Consumption Gentrification -- A Metaphor for Understanding Market Failure in Consumer Law

We have long recognized the impact of market infiltration in the housing sector and the negative impacts on local inhabitants that market infiltration causes.   

Can there be a similar concept in other consumer transactions?  Lets assume that a seller of goods knows a few things about his buyers.   First, he knows that he has a significant market in persons who will not deem insignificant losses as that important to seek a legal remedy.   Thus, the loss of a small number of consumers matters little to the merchant’s bottom line.  He knows that any of these consumers that feel wronged will do a cost-benefit analysis and just walk away quietly.  He also knows he has a second customer base - one that does not necessarily have sufficient means or sophistication to comprehend all of the legal nuances of his or her transaction.  

In such a scenario, two classes of consumers merge with different motivations and rationales for pursuing remedies.   One group may not be motivated at all to pursue a remedy, even though they have the means to do so.  The other group may be highly motivated to pursue a remedy, though they lack the resources or the know-how to do so.   

In a new paper Payment Systems, Consumer Tragedy, and Ineffective Remedies, I argue that this metaphor describes potential issues of consumer protection.  Let’s consider a couple of consumer transactions.   In stored value card transactions, consumers often find themselves at the mercy of merchants who have more thoroughly considered the terms and conditions under which they hold consumer money -- such as whether those terms are the requirement that minimum purchase amounts are required to use cards holding below certain balances.  Similarly, consumer prepaid warranties are replete with instances in which consumers are prevented from raising defects that emerge by terms they did not themselves read or understand applied to their purchase.   Those consumers that choose to purchase the warranty that represent a wealthier class of consumers may simply forego their remedy because of the perception that the pursuit of a remedy is inefficient. Less-wealthier purchasers who thought they were buying a type of insurance against defect may forego a remedy, not because the costs are inefficient, but because the costs of pursuing the remedy are too steep.   

What gentrification as an analogy may do is suggest that our normal filtering of transactional equity needs recalibrating, forcing us to reconsider how the regulatory frameworks that govern such transactions take into account the unequal status of different parties.  

The abstract to the paper: 

Payment methods like the Starbucks Rewards Card, while imitating liquidity, are challenged by confidence-detracting barriers of too little consumer knowledge and a lack of appropriate remedies. Starbucks operates as a non-banking firm performing an essential banking function – the storage of money for consumers to later use. Consumers are rarely well informed of the nature of this transaction and the relief that may be available when contracting for a future sale. Recent congressional action (CAFA) limiting class action lawsuits to Federal Court significantly limits traditional consumer relief while the bankruptcy code provides little relief should the merchant find itself insolvent. All the while, consumers continue to entrust more than $1 billion each year for merchants to hold with no guarantee that the credits will be honored, few enforcement mechanisms to force merchants to do so, and little relief if the company files bankruptcy. Using the metaphor of consumption gentrification, this Article re-conceptualizes the stored value cards problem as a confluence between fair dealing and risk allocation. In doing so, the Article suggests several avenues of relief, but proposes comprehensive reform that incorporates commercial policy, regulatory oversight, and social consumer awareness.

Comments

[Bette Dell]

I've also been considering the development of the relationship between Schultz and Django. I would chime in and agree with you. To me, there's definitely a friendship there, past any 'business'-related partnership. Furthermore, yes, I think they can be likened to a father/son duo as well because I simply find it endearing, not to mention credible: Schultz admits he feels responsible for Django, he guides him and arms him with means of self-protection, and stands by him, defends him every step of the way.

This link sums up everything pretty well: http://tvtropes.org/pmwiki/pmwiki.php/Heartwarming/DjangoUnchained

And yes, please elaborate on your interpretation of their father/son relationship. I can't get enough of any of that kind of evidence.

[Matthew Bruckner]

As a facial matter, the bankruptcy code would treat the owners of such stored value cards as unsecured claimants. As a practical matter, many companies that intend to reorganize seek permission to allow cardholders to redeem their cards at full face value (or as close as these things come to allowing you to get the full amount off of them). In short, it is my understanding that bankrupt companies honor these cards at 100 cents on the dollar, despite having no legal obligation to do so.

[Marc Roark]

Matthew -- Regarding the practical aspects, we have seen at least one prominent bankruptcy decision in which consumers were proposed to use the full cash face value of the card, but only if they spent double the amount of the card (hardly full value). In re Sharper Image Corp., No. 08-10322 (Bankr. D. Del. Mar. 3, 2008). Only after backlash by the National Association of Attorneys General did Sharper Image withdraw its already approved plan. So I'm not sure that its necessarily true that Bankrupt companies generally treat fairly with consumers, outside of some collective, external pressure, be it from state Attorney Generals or legislation.

[Matthew Bruckner]

Hi Marc,

I suppose my point was that gift card holders are holders of unsecured claims. Requiring them to file proofs of claim and accept a pro rata distribution is fair within the bankruptcy context. And yet, I would expect that reorganizing companies act different than liquidating companies.

For companies that are reorganizing (or hope to), rather than liquidating, i would be surprised if they all didn't seek approval to honor gift cards at full face value. Otherwise, they would alienate customers.

Liquidating companies present a different picture. It isn't clear to me why they would honor these cards. Nevertheless, didn't Borders continue to accept gift cards while it liquidated? See In re Borders Group, Inc., 2011 WL 3022401, at *35 Bkrtcy.S.D.N.Y.,2011. (http://www.annarbor.com/business-review/owners-of-unused-gift-cards-target-borders-in-bankruptcy-court/)

[Marc Roark]

Matthew -- I don't disagree that gift card holders are unsecured creditors. In fact one question in the paper is whether we should create a legal fiction of a secured creditor (the unsecured aggregate creditor) to provide a basis of leverage - akin to the class action plaintiff who has no leverage to litigate a small matter, but collectively has greater force. I agree that there is a market force ethic at work for companies seeking to reorganize and different companies will honor the cards differently under those scenarios. But, and I am just venturing a guess on the Borders point, the gift cards were honored for stock they owned as assets for the company. My guess is (and this is purely a guess) that much of Border's inventory was returned to publishing companies who held a greater security interest. I recall walking around Borders and finding the inventory to be rather low compared to its prior state.