Consumer Law
Insurance Law’s Hapless Busybody: A Case Against the Insurable Interest Requirement
117 Yale L.J. 474 (2007). For centuries, the law has prevented people from purchasing insurance on the life or property of strangers because such insurance contracts would give policyholders incentives to end the life or destroy the property in order to collect the insurance payout. The law thus requires that policyholders have an “insurable interest” in the person or property they insure, and contracts lacking such an “insurable interest” are invalidated by courts as against public policy. This Note presents an economic analysis of the insurable interest requirement, and argues that the doctrine creates perverse incentives that encourage the very practices the doctrine seeks to deter. In addition to failing on its own terms, the doctrine also invites unfairness and inefficiency in the insurance market. This Note concludes that the best way for courts to prevent insurance contracts on the life or property of strangers may be to refrain from invalidating such contracts in the first place.
Tenant Screening Thirty Years Later: A Statutory Proposal To Protect Public Records
116 Yale L.J. 1344 (2007) Most consumers learn about tenant-screening reports only when a landlord points to an item on such a report as the reason for rejecting an application and provides the tenant with a copy of that report as required by law. Legal scholars have criticized these reports for more than thirty years, however, observing that they are prone to error, open to abuse, and generally contrary to established public policies. This Note examines existing mechanisms used to regulate these reports and finds them inadequate, endorsing instead one state’s approach of “choking” information flows by disclosing eviction records only when the landlord prevails in court. In a digital age in which personal information is easily aggregated, court records should not be a vehicle for automatic damage to an individual’s renting prospects and reputation.
BlackBerry Users Unite! Expanding the Consumer Class Action To Include a Class Defense
116 Yale L.J. 217 (2006)
Bailing Out Congress: An Assessment and Defense of the Air Transportation Safety and System Stabilization Act of 2001
115 Yale L.J. 438 (2005) This Note provides the first detailed account of the conception, impact, and success of the Air Transportation Safety and System Stabilization Act (ATSSSA) of 2001, an $18 billion federal bailout of the airline industry passed eleven days after the terrorist attacks of September 11. The Note argues that, far from seeking to rehabilitate the commercial aviation industry, Congress hoped only to stabilize the airlines briefly and reassure the nation without severely distorting long-term market forces. In accomplishing this, the Note argues, the ATSSSA has established itself as a model of disaster-response legislation that can be turned to in the unfortunate event of future need.
A "Flip" Look at Predatory Lending: Will the Fed's Revised Regulation Z End Abusive Refinancing Practices?
112 Yale L.J. 1919 (2003) The regulation of predatory loans can be a tedious business. The whole topic redounds of such yawn-inducing terms as "single-premium credit insurance" and "negative amortization." Yet the human costs of predatory lending are no less real for all the financial jargon that masks them. Thousands of Americans, especially minorities and the elderly, have lost their homes due to sharp lending practices. The effective regulation of such abusive lending, while not a very sexy endeavor, could markedly improve the quality of life for some of the nation's most vulnerable people. This reality has led thirteen states and several major cities to undertake statutory and regulatory reform efforts in the past three years. The Federal Reserve Board (Fed), too, has attempted to rein in predatory lending through the recent promulgation of its revised standards under Regulation Z. This Comment will attempt to analyze the potential efficacy of the Fed's effort by examining a specific portion of the revised Regulation Z, namely, its prohibition of so-called loan "flipping." This rule forbids the refinancing of any "high-cost loan" within one year of its initiation, unless that refinancing is "in the borrower's interest." The prosecutorial discretion embedded within the new federal antiflipping provision represents a potential improvement over the previous generation of predatory lending regulations. This is because a discretionary standard better enables regulators and judges to end illegitimate mortgage refinancings, while still permitting others to go forward when warranted by individual circumstances. Such a result can improve both the justice and efficiency of the regulatory regime. Even so, like all other regulatory systems relying on prosecutorial discretion, also present is the opportunity for over- and underenforcement. In the case of the antiflipping provision, most of the worry has been that the standard will be overenforced and cause the market for legitimate subprime loans to dry up. This Comment argues that this fear is overstated and that the real worry is underenforcement.
