Like pawnbrokers, payday lenders cater to people in a tight squeeze. That means they can, in turn, put the squeeze on their customers, charging annual percentage interest rates above 300 percent for their short-term unsecured loans. That also means they are a popular target of federal regulators who are concerned about vulnerable consumers.
The FTC has recently brought a slew of cases against payday lenders. Some actions include one against a payday lender for allegedly tricking consumers into buying debit cards when they applied online for loans and another against a loan intermediary for allegedly tricking consumers into signing up for worthless continuity programs. The latest FTC action targeted a payday lender for garnishing borrowers’ wages.
One thing to glean from these actions is that the FTC is focused on the payday loan industry as a whole and not on some specific type of bad behavior by these lenders. In a twist on “if you build it, they will come,” if you have a payday lending operation, plan on a visit by the FTC. And any level of questionable behavior could very well become the basis of further FTC involvement.
The latest case, in which the FTC filed suit based upon Payday Financial LLC’s practice of garnishing borrowers’ wages, has an interesting twist: the FTC alleges that the payday lender deceived the borrowers’ employers.
The FTC goes after people and companies for false and deceptive practices affecting commerce – that’s its jurisdiction. Normally, its lawsuits allege practices that deceive consumers. So you would think in this case that the FTC would allege that the lender deceived borrowers, tricking them into giving permission for their wages to be garnished. Instead, the FTC alleges that Payday Financial deceived the borrowers’ employers, causing them to believe that Payday Financial was authorized to garnish the borrowers’ wages. The FTC alleged that the defendant’s notice to employers for wage garnishment looked “very similar, in both form and substance, to the documents sent by federal agencies when seeking to garnish wages for nontax debts owed to the United States.”
There are two unusual elements to this action. First, the FTC takes a bit of a circuitous route to get at jurisdiction, arguing that deceiving the borrowers/consumers’ employers impacted commerce. It makes sense when the FTC alleges that consumers’ actions, as a result of deceptive practices, impact commerce; it’s a bit of a stretch to move to a third party’s actions.
Secondly, the FTC argues that employers, normally considered sophisticated parties, were deceived. As we talked about earlier – the FTC focuses on protecting vulnerable consumers. Sophisticated parties are often held to a different standard.
So if you are a payday lender, a lesson from this may be: dot your I’s and cross your T’s. Your industry is not popular with the FTC. The agency is highly motivated to find that you have done something wrong.
Companies marketing prepaid phone cards should be on the lookout: the Federal Communications Commission is threatening more-severe penalties for deceptive advertising.
The prepaid phone card business is pretty profitable, with the industry raking in billions every year. Plastering phone cards with names like “Africa Magic” and “Hola Amigo,” prepaid calling card companies target immigrant populations, advertising thousands of minutes of talk time to immigrants’ native countries for just a few dollars.
The problem is that there are tons of hidden costs that erode the value of these cards before the card user can say “adios.” So while a card purchased for $2 or $5 may say in a big font that it will provide 1000 minutes of talk time, in a tiny font on the detachable “hanger” for the card are additional fees that may reduce the talk time by 45 percent or more.
The major discrepancies between the big-font value and the small-font reality of these prepaid calling cards have made the industry a popular target for state and federal regulators as well as plaintiffs’ attorneys. State attorneys general, the Federal Trade Commission, the FCC, and class action attorneys have pursued prepaid calling card companies for deceptive advertising.
Year after year there are announcements of companies paying out hefty multi-million dollar sums. But the marketing techniques continue. And many of these companies are repeat players. For instance, the company Epana Networks has been pursued in – and settled or been fined in – federal, state, and private actions.
Perhaps prepaid calling card companies have considered responding to legal actions for deceptive advertising as part of the cost of doing business. Getting people to buy their cards under misleading pretenses and paying a fine or settlement is a lot more lucrative than just being more up front about calling fees.
