card and the card’s expiration date. Bormes claims that FACTA allows a receipt to contain one of these things, but not both. The district court dismissed the case, and Bormes ap-pealed to the Federal Circuit. The Federal Circuit vacated and remanded, and Bormes appealed again. Justice Scalia, for the Su-preme Court, vacated and remanded to the Seventh Circuit. The Court asked the Seventh Circuit to de-cide whether the federal government waived its im-munity to damages under the FCRA.HOLDING: Affirmed. REASONING: The Sev-enth Circuit first addressed whether the U.S. is a “person” liable for damages under the FCRA. The act defines “person” as “any…government or govern-mental subdivision or agency.” The court concluded that because the U.S. is a government, the U.S. authorized monetary relief and therefore waived sovereign immunity.

The U.S. argued that the definition of “person” in the FCRA should not be given its natural meaning. Originally the act only allowed for damages against consumer reporting agen-cies and users of information but was later amended to include all persons. Based on the amendment, the U.S. conceded that it is a “person” for the purpose of the Act’s substantive requirements. The U.S. then argued that the legislative history was silent as to whether the amendment applied to remedies. The court rebuffed the U.S.’s argument, concluding that a silent legislative history does not prevent giving the Act’s enacted text its natural meaning. The court held, however, that the FACTA restriction on including both the last four digits of a credit card number and the card’s expiration date applied to paper receipts but not emails. No receipt was printed at the transaction time. If the email was print-ed after Bormes received the email then that was of his own doing and occurred after the transaction took place. Bormes transacted with a website and the receipt was sent to his email account, from which he could obtain access in multiple ways over the Internet.

The court concluded that because the U.S. is a government, the U.S. authorized mon-etary relief and there-fore waived sovereign immunity.

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DEBT COLLECTION

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DEBT COLLECTOR’S LETTER DOES NOT VIOLATE FAIR DEBT COLLECTION PRACTICES ACT

Caceres v. McCalla Raymer, L.L.C., ____ F.3d ____ (11th Cir. 2014).http://media.ca11.uscourts.gov/opinions/pub/files/201312450.pdf

FACTS: Plaintiff, Xilena Caceres (“Caceres”), filed a class action suit against Defendant, McCalla Raymer, L.L.C. (“McCalla”), for violations under the FDCPA. McCalla sent a letter to Caceres stating that Caceres was behind in her payments on her residen-tial mortgage and the amount owed. The letter said that McCalla represented the interests of the lender and that Caceres could dis-pute the validity of the debt within thirty days of receipt of the letter. The letter incorrectly substituted “creditor” for “debt col-lector” when referring to who would infer that the debt amount was valid if Caceres did not contest it within thirty days; however, the letter plainly stated that its purpose was for the collection of a debt and that any information obtained from the debtor would be used for that purpose.

Caceres filed a class ac-tion suit pursuant to 15 U.S.C. § 1692e, which prohibits debt collectors from using false or de-ceptive means to collect a debt. The district court dismissed Ca-ceres’ suit and held that the letter was not an initial communica-tion under the Act because it was issued regarding a foreclosure and thus fell under an exception to the definition of commu-nication; even if the letter were a communication, the technical violation of the statute would not mislead the least sophisticated consumer regarding her rights. Caceres appealed. HOLDING: Affirmed.REASONING: The court first ruled that the district court erred in holding that the letter from McCalla was not an initial com-munication under the Act. The court reasoned that the letter did not fall under the formal pleading exception of § 1692g(a) because it was evident that the purpose of the letter was debt collection, the only references to a lawsuit were fleeting, and no reasonable person would consider it to be a pleading.

The court continued its analysis by examining whether the letter was false, deceptive, or misleading. Applying the least sophisticated consumer standard, the court held that the letter’s incorrect substitution of “creditor” for “debt collector” was not misleading because the same implication arises whether or not the debt collector or creditor assumed the language of the notice valid as required by statute. Caceres should have inferred that the debt collector was the agent of the creditor, and, therefore, she was adequately made aware of her rights and the nature of the debt collection.

CONSUMER FILING CLAIM UNDER FAIR DEBT COL-LECTION PRACTICES ACT DOES NOT HAVE TO FIRST DISPUTE THE DEBT

McLaughlin v. Phelan Hallinan & Schmieg, L.L.P., ____ F.3d ____ (3rd Cir. 2014).http://docs.justia.com/cases/federal/appellate-courts/ca3/13-2015/13-2015-2014-06-26.pdf

FACTS: Plaintiff, Timothy McLaughlin (“McLaughlin”), brought a class action suit against Defendant, Phelan Hallinan & Schmieg (“PHS”), a debt collection law firm that handled his unpaid mortgage loan. PHS sent McLaughlin a letter (the “letter”) with notice of his right to dispute the validity of the debt. McLaughlin subsequently filed suit alleging that PHS violated the FDCPA by falsely representing fees in the letter.