The Law and Economics of Reverse Engineering
111 Yale L.J. 1575 (2002) Reverse engineering has a long history as an accepted practice. What it means, broadly speaking, is the process of extracting know-how or knowledge from a human-made artifact. Lawyers and economists have endorsed reverse engineering as an appropriate way to obtain such information, even if the intention is to make a product that will draw customers away from the maker of the reverse-engineered product. Given this acceptance, it may be surprising that reverse engineering has been under siege in the past few decades. While some encroachments on the right to reverse-engineer have been explicit in legal rulemaking, others seem implicit in new legal rules that are altogether silent on reverse engineering, including the Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS) and the Economic Espionage Act of 1996 (EEA). TRIPS is an international treaty that, among other things, obligates member states of the World Trade Organization to protect trade secrets, yet it neither requires nor sanctions a reverse engineering privilege. The EEA created the first federal cause of action for trade secrecy misappropriation. Its lack of a reverse engineering defense has troubled some commentators because rights granted under the EEA arguably implicate certain reverse engineering activities previously thought to be lawful. Among the explicit legal challenges to reverse engineering are these: In the 1970s and 1980s some states forbade the use of a direct molding process to reverse-engineer boat hulls. In the late 1970s and early 1980s, the semiconductor industry sought and obtained legislation to protect chip layouts from reverse engineering to make clone chips. In the mid-1980s and early 1990s, a controversy broke out about whether decompilation, a common form of reverse engineering of computer programs, was legal as a matter of copyright law. Even after U.S. courts ruled that decompilation was acceptable for purposes such as achieving interoperability, a related controversy broke out over the enforceability of licenses forbidding reverse engineering of software and other digital information. More recently, questions have arisen about whether the decompilation of computer programs infringes upon patent rights in software components. In 1998, Congress outlawed the reverse engineering of technical protections for digital versions of copyrighted works and prohibited both the creation and distribution of tools for such reverse engineering (except in very limited circumstances) as well as the disclosure of information obtained in the course of lawful reverse engineering. Our objectives in this Article are, first, to review legal developments regarding the right to reverse-engineer, and second, to understand their economic consequences. We start in Part II with a discussion of the well-established legal right to reverse-engineer manufactured goods. In our view, the legal rule favoring reverse engineering in the traditional manufacturing economy has been economically sound because reverse engineering is generally costly, time-consuming, or both. Either costliness or delay can protect the first comer enough to recoup his initial research and development (R&D) expenditures. If reverse engineering (and importantly, the consequent reimplementation) of manufactured goods becomes too cheap or easy, as with plug-molding of boat hulls, it may be economically sound to restrict this activity to some degree. In Parts III, IV, and V, we consider the law and economics of reverse engineering in three information-based industries: the semiconductor chip industry, the computer software industry, and the emerging market in technically protected entertainment products, such as DVD movies. In all three contexts, rules restricting reverse engineering have been adopted or proposed. We think it is no coincidence that proposals to restrict reverse engineering have been so common in information-based industries. Products of the information economy differ from traditional manufactured products in the cost and time imposed on a reverse engineer. With manufactured goods, much of the know-how required to make the goods remains within the factory when the products go to market, so that reverse engineering can capture only some of the know-how required to make the product. The information-rich products of the digital economy, in contrast, bear a higher quantum of applied know-how within the product distributed in the market. For so-called digital content (movies, sound recordings, and the like), the relevant knowledge is entirely on the surface of the product, at least in the absence of technical protections such as encryption. Technical protections create costs for reverse engineers. When computer programs are distributed in object code form, a difficult analytical process is required to ascertain information embedded in the program, but it is there for the taking if a reverse engineer is willing to spend the time to study it. For computer chips, the relevant knowledge is circuit design, which is not only embodied within the chip, but also readily accessible using technologies discussed below. The challenge is to design legal rules that protect information-rich products against market-destructive cloning while providing enough breathing room for reverse engineering to enable new entrants to compete and innovate in a competitively healthy way. Part III focuses on the semiconductor chip industry. When the competitive reverse engineering and copying of semiconductor chip designs became too easy and too rapid to enable innovators to recoup their R&D costs, Congress responded by enacting the Semiconductor Chip Protection Act of 1984 (SCPA) to protect chip makers from market-destructive cloning while affirming a limited right to reverse-engineer chips. The SCPA allows reverse engineers to copy circuit design to study it as well as