These companies may not be able to make the “cost-of-doing-business” decision for long, though. The FCC announced forfeitures by four different telecommunications companies earlier this month. Each of the companies was fined $5 million. The notice for each forfeiture, in the form of a No Action Letter (NAL), was almost a mirror of the next. One thing that bears repeating is how the FCC could have calculated the fines against these companies: $150,000 for each violation AND each card purchased as a separate violation. The FCC opted not to calculate out these prospective sums and instead determined that a $5 million fine would be sufficient to protect consumers and deter future bad behavior.
But, in each NAL, the FCC also noted that should the company continue to engage in “unjust and unreasonable practices” (deceptive advertising), the FCC would issue more NALs imposing substantially greater forfeitures and revoking each company’s operating authority. The takeaway here: current practices of hidden fees may be a thing of the past if prepaid calling card companies want to have a future.
In an unusual and little-noticed recent settlement, Google Inc. has agreed to pay a forfeiture of $500 million because it permitted Canadian pharmacies to advertise to United States consumers on its site using Google AdWords, resulting in the illegal sale of prescription drugs through online channels into the United States between 2003 and 2009.
The U.S. Department of Justice announced this agreement on August 24, 2011, in conjunction with the Food and Drug Administration’s Office of Criminal Investigations and the Attorney General of Rhode Island.
The government said that this forfeiture represents the gross revenue received by Google as a result of Canadian pharmacies advertising through Google’s AdWords program, plus the gross revenue made by Canadian pharmacies from their sales to U.S. consumers.
Although Canada has its own system of regulation of pharmaceuticals, Canadian pharmacies that ship drugs outside that nation are not subject to that system, and the U.S. Food and Drug Administration regards those shipments into the United States as generally illegal since they don’t comply with its regulations regarding labeling, distribution, and the use of a valid prescription.
What is most unusual here is that Google agreed to pay the forfeiture – even though its role was simply to accept advertising by Canadian pharmacies and to turn a blind eye to the legal problems. According to the government, Google did so from 2003 through 2009, when it learned of the investigation and took a number of steps to prevent the unlawful sale of prescription drugs by online pharmacies, including Canadian pharmacies, to U.S. consumers.
Last March, we asked the question, “Does Google Need to Police Its Ads for Fraud?” when Consumer Watchdog asked whether Google should be held legally responsible for deceptive advertisements placed on its site by mortgage rescue companies. This forfeiture agreement puts Google – and others in its position – on notice that they may need to account for their actions in connection with potentially illegal advertising.
It may go even further. A blog that covers the affiliate marketing community has noted: “For affiliate marketers, the Google and Justice Department settlement has serious consequences. There are many opportunities to partner with products or services online that may or may not be entirely legal.”
In fact, this settlement may have significant effects on the affiliate marketing community. Does each affiliate marketer that places an ad on a website, or simply permits an ad to go on a website, need to check the accuracy and truthfulness of the ad, or risk a major fine? This is at the very least a question that affiliate marketers need to concern themselves with.
If you advertise or sell over the Internet, be aware that changes are afoot at the FTC that will affect your business. The Commission is in the midst of revamping its Dot Com Disclosures, guidelines it prepared back in 2000 regarding online advertising. It issued a request for public comment on prospective revisions in late May. Now that the comment period has ended in early August, we are in a wait-and-see period until the new guidelines are published.
The original guidelines were pretty broad, generally providing that advertising standards that applied to more traditional media also applied to advertising over the Internet.
Acknowledging the vast technological developments in marketing since the Dot Com Disclosures were published over a decade ago — e.g., mobile marketing, the app economy, pop-up blockers and social networking – the FTC requested comment on a number of issues, in 11 questions. For instance, it requested comment on (1) what issues have been raised by new technologies or Internet features, (2) what should its staff consider regarding online advertising techniques or consumer online behavior, and (3) what issues have arisen from multi-party selling arrangements.
As we wait for the FTC’s revisions, we can anticipate several areas that the new guidelines will address. Generally speaking, the FTC likely will express interest in two broad categories affected by new technology: (1) what is conveyed and (2) what is collected.