The district court dismissed the complaint, holding McLaughlin could not bring suit challenging the letter with-out first disputing the debt, as required by FDCPA procedure. McLaughlin appealed.HOLDING: Reversed.REASONING: The court began by looking at the statutory lan-guage of the FDCPA, concluding that the statutory language did not indicate Congress’ intent requiring debtors to dispute their debts before filing suit. The Act suggests that disputing a debt is optional and failure to do so cannot be construed as an admission of liability. See 15 U.S.C.A. §1692e, g.

The court found imposing a requirement to first dispute the debt would undermine the FDCPA’s protection of unsophis-ticated debtors who would have no reason to suspect that they would be barred from filing suit as a consequence of failing to invoke the optional statutory procedure. The requirement would also have the effect of immunizing false statements that a con-sumer failed to promptly dispute, which was inconsistent with the FDCPA’s goal of ensuring debt collectors act responsibly. The court also held that declining the requirement would not frustrate the FDCPA’s validation procedure because it led to cheap and quick debt resolution.

TEXAS CONSTITUTION DOES NOT PROHIBIT THE RESTRUCTURING OF A HOME EQUITY LOAN THAT ALREADY MEETS ITS REQUIREMENTS IN ORDER TO AVOID FORECLOSURE

Sims v. Carrington Mortg. Servs., L.L.C., ____ S.W.3d ____ (Tex. 2014).http://www.supreme.courts.state.tx.us/historical/2014/may/130638.pdf

FACTS: Plaintiffs, Frankie and Patsy Sims (the “Sims”), obtained a home equity loan from Defendant, Carrington Mortgage Ser-vices, L.L.C. (“CMS”). The Sims fell behind on their mortgage payments and proceeded to sign two “Loan Modification Agree-ments” with CMS. These agreements called for capitalizing past-due interest and other charges.

Plaintiffs brought a class action lawsuit against CMS

The court held that the letter’s incorrect substi-tution of “credi-tor” for “debt col-lector” was not misleading.





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alleging the loan modifications violated the Texas Constitution. The U.S. District Court dismissed the case for failure to state a cause of action. On appeal, the Fifth Circuit certified the follow-ing question to the Texas Supreme Court: after an initial exten-sion of credit, if a lender enters into a new agreement with the borrower that capitalizes past-due interest, fees, property taxes, or insurance premiums into the principal of the loan but neither satisfies nor replaces the original note, is this transaction prohib-ited under Section 50 of Article XVI of the Texas Constitution?HOLDING: Question answered.REASONING: The court stated that a restructuring of a home equity loan must extend new credit in order for the requirements of Section 50 of Article XVI to apply. The Plaintiffs’ argument was that in restructuring the loan, CMS was actually advancing additional funds to itself (past-due interest) or other fees (past-due taxes & insurance), and that this constituted a new extension of credit. The court, however, disagreed with this argument. The court noted that the Plaintiffs’ obligation to pay for such amounts and CMS’s right as a lender to protect its security, were all terms of the original extension of credit rather than a new extension of credit.

The Court further reasoned that requiring interest on capitalized, past-due amounts was not a new loan, but simply a way to defer payments already owed. These deferred payments would protect Plaintiff’s home from foreclosure-a purpose of Section 50 of Article XVI. The Court concluded that the Texas Constitution does not prohibit the restructuring of a home eq-uity loan that already meets its requirements in order to avoid foreclosure while maintaining the terms of the original extension of credit.

DEBT COLLECTOR FAILED TO PROPERLY VERIFY DEBT

DEBT IS CLASSIFIED BASED ON PURPOSE AT TIME OF INITIAL TRANSACTION

Haddad v. Alexander, Zelmanski, Danner & Fioritto, P.L.L.C., 698 F.3d 290 (6th Cir. 2012).http://www.ca6.uscourts.gov/opinions.pdf/12a0363p-06.pdf

FACTS: Appellant, Camille Haddad (“Haddad”), owned and lived in a condominium. Haddad timely paid the monthly as-sessments, pursuant to the condominium’s deed. Haddad moved out and began leasing the condominium; Appellee, Alexander, Zelmanski, Danner & Fioritto, P.L.L.C. (the “Firm”), sent Had-dad a collection letter on behalf of the condominium association for having defaulted on the monthly assessments. The Firm ex-plained that a lien would be filed against Haddad’s condominium if the amount demanded was not paid. Haddad requested verifi-cation of the debt, but the Firm did not verify and later recorded a Notice of Lien on the condominium.