to reuse information learned thereby in a new chip, but it imposes a forward engineering requirement that inevitably increases a second comer's development time and increases its costs. In the context of the chip industry, we think this restriction on reverse engineering is economically sound. Part IV focuses on the software industry. Reverse engineering is undertaken in the software industry for reasons different from those in other industrial contexts. The most economically significant reason to reverse-engineer software, as reflected in the case law, is to learn information necessary to make a compatible program. The legal controversy over whether copies made of a program during the decompilation process infringe copyrights has been resolved in favor of reverse engineers. But as Part IV explains, the economics of interoperability are more complex than legal commentators have acknowledged. On balance, however, we think that a legal rule in favor of reverse-engineering computer programs for purposes of interoperability is economically sound. Part V discusses the emerging market for technically protected digital content. Because technical protection measures may be defeated by countermeasures, copyright industry groups persuaded Congress to enact the Digital Millennium Copyright Act (DMCA), which creates new legal rules reinforcing technical measures used by copyright owners to protect their works. It protects them against most acts of circumvention, against the manufacture and distribution of circumvention technologies, and against dissemination of information resulting from privileged acts of circumvention. In our view, these new rules overly restrict reverse engineering, although the core idea of regulating trafficking in circumvention technologies may be justifiable. Part VI steps back from particular industrial contexts and considers reverse engineering as one of the important policy levers of intellectual property law, along with rules governing the term and scope of protection. The most obvious settings for the reverse engineering policy lever are "on" (reverse engineering is permissible) and "off" (reverse engineering is impermissible). However, our study reveals five additional strategies for regulating reverse engineering in the four industrial contexts studied: regulating a particular means of reverse engineering, adopting a "breadth" requirement for subsequent products, permitting reverse engineering for some purposes but not others, regulating tools used for reverse engineering, and restricting the dissemination of information discerned from reverse engineering. In this discussion, we distinguish between regulations affecting the act of reverse engineering and those affecting what the reverse engineer can do with the resulting information. Some restrictions on reverse engineering and on post-reverse-engineering activities may be economically sound, although we caution against overuse of restrictions on reverse engineering because such restrictions implicate competition and innovation in important ways. Part VI also considers policy responses when innovators seek to thwart reverse engineering rights by contract or by technical obfuscation. Intellectual property law in the United States has an important economic purpose of creating incentives to innovate as a means of advancing consumer welfare. The design of intellectual property rules, including those affecting reverse engineering, should be tailored to achieve these utilitarian goals and should extend no further than necessary to protect incentives to innovate. Intellectual property rights, if made too strong, may impede innovation and conflict with other economic and policy objectives.
Tobacco Unregulated: Why the FDA Failed, and What To Do Now
111 Yale L.J. 1179 (2002) The book jacket promises drama. David Kessler, former Commissioner of the Food and Drug Administration (FDA), is said to tell "a gripping detective story," a story of "right and wrong" and "moral courage." The "unlikely heroes" are a small team of FDA employees who set out to battle the "lethal" tobacco industry. Kessler himself plays a role akin to James Stewart's Mr. Smith. This was real life, however, and the good guys did not win. Based on its investigations of the tobacco industry, the FDA answered the "question of intent"--whether tobacco manufacturers intended to produce nicotine's drug-like addictive effects--positively. This finding meant, for the FDA, that tobacco was a drug, and that tobacco therefore fell within its jurisdiction. The Agency acted on its claimed authority to promulgate rules aimed at reducing the incidence of youth smoking. These rules, for example, restricted underage purchases, prohibited billboard advertising near schools, and banned all but text-only ads in print publications that reach the young. The Supreme Court, however, taking the position that Congress did not intend to place tobacco within the Agency's jurisdiction, struck down the regulations. Of course, the FDA's battle, despite its ultimate failure to create a regulatory scheme for tobacco, was not wholly without effect. Its investigation brought to light information about the mechanisms manufacturers use to control the level of nicotine in their products. Industry documents obtained by the Agency showed plainly how tobacco products are designed to "deliver nicotine, a potent drug, with a variety of physiological effects." The Agency's evidence demonstrated, as the Supreme Court observed, "that tobacco use, particularly among children and adolescents, poses perhaps the single most significant threat to public health in the United States." Collectively, the information produced through the FDA's investigation "changed popular thinking forever." The investigation also spurred a televised congressional hearing at which tobacco executives denied the addictive nature of cigarettes, a position that helped further to