What is conveyed. A general concern with disclosure standards since the earlier guidelines were published is how disclosure applies to marketing through new media. How do traditional “clear and conspicuous” standards (such as proximity of a disclosure to the relevant claim, prominence of the disclosure, or duration of the disclosure) play out on a small mobile device such as a smartphone? How can advertisers effectively disseminate disclosures on such devices?
What is collected. A greater concern, as expressed in many of the public comments submitted to the FTC, is the development of consumer tracking online and online behavioral advertising. Something that can be a great boon to sellers, who can now tailor their advertising to an individual user’s interests, or to advertisers who collect and sell that consumer data, can become a privacy nightmare. One group that made a comment to the FTC noted the development of technologies that can track consumer behavior both on and offline.
Recent enforcement actions as well as informal initiatives by the FTC and consumer groups demonstrate the likelihood that the Commission will address consumer privacy in the new guidelines. For instance, the FTC just settled charges with W3 Innovations, a mobile app company, for alleged violations of the Children’s Online Privacy Protection Act. The action, based on the company’s failure to obtain parental consent before collecting children’s personal information, was the first of its kind. The FTC has also been promoting its Do Not Track program, which calls for enhanced consumer controls over online data tracking.
It’s worth noting the likelihood that the FTC will devote a part of its new guidelines to multi-party selling arrangements. Affiliate marketing-related issues involve both broad categories above, impacting both what is disseminated and what is collected. The Commission may highlight the importance of effective disclosure at all levels when multi-party selling arrangements are involved. It may also address privacy concerns along the various levels of the advertising chain. And there are good indications the FTC will take the view for enforcement purposes that all parties along the advertising chain are subject to FTC standards.
The FTC recently issued the Mortgage Acts and Practices – Advertising Final Rule. This rule is the FTC’s response to a congressional directive to address unfair or deceptive acts in the mortgage loan industry. Briefly, the MAP Rule (1) gives the FTC and state authorities the ability to seek civil penalties for deceptive mortgage advertising, (2) clarifies and provides examples of what constitutes deceptive mortgage advertising, and (3) institutes record-keeping requirements on mortgage advertisers.
FTC Commissioner Edith Ramirez asserted in her concurring statement that the “[t]he MAP Rule is narrow in scope — addressing only the advertising phase of the mortgage lifecycle by those subject to the Federal Trade Commission’s jurisdiction — and does not render unlawful any conduct that is not already banned by the prohibition on deception in Section 5 of the FTC Act.”
At first blush, one might think that the new rule merely states the obvious, i.e. that deceptive advertising, unlawful in other industries, is also unlawful in the mortgage industry and that the rule does nothing more than to provide guidelines for what may be considered unfair or deceptive. If that were all, the rule might have deserved a resounding “duh.”
However, the record-keeping requirements that are a part of this rule should instead inspire an “ugh.” The MAP Rule requires anyone subject to the rule (essentially, everyone involved in mortgage advertising with the exception of banks and other financial institutions specifically exempted from FTC oversight) to maintain records of:
• Commercial communications, sales scripts, training materials, and marketing materials regarding any term of any mortgage credit products; and
• Documents describing or evidencing all mortgage credit products and all additional products or services that may be offered in conjunction with the products at the time of the communication.
Under the rule, this documentation must be maintained for 24 months. And failure to keep these records could constitute an independent violation of the MAP Rule.
Considering that the MAP Rule touches everyone in commercial mortgage communications who is not specifically exempted, these record-keeping requirements are hefty. Not just lenders and brokers, but also real estate agents and brokers, ad agencies, affiliate marketers, and lead generators will be subject to the rule as long as they are involved in disseminating information on mortgage products. Compliance will require advertisers to monitor and keep records of downstream ads and will require the tracking of weekly changes in mortgage rates regardless of whether one is acting on behalf of loan originators.