Haddad brought an action against the Firm for viola-tion of the FDCPA. The district court granted the Firm’s motion for summary judgment declaring the debt outside of the FDCPA statutory definition of “debt” and the scope of the FDCPA. Had-dad appealed.HOLDING: Reversed and remanded.REASONING: The court recognized that the FDCPA governs

only debts incurred for personal, not business, purposes, and only requires verification of the debt when the debt was for personal purposes. The court could not make a determination whether Haddad’s debt was personal or business based solely on the statu-tory definition. The court considered precedent from the 7th Circuit that declared the point in time of the original transaction determines the nature of the debt.

The Firm argued that the debt was no longer a personal debt because the assessments only existed for Haddad under the business purpose of leasing out the condominium. The court ad-opted the 7th Circuit reasoning and found that because the obli-gation to pay the assessment originally arose from the purchase of the condominium for personal reasons, the debt remained under the governance of the FDCPA and required verification.

FAIR DEBT COLLECTION PRACTICES ACT DOES NOT REQUIRE CONSUMER DISPUTE A DEBT TO SUE UN-DER THE ACT

Russell v. Absolute Collection Servs., Inc., ____ F.3d ____ (4th Cir. 2014).http://www.ca4.uscourts.gov/Opinions/Published/122357.P.pdf

FACTS: Appellee, Diane Russell (“Russell”), was indebted to a hospital that hired Appellant, Absolute Collection Services (“ACS”), as their collection agency. ACS sent Russell a debt col-lection letter instructing her to pay. Russell paid her debt directly to the hospital and notified ACS. ACS sent Russell demand letters that falsely asserted an outstanding debt and threatened to report it to credit agencies.

Russell brought suit against ACS alleging that ACS vio-lated the FDCPA. The district court granted Russell’s motion for judgment as a matter of law. ACS appealed. HOLDING: Affirmed. REASONING: ACS argued that Russell had to first dispute her debt with them prior to filing suit under the FDCPA. The court rejected that argument for three reasons. First, it would not have been consistent with the FDCPA’s remedial scheme to hold that a plaintiff’s ability to state a claim under the FDCPA was extin-guished because a plaintiff failed to dispute the validity of the debt when he or she had no reason to seek validation in the first place.

Second, requiring debtors to dispute their debts as a condition to filing suit goes against the FDCPA’s essential pur-pose of preventing “abusive, deceptive, and unfair debt collec-tion practices.” See 15 U.S.C. §1692(a). The court explained that shielding debt collectors from liability would have defeated that purpose. The purpose of the validation requirement was to elimi-nate the problem of debt collectors going after the wrong person or debts that were already paid. Third, the court explained that the debt validation in §1692(g) still served the important purpose of ensuring that con-sumers receive notice of their rights of verification and to dispute the debt. Allowing debtors to seek relief for violations of §1692(e) without disputing their debts did not render the statute’s valida-tion procedures superfluous.


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ARBITRATION

DISPUTE WAS OUTSIDE THE SCOPE OF ARBITRATION CLAUSE

CardioNet, Inc. v. Cigna Health Corp., 751 F.3d 165 (3rd Cir. 2014).http://www.gpo.gov/fdsys/pkg/USCOURTS-ca3-13-02496/pdf/USCOURTS-ca3-13-02496-0.pdf

FACTS: Appellants, CardioNet, Inc. (“CardioNet”), provided cardiac arrhythmia monitoring devices covered by appellee, CIG-NA Health Corporation, (“CIGNA”) under CIGNA’s Adminis-trative Service Agreement (the “Agreement”). Eventually, CIGNA notified CardioNet that the services would no longer be covered.

CardioNet filed suit against CIGNA on behalf of them-selves and their patients. CIGNA moved to compel arbitration under the parties’ Agreement. The District Court held that Car-dioNet’s claims fell within the arbitration clause. CardioNet ap-pealed. HOLDING: Vacated and remanded.REASONING: The court questioned whether the dispute fell within the plain language of the arbitration agreement. The court interpreted the word “disputes” within the context of the entire contract and determined it covered the performance or interpre-tation of the Agreement. The court applied a narrower interpreta-tion of “dispute” to both the direct and derivative claims by appel-lants that dealt with the notification ending coverage outside the Agreement. Therefore, the court held that the arbitration agree-ment did not bind any of appellants’ direct or derivative claims.