discredit the industry in the public mind. The Kessler-led effort, in short, has put tobacco reform on the public agenda in a way that promises continuing change. Nevertheless, the fact remains that the FDA's regulatory effort failed. One aim of this Review is to explain why. I maintain that Kessler, perhaps driven by the sort of black-and-white dynamics that color the book jacket, sought too much. He claimed an essentially open-ended jurisdiction with unidentified aims. Had he argued for a more limited vision of the Agency's authority, one that, for example, confined itself to the youth smoking that was, in any case, the subject of the Agency's proposed regulations, the Supreme Court might have supported the Agency. When he announced the regulatory effort, President Clinton stated that the "cigarette companies still have a right to market their product to adults. But today we are drawing the line on children." The restrictions promulgated by the FDA did indeed specifically target youth smoking. However, the FDA's jurisdictional claim, based on the addictive effects of nicotine in tobacco, was more sweeping. For Kessler, gaining jurisdiction "was far more important than" any rule, since any rule "was likely to be relatively modest, at least initially." The implication of this and other comments is that Kessler intended for the FDA eventually to regulate adult smoking and quite possibly to reduce nicotine levels in cigarettes generally. The breadth of the FDA's jurisdictional claim allowed the industry to raise the stakes of tobacco regulation to unacceptable levels. The industry argued that the Agency's findings on the harmful effects of nicotine would necessitate an absolute ban on the sale of tobacco products, but that such a ban was not intended by Congress. Whether the FDA could ever have regulated adult use of tobacco products is debatable, but if the Agency wanted to leave the issue open it should have done so in a way that made further regulation subject to independent judicial review, by, for example, framing its initial jurisdictional assertions in a way that precluded the possibility of any de facto ban. By arguing for open-ended authority, Kessler ironically allowed the tobacco industry to inject its own question of intent, one that looked not to the minds of the manufacturers but to the thinking of congressional lawmakers. The first two Parts of the Review elaborate this thesis. Part I summarizes Kessler's account of the Agency's decision to take on tobacco and its search for evidence to support its jurisdictional claims. The summary points out the discoveries that the FDA made and highlights the ways in which Kessler designed the FDA's effort to regulate youth smoking as a sympathetic hook upon which to capture wide jurisdictional authority. Part II examines the Supreme Court decision that invalidated the FDA's rule. The Court's decision merits only brief mention in Kessler's discussion, which dismisses it as a straightforward outcome of conflicting ideologies. Whatever the Justices' motives, their opinions respond to basic questions about congressional intent and the scope of an agency's delegated authority. My analysis of the Court's opinion suggests that, given an agency's ability to adapt its legal powers to new circumstances in light of the statutory purpose of its enacting legislation, the FDA's youth-centered rule could have survived had the Agency argued for it on narrower jurisdictional grounds. In any case, the conflicting approaches expressed by the majority and the dissent regarding agency discretion, both generally and in the tobacco context, provide signposts for the FDA in determining its future role in the realm of tobacco regulation. Part III considers directly the future of tobacco policy. Echoing the crusading chords of the book jacket, Kessler makes a stark proposal: He suggests that tobacco companies "be spun off from their corporate parents" and transferred to a congressionally chartered corporation that satisfies the industry's product liability obligations and sells tobacco in brown paper wrappers. If, as one tobacco lawyer suggested, the industry must now "obtain[] permission from society to continue to exist," Kessler seems unwilling to grant such permission. I argue that his approach is riddled by too many unknowns, and is also constitutionally problematic, since First Amendment protections of commercial speech ordinarily preclude a total restriction on product promotion. Furthermore, the proposal ignores the advent of new types of risk-reduced tobacco products, "safer" cigarettes that may help those who cannot or will not quit smoking. A recent FDA-funded report by a committee of the Institute of Medicine (IOM) in the National Academy of Sciences found that these "reduced exposure" products could potentially be beneficial, if accompanied by an adequate regulatory scheme. Philip Morris, which is developing a smokeless cigarette, has also issued a new position paper acknowledging the need for legislation authorizing limited FDA regulation of tobacco. In the remainder of Part III, I argue that the FDA should be given regulatory authority over reduced-risk products. Moreover, even if no new authority is granted, the Agency's existing authority may by itself permit regulation. Although the Supreme Court rejected the FDA's broad jurisdictional claim, the Court was dealing with tobacco products generally, not with products specifically intended to reduce risk. I conclude by suggesting that tobacco companies should have an obligation, because of tobacco's addictive nature, not only to reduce smokers' risk but also to assist smokers who wish to quit. Most promising would be industry development and marketing of cigarettes containing progressively lower quantities of nicotine as part of a graduated program of cessation. Measures such as this would restore to tobacco users the choice of which addiction robs them.