The FTC justifies this burden as helpful in enforcement actions. But the costs of compliance with the MAP Rule outweigh this negligible benefit. How many companies that were once involved in dissemination of mortgage product information will simply decided not to communicate? This may be especially true, considering that the record-keeping requirements come with their own penalty for compliance failures. The result will be that the MAP Rule will discourage real estate agents, brokers and others from providing mortgage-related information to clients. It will create barriers to entry for those not large enough to afford a compliance program.
The FTC, in its press announcement on the final MAP Rule, claims the rule “is designed to create a level playing field for legitimate businesses to compete in the marketplace.” Instead, it appears that the FTC is reducing the size of the playing field by creating compliance costs that will discourage market entrants/players. How will the consumer benefit from fewer options?
Given the fact that the record-keeping requirements were not a part of the congressional directive regarding mortgage ads, we look forward to seeing someone in the industry challenge them in court.
The companies behind the ubiquitous “1 Tip for a Tiny Belly” ads are the most recent targets of a new FTC crackdown on online weight-loss ads that have conned millions of people. The ad seems innocent enough; it promises “1 Tip” to a svelte stomach. But this ad is actually the tip of something much larger: a scheme by the promoters and sellers of a host of diet pills and weight loss products to grab consumer credit card information and pile on additional, unapproved charges.
The headline typically reads: “1 Tip for a Tiny Belly,” in what appears to be hand-lettered type and positioned above a crudely animated drawing of a woman’s bare midriff, which shrinks and reinflates — flabby to svelte, svelte to flabby. Versions of these ads appear just about everywhere, including Facebook and the home pages of major news organizations. The government estimates that the accumulated number of “impressions”—the number of times it has flashed by a viewer on the Internet over the past 18 months — runs into “the tens of billions.”
In April, the FTC filed ten lawsuits against some of the companies and individuals behind these ads, but the “1 Tip” ads continued. The ads are the work of an army of affiliate marketers who place them on various websites on behalf of diet product sellers with such names as HCG Ultra Lean Plus. The promoters make money every time someone clicks through to the product seller’s site and orders a “free” sample. The samples, however, are not always free. The government estimates that the affiliate companies sued by the FTC spent more than $10 million buying Internet ads to push products such as acai berry diet products. One of the companies the government sued, IMM Interactive of Long Island, spent more than $1.3 million last year to place “flat belly” ads, which generated more than a billion impressions.
The FTC contends that almost everything about these ads is bogus. According to the FTC, these ads are part of a three-part scheme to obtain consumers’ credit card information and pile on additional, unapproved charges, which have led to thousands of consumer complaints. The “1 Tip” ad is the first step in this scheme, meant to lure consumers into the process. Consumers who click on the ad are directed to a second site, which looks like a diet or health-news page that seems to carry positive information about the products supposedly from credible news sources like CNN, USA Today, or ABC and to include brief “reader comments” extolling the virtues of the product. The pages then link to a third site, where consumers can use a credit or debit card to order “trial” samples of the featured products. But people who order the free sample find out later that they have actually agreed to pay $79.99 for an additional shipment of the product two weeks later, and another $79.99 for a shipment six weeks later, and so on until the consumer cancels the product, which is not always that easy.
These ads undoubtedly have power to attract the unwitting consumer in search of weight loss secrets. Some of this drawing power can be attributed to their appearance on websites belonging to real news organizations. In all of these cases, the credible news sites appear to be passive hosts of the ads. The ads are “served” to the news sites and thousands of others by ad networks, including those operated by Google and Pulse360, based in New York. The “host” sites, in turn, receive a commission for being part of the network or when their visitors click on one of the network-fed ads. If these ads continue, perhaps the the FTC will decide to investigate hosts of these ads, such as Google, for promoting these deceptive ads, as the Consumer Watchdog group encouraged the FTC to do in the case of mortgage scammers.
The Association of Private Sector Colleges and Universities is taking on the Department of Education. The organization, which represents some 1500 for-profit education institutions, filed its second lawsuit this year to contest the agency’s new regulations aimed at career colleges. The ASPCU won one and lost two in the first suit, and is currently appealing the rulings against it. The most recent suit, filed last week in federal district court in D.C., challenges the DOE’s “gainful employment” rule (as well as two related regulations).