ATTORNEY’S FEES AWARDED NOTWISTANDING ARBI-TRATION CLAUSE THAT REQUIRED EACH SIDE BEAR THE COST OF ITS ATTORNEY’S FEES

D.R. Horton-Texas, Ltd. v. Bernhard, 423 S.W.3d 532 (Tex. App. 2014).http://law.justia.com/cases/texas/fourteenth-court-of-appeals/2014/14-12-01150-cv.html

FACTS: Appellees, the Bernhards (“Bernhard”), sued appellant, D.R. Horton-Texas, Ltd. (“D.R. Horton”), for construction de-fects on their home. The trial court referred the case to arbitra-tion pursuant to the sales contract between the parties. The ar-bitration agreement stated that each party would bear the cost of their own attorney’s fees and expenses, but Bernhard was awarded damages, including attorney’s fees classified as “economic dam-ages” under the Residential Construction Liability Act (“RCLA”).

D.R. Horton moved to vacate the attorney’s fees from the arbitration award, but the district court denied the motion and awarded additional appellate attorney’s fees. D.R. Horton ap-pealed. HOLDING: Affirmed but modified.REASONING: The Court overruled D.R. Horton’s assertion that the trial court erred by enforcing the arbitrator’s award of attorney’s fees in violation of the Texas Arbitration Act (“TAA”), which requires courts to vacate an award if the arbitrator exceeded his powers. Tex. Civ. Prac. & Rem. Code Ann. §171.088(a)(3)

(A). An arbitrator exceeds their powers by disregarding the con-tract and dispensing their own idea of justice. Therefore, arbi-tration issues are reversed when the arbitrator decides a matter outside of his authority.

The Court found that the issue of attorney’s fees was properly before the arbitrator because the arbitrator consulted both the contract and regulations in decision-making. The arbi-tration agreement stated that each party “shall bear the fees and expenses o[f ] counsel,” and the court interpreted this to mean that the contract did not prohibit an arbitrator from awarding attorney’s fees as economic damages by applying the RCLA to the FAA guidelines. Because the arbitrator had followed the FAA guidelines, the Court found that it could not be reasonably said that the arbitrator was merely dispending his own ideas of justice.

CANCELLATION OF SATELLITE TELEVISION CON-TRACT TEN DAYS INTO A TWELVE-MONTH CON-TRACT WAS IMMEDIATE CANCELLATION, AND NO CONTRACT WAS FORMED

DIRECTV, Inc. v. Murray, 423 S.W.3d 555 (Ark. 2012).h t tp : / /www. l e ag l e . com/dec i s i on / In%20ARCO%2020121004024

FACTS: Appellee, Jo Murray (“Murray”), was a DIRECTV sub-scriber. When she received her first month’s bill, she also received a “Customer Agreement” stating that if she “did not call DIREC-TV to dispute any terms or conditions of the agreement, and did not immediately cancel her services,” she would be charged an early cancellation fee. After receiv-ing the Customer Agreement, nine to ten days into the contract, Appel-lee terminated DI-RECTV’s service and was charged the fee.

Appe l l ee filed suit against DIRECTV in an Arkansas state court as part of a class action for enforcement and collection of her early cancellation fee. DIRECTV moved to compel Appellee to arbitration in accordance with an arbitration provision in the Customer Agreement. Deciding no contract was formed, the circuit court denied DIRECTV’s motion to compel arbitration. DIRECTV appealed the decision.HOLDING: Affirmed.REASONING: The Court applied Arkansas contract law to evaluate whether a contract existed between the parties prior to Appellee’s cancellation of her service. The Court found that the Appellee terminated her service in sufficient time after the first billing statement and upon her notice of the Customer Agree-ment to properly prevent the formation of a contract.

DIRECTV alleged that the district court misapplied Ar-

Because Appellee can-celled the contract just a few days after order-ing services, the court found that the contract fell “closer to ‘immediate termination’ than to ‘continued use.’”



http://law.justia.com/cases/texas/fourteenth-court-of-appeals/2014/14-12-01150-cv.html

http://law.justia.com/cases/texas/fourteenth-court-of-appeals/2014/14-12-01150-cv.html

http://www.leagle.com/decision/In%20ARCO%2020121004024

http://www.leagle.com/decision/In%20ARCO%2020121004024


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kansas law on contract formation, asserting that the contract was enforceable because the Appellee failed to follow the terms of the Customer Agreement. However, because Appellee cancelled the contract just a few days after ordering services, the court found that the contract fell “closer to ‘immediate termination’ than to ‘continued use.’”