Stopping Above-Cost Predatory Pricing
111 Yale L.J. 941 (2002) This Essay has refocused the predatory pricing debate on ex ante incentives--i.e., the incentives for entry and limit pricing before the predatory period--instead of the traditional focus of high prices after the predatory period. Ideally, a monopoly incumbent should price reasonably low, and in the event that it prices high, other firms should enter the market. The difficulty arises when the entrants have higher costs than the incumbent and expect to be out-competed upon entry. Consumers would then be worse off than if the monopoly firm did not exist, because they would have to pay higher prices than entrants would charge if they entered. Monopolies that cut prices dramatically in response to entry are exclusionary because the behavior discourages entry. This observation holds even if they are only matching rivals' prices, and even if they are charging prices that exceed their costs. If courts view such behavior as monopolization under section 2 of the Sherman Act, monopolies will price lower than they do now under the Brooke Group rule. Likewise, it is exclusionary for an incumbent monopoly to respond to entry by substantially improving product quality, as when a monopoly airline increases flight frequency. This behavior is no less exclusionary when the product remains priced above cost, as in the AMR Corp. case. If such behavior constitutes monopolization under section 2 of the Sherman Act, monopolies will provide higher-quality products than they do now under the Brooke Group rule. The courts have two choices about how to recognize above-cost price cuts and quality enhancements as exclusionary. The Supreme Court could simply overrule Brooke Group. A more moderate approach in the lower courts would distinguish the monopoly cases at issue in this Essay from oligopoly cases like Brooke Group. As this Essay has pointed out, a monopoly typically has substantial advantages that allow it to drive out entrants without incurring losses, a possibility that is less plausible in oligopoly cases like Brooke Group. This Essay's predation rule essentially makes the market more contestable. A contestable market behaves like a competitive market even when only one incumbent serves the market, because competitors wait in the wings to enter if the incumbent prices high. The great advantage of a contestable market is that low prices are ensured by the decisions of market participants. No regulator needs to know the costs of other firms, and, in fact, firms do not need to know other firms' costs. The market price is never high, because if it were, competitors would enter and drive it down. Certainly, recognizing a new category of above-cost predation would not make markets perfectly contestable, but it would make markets more contestable. This Essay's arguments are strongest in the core case, with homogeneous products, a cost advantage for the incumbent, and a clear understanding of what constitutes substantial entry. Substantial administrative difficulties arise when products are differentiated by quality or other characteristics, when entrants are difficult to identify, or when it is difficult to tell whether the incumbent is reacting after rather than before the entrant has materialized. This Essay only briefly mentioned some of these complexities but suggested as an example that if the overall deal offered by an entrant seems comparable to a twenty percent discount on the incumbent's product, the entrants would qualify as substantial and warrant some protection. Such a standard, however, is easier to state than to implement carefully. The variety of potential administrative difficulties is daunting indeed, but the same is true in other antitrust cases. How is the court to know, for example, whether a merger will or will not be anticompetitive? The Essay has not dealt further with administrative complexities, because to do so in advance would yield limited insights. Such questions are best faced as they come before the courts. Hopefully, this Essay has at least made clear that low prices can harm consumers and also lower total welfare even if prices exceed cost--a possibility that one sees most clearly by focusing on ex ante incentives to enter the market. The principal substantive objection to the rule proposed here is that it protects inefficient entrants. Why would we want inefficient firms in the market, and what business is it of antitrust to protect them? The best answer is that consumers often need inefficient entrants. Recall that the entrant only receives any protection if it is a "substantial entrant," which I suggest operationalizing as one pricing at least twenty percent below the incumbent. Only entrants who provide substantial benefits to consumers receive any protection. From the vantage point of overall wealth maximization, the advantages of this rule are ambiguous if the incumbent does not charge low enough limit prices to bar all entry, because some less efficient firms may enter. Consumer benefits are more certain, however, since limit pricing is encouraged; and at any given incumbent price level, entry is encouraged. Conditional upon entry, the entrant has a strong incentive to price twenty percent below the incumbent instead of ducking just under the monopoly price umbrella. Courts that favor total welfare maximization over maximizing consumer benefits could modify the proposed rule appropriately.