The rule requires colleges to demonstrate that at least 35 percent of students are repaying their loans, or that loan repayments do not exceed either 30 percent of students’ discretionary income or 12 percent of their total earnings. Schools failing to meet all of these requirements in three out of four years will no longer be able to accept student payment with federal loans.
In a hefty complaint, ASPCU attacks the rule on a number of grounds, contending flaws in the regulatory process and agency overreach. The complaint notes that the DOE’s Inspector General is investigating problems with the rulemaking, while members of Congress have called for congressional investigations and review by the DOJ and the SEC regarding allegations of insider trading involving DOE officials. And the complaint’s allegations come a day before the Daily Caller’s release of an email suggesting potential witness tampering by Senator Tom Harkin’s office during congressional hearings into (or rather, against) for-profit education institutions.
Never mind the questions of impropriety…From a policy perspective, two of the more interesting arguments in the complaint involve the gainful employment rule’s anticipated consequences:
(1) The rule could lead to an unfair and disparate impact on prospective students from low-income, minority and other traditionally underserved student populations. APSCU argues that the rule, which ties federal funding to the financial success of graduates, will force institutions to restrict enrollment, eliminating education opportunities for those students least apt to obtain profitable jobs post graduation. Those most affected likely will be students from economically underserved areas “because it is those student populations who are the most at risk for failing the Department’s arbitrary tests.”
This potential consequence demonstrates the importance of carefully analyzing the impact of any new law or regulation while in the drafting phase. Certainly advocates of the gainful employment rule have the intention of helping traditionally underserved students; they are undoubtedly thinking of those students when devising a rule to address the problem of students being saddled with unreasonable debt. But this rule may have unintended consequences. Students won’t have to worry about student loan debt when deprived of the opportunity to invest in an education.
(2) The rule will bind educational institutions to the future employment decisions of their graduates, decisions that are beyond the institutions’ control. The gainful employment rule ties access to federal funding to graduates’ actual repayment of federal loans or to their ability to repay those loans (the latter being a reflection of how much money the graduate makes in their post-education career). The tricky part is, colleges do not have power over a graduate’s actions – they can’t control whether a graduate defers loan repayment where able, defaults, or … backpacks across Europe instead of accepting a lucrative job.
Educational institutions prepare students for employment; they cannot guarantee employment (a thing impossible, especially in this economy) or compel employment. The gainful employment rule puts colleges in the untenable position of warranting students’ future behavior. Such an obligation would be problematic in the context of a voluntary agreement between parties; with a federal mandate, it places the schools in an impossible position.
There’s been a lot of talk of late about the cost to industry of government regulation. The president of the U.S. Chamber of Commerce, Tom Donohue, asserted at a job summit on Monday that recent government initiatives are “unjustified and uncalled for in a free society and a free economy” and are “killing American jobs.”
Case in point: a recent set of proposed “voluntary” principles for food manufacturers set out by the FTC and three other government agencies. The proposed guidelines have caused quite a stir in the food industry for their breadth, their impending chilling effect on commercial speech, and their likely economic costs (one analysis suggested the guidelines would do away with 75,000 jobs annually). In fact, in response to the “voluntary” principles, food manufacturers themselves have just announced their own, less stringent guidelines, in an effort to supplant the government’s efforts.
The government’s proposed principles were put together by the Interagency Working Group (IWG), a group established by congressional directive and composed of representatives from the FTC, Food and Drug Administration, Department of Agriculture and Centers for Disease Control. The IWG was directed by Congress to develop principles to “guide industry efforts to improve the nutritional profile of foods marketed directly to children ages 2 to 17 years.”
Hence, a sweeping set of principles was published at the end of April “suggesting” that “[b]y the year 2016, all food products within the categories most heavily marketed directly to children should meet two basic nutrition principles. Such foods should be formulated to: (A) make a meaningful contribution to a healthful diet; and (B) minimize the content of nutrients that could have a negative impact on health and weight.” The report comes with detailed formulations of how to arrive at Principles A and B. It also comes with “proposed definitions of advertising, promotion, and other marketing activities targeting children ages 2-11 years and adolescents ages 12-17 years to which the nutrition principles would apply.”