The court also applied the contract principle of mutual assent and found that DIRECTV failed to prove a meeting of the minds because Appellee did not receive the agreement until service had already begun. Because the contract lacked mutual as-sent and it was immediately cancelled, the majority held that no contract was formed, and thus both the early cancellation fee and the arbitration provision were unenforceable. The dissent agreed with the majority that Appellee’s cancellation was sufficiently im-mediate but dissented on other grounds.

ARBITRATION CLAUSE FOUND UNCONSCIONABLE

Newton v. Am. Debt Servs., Inc., 549 Fed. App’x 692 (9th Cir. 2013).h t t p : / / c d n . c a 9 . u s c o u r t s . g ov / d a t a s t o r e / m e m o r a n -da/2013/12/12/12-15549.pdf

FACTS: Plaintiff, Heather Newton (“Newton”), brought a pu-nitive class action against Defendant, American Debt Services, Inc. (“American Debt”), alleging fraud, negligence, and interfer-ence with contractual relations. American Debt moved to compel arbitration and the district court denied the motion. American Debt appealed.HOLDING: Affirmed.REASONING: Under California law, a contract clause is uncon-scionable if it is both procedurally and substantively unconscio-nable. An arbitration agreement is procedurally unconscionable if the manner of negotiations and circumstances of the parties at

the time were unconscionable. The court looked to whether the agreement involved op-pression or surprise. Ameri-can Debt conceded that the arbitration agreement was an adhesion contract, and thus, oppressive. The court also

found an element of surprise because Newton did not sign the arbitration agreement; it was incorporated only by reference on the back of a one-page document in small print. The agreement was substantively unconscionable be-cause it was unfairly one-sided for four reasons: (1) it required Newton, a California resident, to arbitrate in Oklahoma; (2) it reserved the selection of arbitrator for American Debt; (3) it lim-ited damages otherwise available to Newton under statute; and (4) it increased Newton’s liability for attorney’s fees compared to California’s codified fee shifting regime. The court found the ar-bitration agreement unconscionable and unenforceable because it was both procedurally and substantially unconscionable.

ARBITRATION AGREEMENT IN EMPLOYEE HAND-BOOK IS ILLUSORY AND UNENFORCEABLE

Scudiero v. Radio One, ____ 547 F. App’x 429 ____ (5th Cir. 2013).http://law.justia.com/cases/federal/district-courts/texas/txsdce/4:2012cv01088/967055/19

FACTS: Vince Scudiero and Christel Thornton (“Plaintiffs”) filed suit in federal district court against former employer, Radio One of Texas II, L.L.C. (“Radio One”) on charges of racial dis-crimination and retaliation. Radio One filed a motion to dismiss and to compel arbitration because the Plaintiffs had signed off on arbitration sections contained in the employee handbook. The handbook also contained a section that stated Radio One reserved the right to unilaterally “supersede, modify, or eliminate existing policies.”

In consideration of these facts, the magistrate judge rec-ommended the motion’s denial. Radio One objected; however, the district court overruled the objections and denied the motion to dismiss and compel arbitration. Radio One appealed claiming that the arbitration agreement was not illusory and therefore en-forceable. HOLDING: Affirmed REASONING: The court first laid out the elements for deter-mining whether the parties had an agreement to arbitrate: (1) was a valid agreement to arbitrate between the parties and (2) did the dispute fell within the scope of that agreement. The court explained that federal policy resolves ambiguities in favor of ar-bitration when dealing with the second element. However, when deciding whether the case meets the first element, ordinary con-tract principles govern.

The Texas Supreme Court previously held that an ar-bitration clause was not illusory unless one party could avoid its promise to arbitrate by amending the provision or terminating it altogether. The court explained that if the employer merely refer-enced a separate document of an agreement to arbitrate and did not impose any contractual relationships in the employee hand-book, the arbitration agreement was not illusory.

The court explained the significance of the separation of the arbitration document and an employee handbook’s modifica-tion provisions. The arbitration clause needed to be a separate and stand-alone contract. There could not be an arbitration document that referred back to a handbook with a modification provision for all of its procedure. That would not have been a stand-alone contract because the modifications would have included modi-fications to the arbitration agreement. Because Radio One “re-served the right to unilaterally supersede, modify or eliminate existing policies” in the handbook, which contained its only arbi-tration provisions, the promise to arbitrate was not a stand-alone contract, and, therefore, was illusory and unenforceable.