Drug Designs are Different
111 Yale L.J. 151 (2001) In an essay published in this Journal entitled Is There a Design Defect in the Restatement (Third) of Torts: Products Liability?, George Conk criticizes the American Law Institute and the Reporters of the new Restatement for immunizing prescription drug manufacturers from liability for defective design. In doing so, he joins other commentators who have been critical of this aspect of the new Restatement, upon which we served as Reporters. Because Conk claims to have history on his side, and because this most recent criticism may prove to be disproportionately influential, we offer a response both to him and to other critics. Conk praises the general product-design standard adopted by the Restatement, which predicates liability for almost all nonprescription products upon proof that a reasonable alternative design could have been adopted that would have avoided or reduced harm to the plaintiff. However, he criticizes the Restatement's provisions relating to defective drug design for not applying the same "reasonable alternative" standard. (The Restatement deems a drug defective in design only if it would not be prescribed for any class of patients.) In his view, the Restatement test for defective drug design would protect prescription drug manufacturers from liability even if a plaintiff could show that an alternatively designed drug would have avoided unnecessary risk. Conk argues that during the late 1970s and early 1980s, the absence of a reasonable alternative design standard for prescription drugs allowed distributors of blood to escape liability for supplying blood products contaminated with the hepatitis C virus and that the Restatement test would condone such noxious results in the future. Claiming this regrettable history as support for his position, Conk urges that the defectiveness of prescription drug designs should be determined by the same standard as is generally applicable to nonprescription products. Our critics have misread the prescription drug design provision of the new Restatement. It does not immunize prescription drug manufacturers for defective design. Plaintiffs may establish defectiveness by showing that safer alternative drugs were available on the market that reasonable health care providers would have prescribed in place of a defendant's drug for all classes of patients. Moreover, Conk's premise that the blood cases in the 1980s would have been decided differently if blood products had been subject to the reasonable alternative design rule of the new Restatement is false. Finally, the purportedly pro-plaintiff approach he advocates, which would require courts to deny classes of patients access to a particular drug that provides them unique benefits in order to protect other patients from the risks of misprescription by negligent physicians, is both unfair and inefficient. In short, the Restatement is quite correct in treating prescription drug designs differently from other product designs, although it does not treat them as differently as Conk supposes. Drug designs are different from other product designs, and they deserve different treatment under the new Restatement. Part I of this Essay summarizes Conk's thesis, including his interpretation of the new Restatement. Part II identifies significant errors in Conk's critique: He has read the Restatement incorrectly, and his reliance on the blood cases is misplaced. Part III explains and justifies the substantive differences between the new Restatement's treatment of prescription drug design and its treatment of defective product design generally. These differences include the Restatement's refusal to allow courts to consider alternative, safer prescription products that have not yet received FDA approval (under the general design provisions, courts routinely consider not-yet-marketed alternative designs) and its refusal to sacrifice the welfare of one class of patients to enhance the welfare of another class of patients (under the general design provisions, such cross-consumer sacrifices of welfare are routinely condoned). Part III also explains why drug design litigation cannot legitimately be made more plaintiff-friendly by reducing its complexity and why the rule in the new Restatement should not significantly reduce manufacturers' incentives to discover new and safer prescription products.