The IWG report and principles clearly are directed at food manufacturers’ commercial speech. And were the “principles” labeled “regulations” instead, there’s little question that they wouldn’t pass muster under the First Amendment. That is perhaps why the report and FTC statements regarding it repeat the term “voluntary” with annoying frequency. But how voluntary are these proposed guidelines? Dan Jaffe, of the Association of National Advertisers, has asked, “Can anyone doubt that these proposals are not ‘voluntary’ but thinly veiled governmental commands?” And ever thin is the veil: just how voluntary is a guideline that comes with a five-year implementation period?
David Vladeck, the FTC’s consumer protection director, tried to dispel concerns over the force and impact of the report with a nonchalant blog post in which he suggested those concerned over the guidelines “switch to decaf.” Vladeck maintained the government position that the guidelines are merely voluntary. His statements do nothing to change a reality well understood by industry execs that “suggestions” by regulators come with consequences.
Fortunately, food manufacturers are not standing down…entirely. The Sensible Food Policy Coalition, which includes General Mills, Kellogg and PepsiCo, recently hired former Obama White House Communications Director Anita Dunn for this food fight, spending some $6.6 million in lobbying efforts regarding obesity in the first quarter of this year alone.
Industry leaders have just announced they will establish their own standards. Though less stringent than those proposed by the government, the companies’ announcement could be seen as a concession, bowing to pressure from the feds. It will be interesting to see what happens to a company that listens neither to the government nor to these food companies’ guidelines. Will consumer groups be after them, armed with a new standard of “reasonableness”?
Business is booming at America’s for-profit colleges. With steady high unemployment rates, many of the job-hungry have opted to pursue higher or specialized degrees in an effort to make themselves more marketable. Pricy for-profit institutions, like the 400,000 strong University of Phoenix, are flourishing with this increased demand as students flock to their courses to invest in new career prospects.
But recent regulatory activity at both the state and federal levels may signify that the party is over … or, more likely, that it must settle down quite a bit. Questionable recruiting and student financing practices at some career colleges have brought these education companies to the attention of many state attorneys general, the Department of Education, and the Senate Committee on Health, Education, Labor and Pensions, with the latter holding hearings on student financing at for-profit colleges.
Federal-level issues largely center on less-than-desirable statistics regarding federal student loans. Apparently, nearly half of federal student loan defaults come through these for-profit colleges, while financing for students at the institutions grows rapidly. Significant to these statistics is how expensive for-profit colleges are as compared to state schools. A 2010 GAO Report noted that, while enrollment in career colleges jumped from 1 million to 1.8 million students from 2003-2008, federal student aid to those institutions tripled from $8 billion to $24 billion.
State-level issues revolve around alleged violations of consumer protection statutes through aggressive recruiting tactics. For instance, for-profit colleges are being investigated for potential false or deceptive claims to prospective students on accreditation for degree programs and post-graduation career prospects. Also at issue are colleges’ disclosures of student loan financing and loan default rates.
Some ten states’ attorneys general formed a task force in March to combine efforts and share investigative information as they pursue actions against these institutions. According to a recent op-ed by Kentucky Attorney General Jack Conway, who is leading the task force, the number of states investigating has jumped to 18. States, including New York and California, are and have been going after for-profit colleges on their own (including a recent action by New York AG Schneiderman against Trump University).
At the federal level, the Department of Education has been busy establishing new regulations for career colleges. The most notable of late, the “gainful employment” rule, will require colleges to demonstrate that at least 35 percent of students are repaying their loans, or that loan repayments do not exceed 30 percent of their discretionary income or 12 percent of their total earnings. Schools failing to meet the standard in three out of four years will no longer be able to accept student payment with federal loans.