A contract clause is unconscionable if it is both procedurally and substantively unconscionable.

http://cdn.ca9.uscourts.gov/datastore/memoranda/2013/12/12/12-15549.pdf

http://cdn.ca9.uscourts.gov/datastore/memoranda/2013/12/12/12-15549.pdf

http://law.justia.com/cases/federal/district-courts/texas/txsdce/4:2012cv01088/967055/19

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UNCONSCIONABILTY IS A QUESTION OF LAW

UNCONSCIONABLE PROVISION MAY BE SEVERED FROM AN ARBITRATION AGREEMENT

Venture Cotton Coop. & Noble Ams. Corp. v. Freeman, ____ S.W.3d ____ (Tex. 2014).http://www.supreme.courts.state.tx.us/historical/2014/jun/130122.pdf

FACTS: Plaintiff, Alan Freeman (“Freeman”), was a farmer who joined a pool for the exclusive sale and marketing of cotton pro-duction with Defendant, Venture Cotton Cooperative (“Ven-ture”). Freeman was required to sign Venture’s Membership and Marketing Agreement (the “Agreement”), which contained an arbitration provision. Venture moved to compel arbitration and Freeman asserted that the agreement was unconscionable, in part, because it eliminated a statutory right to attorney’s fees and other

remedies. The trial court

refused to compel arbi-tration because it found the arbitration agree-ment unconscionable. Venture appealed the trial court’s decision, but the appellate court affirmed. The appellate court held that certain terms in the arbitration

agreement were unconscionable¾designed to foster arbitrator bias and to deny Freeman adequate discovery and preparation time. Venture then filed petition for review. HOLDING: Reversed and remanded.REASONING: The Court first addressed the difficulty in de-fining unconscionability. It recognized that the UCC provides for a court to allow parties a reasonable opportunity to present evidence as to a contract’s commercial setting, purpose, and ef-fect, to aid the court in evaluating the defense. Under the UCC, the unconscionability defense is a question of law that requires a highly fact-specific inquiry into the circumstances of the bargain. The Court then highlighted Freemen’s arguments pertaining to unconscionability in the court of appeals.

Venture argued that even if the arbitration clause was deemed unconscionable, the court of appeals nevertheless erred when it refused to sever the offending rule and to compel arbitra-tion under the remainder of the agreement. Looking to case law, the Court noted that an illegal or unconscionable provision of a contract generally may be severed so long as it does not consti-tute the essential purpose of the agreement. In order to determine an agreement’s essential purpose, one must resolve the issue of “whether or not parties would have entered into the agreement absent the unenforceable provisions.”

The Court reasoned that the agreement’s collateral effect on statutory rights and remedies appeared to be a peripheral con-cern to the essential purpose of providing speedy and efficient res-olution disputes. The Court accordingly concluded that the court of appeals erred in declining to sever the objectionable limitation.

ARBITRATION AGREEMENT DID NOT COVER DIS-PUTE WITH NON-PARTY

Douglas v. Trustmark Nat’l Bank, ____ F. Supp. 2d ____ (S.D. Miss. 2012).

FACTS: Plaintiff, Shirley Douglas (“Douglas”), opened a check-ing account with Union Planters’ Bank (“Union”) and signed an agreement (the “Agreement”) requiring the parties to resolve disputes through arbitration. The Agreement expressly applied to disputes “between [Douglas] and [Union], its agents or em-ployees, or its parents, subsidiary or sister corporations or their employees or agents….” Union subsequently merged with Re-gions Bank.

Douglas filed an action against Regions Bank. Regions Bank filed a motion to compel arbitration based on the Agree-ment between Douglas and Union.HOLDING: Motion denied.REASONING: The court initially looked to the Federal Arbitra-tion Act, which treats arbitration agreements similar to other con-tracts. See 9 U.S.C. §2. For a party to compel arbitration, both parties must have agreed to submit to arbitration. In the instant case, the named parties to the Agreement were only Douglas and Union, not Regions.

Additionally, the court found no reference in the Agree-ment that would expand the scope of disputes to Union’s suc-cessors. While Mississippi recognizes that a non-signatory to an arbitration agreement may under certain theories enforce the agreement, the court concluded that in the present case, Regions Bank failed to identify any principle that would permit Regions Bank as a non-signatory successor to enforce the Agreement. Therefore, the court refused to allow Regions to compel arbitra-tion under the Agreement.

WHETHER ARBITRATION AGREEMENT AUTHORIZES CLASSWIDE ARBITRATION IS FOR COURT TO DECIDE

Opalinski v. Robert Half Int’l, Inc., ____ F.3d ____ (3rd Cir. 2014) (unpublished).http://www2.ca3.uscourts.gov/opinarch/124444p.pdf

FACTS: Appellees, David Opalinski and James McCabe (“Opal-inski”), brought suit against their former employer, Appellant Robert Half International, Inc. (“RHI”), alleging that RHI failed to pay them overtime and improperly classified Appellees as over-time-exempt employees in violation of the Fair Labor Standards Act (the “FLSA”). Appellees’ employment agreement contained arbitration provisions, but neither agreement mentioned class-wide arbitration. RHI filed a motion to compel Appellees to arbitration. The District Court granted the motion in part and compelled arbitration, but also held that classwide arbitration was for the arbitrator to decide. RHI appealed. HOLDING: Reversed.REASONING: The court reasoned that when a contract is silent on classwide arbitration the court decides its availability rather than an arbitrator. The applicability of classwide arbitration rests on whether the issue is a “question of arbitrability,” defined as non-procedural questions. If the issue is a question of arbitrabil-

The court noted that an illegal or unconscio-nable provision of a contract generally may be severed so long as it does not constitute the essential purpose of the agreement.



http://www2.ca3.uscourts.gov/opinarch/124444p.pdf


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INSURANCE

ity, it is a “gateway issue” presumptively determined by the district court. If it is not a question of arbitrability, it is not a gateway issue and presumptively for the arbitrator to resolve.

Lacking substantial precedent, the court identified two independent reasons why classwide arbitration is a gateway issue for the district court to determine: (1) the Supreme Court has recognized that a district court must determine which claims an arbitrator is authorized to decide; and, (2) the question of arbitra-bility concerns whether a binding arbitration clause applied to a certain type of controversy. The former creates a strong presump-tion that courts decide questions of arbitrability absent express contractual language delegating the authority to the arbitrator. Because nothing in the employment agreements in this case ad-dressed the question of arbitrability, it led the court to believe neither party agreed to submit questions of arbitrability to the arbitrator.

ARBITRATOR RATHER THAN COURT DETERMINES IF PARTIES AGREED TO CLASS ARBITRATION

Sandquist v. Lebo Auto., Inc., 174 Cal. Rptr. 3d 672 (Cal. Ct. App. 2014).http://www.courts.ca.gov/opinions/documents/B244412.PDF

FACTS: Plaintiff, Timothy Sandquist (“Sandquist”), filed a class action discrimination suit against his employer, Defendant, Lebo Automotive, Inc. (“Lebo”). Lebo moved to compel arbitration pursuant to Sandquist’s employment contract. The trial court granted the motion and dismissed Sandquist’s class action suit because Sandquist and the other employees were subject to indi-vidual arbitration under their employment contracts. Sandquist appealed. HOLDING: Reversed and remanded.REASONING: First, the court addressed the issue of whether Sanquist could appeal the trial court’s decision. The trial court de-cision was appealable under the “death knell” doctrine, allowing appeal of an order that is tantamount to a dismissal of an action to all members of the class other than the plaintiff.

Second, the court held that the arbitrator, not the trial court, should determine whether the arbitration contract between Sandquist and Lebo qualified for class arbitration. The court not-ed a circuit split on the issue; the Second, Third, and Ninth Cir-cuits have held that this issue is for the arbitrator to decide, while the Third and Sixth Circuits have held itis for the court to decide. The court agreed with the persuasive Ninth Circuit decision and found the arbitrator, instead of the court, should have decided the issue because it was beyond the scope of a court’s responsibility to interpret the types of arbitration allowed by the contract.

POLICY EXCLUSION ELIMINATES COVERAGE FOR TELEPHONE CONSUMER PROTECTION ACT CLAIM

Certain Underwriters at Lloyd’s, London v. Convergys Corp., ____ F.3d ____ (2nd Cir. 2014).

FACTS: Defendant, Convergys Corporation (“Convergys”), was sued under the TCPA for making improper and unsolicited au-tomated calls to customer cell phones. Convergys settled this so-called “Martin Action” and requested indemnification from its insurance carrier, Plaintiff, Beazley, for the defense costs. The in-surance policy contained an exclusionary clause (“Exclusion K”), excluding coverage for damages, penalties, or expenses in connec-tion with any alleged violation of consumer protection law, such as the TCPA. The policy had an exception to Exclusion K (“Insur-ing Clause I.C.”) for any alleged breach of a privacy policy that provided a person with the ability to opt-in or opt-out of the col-lection or use of personally identifiable non-public information.

Beazley filed a declaratory judgment action asking the court to find it was not obligated to cover due to Exclusion K. HOLDING: Motion granted.REASONING: The court began by addressing case law hold-ing insurance policies should be read in light of common speech and the reasonable expectations of a businessperson. The court opined that if the underlying action was brought for breach of consumer protection law, then Exclusion K would bar coverage for Convergys. If, however, the original action was brought for breach of consumer privacy law-failure to comply the opt-in/opt-out privacy policy-then the Insuring Clause I.C. exception to Ex-clusion K would apply.