These government efforts may make it seem that career colleges are nothing more than greedy institutions preying upon the unemployed during bad economic times, and that the white hat-donning government regulators are nobly reining them in.
However the economics of, or the basis of, for-profit colleges does not appear to have been considered: for-profit colleges are not as much in the business of educating and graduating stellar students as they are in the business of making money. These companies have an interest – and obligation to their shareholders/investors – to maximize profit and minimize cost. The more money they can charge students and the less money they must dole out for the service they provide (i.e. education), the better off they are. And again, that is their overarching duty to their investors.
In a perfect free market, career colleges could not charge exorbitant fees to attend their schools if their students could not get jobs after graduation – because students would not pay. But in our current structure where the cash cow of federal student loans exists, both for-profit colleges and prospective students have almost unlimited access to big funds. For-profit colleges would be irresponsible to their investors if they did not tap this resource. Students often are not responsible enough to understand the consequences of accruing significant student loan debt.
Bottom line, much of the issue of for-profit colleges in the social context is that they have both a financial and legal duty to act in their own interest. The problems federal and state regulators seek to address are largely problems created by the federal government’s presence in the first place. Without the federal cash cow, private lenders (who would be the sole source of student financing) would insist both for-profit colleges and students behave differently. Colleges would have to improve performance and students would have to be more judicious about how they spend their money.
On May 25, 2011, a class action was filed against the Thomas Jefferson School of Law (TJSL) in San Diego for intentionally misrepresenting employment data of recent alumni. The complaint states that in order to continue attracting students despite exorbitant law student debt and a depleted legal job market, TJSL has “adopted a practice of misrepresenting its post-graduation employment statistics.”
These facts aren’t unique. According to a non-profit devoted to this issue, until very recently almost all 198 American Bar Association-accredited law schools deceptively touted churning out graduates with at least a 90 percent employment rate within nine months of graduation.
The Above the Law blog very recently referred to UCLA Law’s claim that 97.9 percent of its class of 2010 was employed within nine months of graduation at a median starting salary of $145,000 as “frankly unbelievable.”
According to Paul Campos in The New Republic, only about 60 percent of law graduates nationwide obtain permanent, full-time legal employment nine months after graduation.
Some observers say the Federal Trade Commission should step in to have turned to investigate whether the law schools have engaged in false advertising. However, we doubt that this would be a good idea, for several reasons.
Is there jurisdiction? The FTC’s jurisdiction is limited to entities such as for-profit corporations and partnerships and nonprofits that provide a pecuniary benefit to members. This may not include law schools, which are nonprofit institutions of higher education that provide scholastic rather than economic benefits. For the FTC to assert jurisdiction in this instance would be tantamount to an effort to regulate the advertising and marketing of all institutions of higher education, which would be far from the original purpose of the FTC to regulate the trade practices of businesses.
Are law schools completely at fault? Employment statistics are gathered according to the industry standard — a compilation of voluntary student responses to questionnaires provided by the ABA. However, many schools are not receiving anything near full participation from their students, resulting in skewed statistics. Schools tend to indicate this by inserting a disclaimer of the true percentage of student participation, making it clear that the statistic is not fully reliable. However, U.S. News & World Report publishes these statistics without the disclaimer. USNWR remains the most popular resource for potential law students in researching which law schools to attend, and its readers will find no disclaimer.
Is there a violation? Even if the FTC could regulate law schools, in order for there to be a false advertising violation, the misrepresentation must be material. There are numerous factors that go into a perspective student’s decision: location, student body, student/faculty ratio, tuition, and the average GPA/LSAT scores of admitted students. Further, the misrepresentation must also have been reasonably relied upon. Nearly all perspective students who view these statistics already have or nearly have obtained an undergraduate degree. It may not be reasonable to assume that these highly educated consumers have actually relied on claims of a 90 percent-plus employment rate in today’s economy, where unemployment is known to be historically high. The FTC normally protects the most vulnerable consumers against marketing practices that target the gullible, the poor, and the less educated. A lawsuit on behalf of law school applicants hardly seems consistent with the agency’s priorities.