The court concluded that Exclusion K applied. The court reasoned that both the plain language of the clause and the distinction that Martin Action was brought as a violation of con-sumer protection law rather than consumer privacy law, indicate that Exclusion K should control instead of Insuring Clause I.C.

http://www.courts.ca.gov/opinions/documents/B244412.PDF


MISCELLANEOUS

RECENT DEVELOPMENTS

WEBSITE’S TERMS OF USE UNENFORCEABLE WHEN CONSUMER LACKS REASONABLE NOTICE

Nguyen v. Barnes & Noble Inc., ____ F.3d ____ (9th Cir. 2014).h t t p : / / c d n . c a 9 . u s c o u r t s . g o v / d a t a s t o r e / o p i n -ions/2014/08/18/12-56628.pdf

FACTS: Appellee, Kevin Nguyen (“Nguyen”), initiated a putative class action against appellant, Barnes & Noble (“B&N”), alleg-ing that it deceptively advertised and sold a discontinued tablet computer model when it lacked adequate supply to fulfill all or-ders. Nguyen filed suit in a California state court, but B&N suc-cessfully removed the case to federal court. The retailer moved to

compel arbitra-tion pursuant to a stipula-tion in its web-site’s Terms & C o n d i t i o n s (T&Cs) man-dating it as re-course for for-mal customer c o m p l a i n t s . Nguyen coun-tered that he could not be

bound by the site’s T&Cs because he had at no point read them prior to purchase. In response, B&N noted that links to its T&Cs were located inside every page-footer on its website, as well as proximate to the buttons used to place an order. The trial court

Further, the court’s implied notion that a website user must actively consent to T&Cs prior to a purchase raises a significant ques-tion of law in regard to the country’s largest e-com-merce retailer, Amazon.com (headquartered within

agreed with Nguyen’s reasoning, finding that B&N had supplied no evidence that Nguyen had ever received actual or constructive notice of the T&Cs. On appeal, B&N contended that the trial court’s definition of “constructive notice” was out of line with ex-tant precedent, and that its placement of hyperlinks to its T&Cs near its purchase buttons served as a valid means of notice.HOLDING: Affirmed.REASONING: The Ninth Circuit focused predominately on the question of whether passive notice of a site’s T&Cs – in other words, requiring a “reasonably prudent [website] user” to click through to a separate page to view them – constituted “construc-tive notice.” Contrary to existing precedent on topic, the court concluded that passive notice did not suffice. Instead, it held that website operators must require users to take “affirmative action to demonstrate assent [to its T&Cs].” The court did not, however, limit the holding’s scope merely to the validity of a site’s arbitration terms. It concluded that all of a website’s T&Cs could be legally invalid absent actual notice of user assent. The potential ramifications of the decision are consequently extensive in breadth and, at least in theory, ap-plicable to the entire T&Cs of any e-commerce site situated inside the Ninth Circuit. Further, the court’s implied notion that a web-site user must actively consent to T&Cs prior to a purchase raises a significant question of law in regard to the country’s largest e-commerce retailer, Amazon.com (headquartered within the Ninth Circuit). The company’s patented “1-Click” purchase mechanism, a widely employed and popular element of its checkout process, does not appear to fit the circuit court’s definition of legally ac-ceptable notice of its T&Cs, which are functionality identical to B&N’s.




THE LAST WORD

T

Richard M. AldermanEditor-in-Chief

hree years ago, the Consumer and Commercial Law Section decided to distrib-ute the Journal electronically, instead of sending a hard copy. The change was done in large part due to costs, but it also allowed us to provide a better product. Specifically, sending the Journal electronically allows us to link the many cases we

discuss with a copy of the opinion. This issue includes more links than ever. But we still occasion-ally have technology problems, and while the link is correct, you cannot access the case by simply clicking on it. If this happens, we apologize. There is, however, a quick fix--simply copy the link and paste it into your browser. Sorry for any inconvenience. As usual, this issue contains a cornucopia of information. For example, the lead article dis-cusses “plain language” laws in South Africa and compares them to those in the United States. And the student article highlights a recent case finding a payday loan unconscionable, notwithstanding the fact that it complied with state lending rules. As always, the Case Alert and Digest sections highlight many of the important decision of the past four months. Once again, the Journal is the best way to stay current with commercial and consumer developments. Finally, think about submitting something for publication in a future issue of the Journal. We consider everything from short editorial pieces to full-blown law review articles and everything in between. If it is of interest to you, odds are many other readers also will find it interesting. Please send submissions to me at [email protected].

mailto:[email protected]

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