Credit Card Fair Fee Act

Update: The final amended language of the Credit Card Fair Fee Act, as reported by the House Judiciary Committee, is now available. It employs a rather clever two-step device in an attempt to stimulate negotiated merchant fees. First, as blogged below, the bill extends antitrust immunity to groups of merchants and banks negotiating card acceptance fees. But then, it pulls the immunity back whenever a card issuer, or acquirer, or a merchant “is engaged in any unlawful boycott.”

Could this language mean that neither the merchant group, nor the banks, can walk away from the negotiations if the other side does not agree to acceptable terms? The take-it-or-leave-it approach has long been the banks’ modus operandi. Taking this threat from their arsenal could meaningfully change the market dynamic. Still, one has to wonder how a negotiation is supposed to proceed if the parties can’t threaten to walk away.

The bill would require the largest merchants, card issuers, and acquirers to produce cost information to the DOJ Antitrust Division, and Division representatives would take part in the negotiations. All this seems to stack the deck in favor of some sort of cost-based, negotiated merchant fee, which would be fine if costs served as a basis for setting an efficient fee. Unfortunately, they don’t; as the economist Michael Katz has explained.

A competitive means to set merchant fees would likely be superior to a cost-based system. There are at least three proposals in the literature to set fees competitively: (1) placing the costs of payment mechanisms on consumers by, for example, allowing merchants to surcharge card transactions; (2) empowering merchants to select the network over which a payment will be processed; and (3) forcing large card issuers to negotiate their own interchange fees. I have advocated for the latter, but all three seem to hold more promise that the Judiciary Committee’s current approach.

Original Blog: On July 16, the House Judiciary Committee reported out Congressman Conyers’ Credit Card Fair Fee Act over a sharply divided, yet surprisingly non-partisan, 19-16 vote. The amended text is not yet available, but you can piece it together from the hearing transcript at http://judiciary.house.gov/hearings/transcripts/transcript080716.pdf.

The bill as reported differed significantly from the bill originally introduced in March. Both bills are intended to combat the problem that merchants need to accept Visa and MasterCard so desperately that they have little ability to resist fee increases. At the heart of both the original March bill and the amended bill is essentially a bargaining order, requiring the banks issuing cards on large systems to negotiate with merchant groups on interchange fees and exempting from antitrust scrutiny the agreements reached in these negotiations. A key provision of the original bill would have created a panel of interchange fee judges, who would have set the fees if the parties could not agree. The Department of Justice and Federal Trade Commission both opposed the bill and were particularly critical of the panel of judges. At the July 16 hearing, Congressman Conyers removed the panel proposal from the bill. In addition, he added provisions (1) permitting small banks and credit unions to exempt themselves from these negotiations and (2) requiring that merchants do not simply retain fee reductions as profit.

This bill fails to engage the real problem with interchange fees, because a bargaining order is unlikely to reduce the card systems’ market power. Removing the judicial panel means that there is no real threat if the card companies fail to engage in meaningful bargaining. Still, eliminating the panel was a wise decision. Efficient interchange fee setting cannot track costs or any other factor accessible to a panel of experts. Appropriate fee setting must take account of demand conditions that are simply inaccessible to a regulator and probably the market participants as well. Given that, there seems to be little reason to provide an antitrust exemption. Who knows what mischief these bargaining groups might get themselves into?

The remedy to the interchange problem will ultimately be competitive, not regulatory. Congress could bring this about by simply requiring the large card-issuing banks to set their own interchange fees. If Discover can set an independent merchant fee with a market share of 5-6% of transaction volume, Citibank, Chase, Bank of America, CapitalOne, and perhaps a handful of others should be able to do so as well. Merchants would have substantially more leverage if they could refuse one issuer’s cards as opposed to the entire Visa or MasterCard association. Congress could achieve this result by simply prohibiting the card systems from enforcing the aspect of their honor-all-cards rule that requires merchants to accept the cards of every issuer on the network. Traditionally, this sort of remedy has been opposed as unworkable. After all, there are thousands of issuing banks. Requiring all of them to set their own fees, many have claimed, would be a mess. One positive aspect of Fair Fee bill is that it apparently recognizes that the rules that apply to the big issuers should not necessarily apply to smaller players. The bill applies only to systems with more than 20% of card volume and permits small banks and credit unions to exempt themselves from the negotiations. A competitive bill might require only those issuers with more than 5% of card volume to set their own fees. Without the large issuers in the mix, Visa and MasterCard could continue to set interchange fees for their thousands of smaller issuers without the power to compel merchant acceptance that has led to excessively high fees.

Waiting for SB 2080

Both chambers of the Illinois legislature passed SB 2080 on May 31, 2008. Taking advantage of most of the 30 days the Illinois Constitution affords the legislature to present a passed bill to the governor, see Ill. Const. art. IV, § 9(a), SB 2080 was sent to Governor Rod Blagojevich on June 27, 2008. As of July 30, 2008, Governor Blagojevich has neither signed nor vetoed SB 2080. If this were legislation Congress forwarded to President Bush or that most state legislatures forwarded to their respective governors, SB 2080 would by now be deemed enacted by passage of time. However, the Illinois Constitution affords the governor 60 days to sign or veto a bill before it is deemed enacted without the governor's action. See Ill. Const. art. IV, § 9(b). So, while the bills enacting Revised Article 1 in Pennsylvania (also enacting Revised Article 7), South Dakota, Tennessee, and Vermont this year have all taken effect since the Illinois General Assembly passed SB 2080, Illinois's incipient enactment of Revised Articles 1 and 7 continues to idle. (Hopefully, unlike Godot, SB 2080 will eventually arrive.)

If enacted, SB 2080 will make Illinois the thirty-fourth state to have enacted Revised Article 1 and the thirty-first state to have enacted Revised Article 7.

Losing Limited Liability with the Stroke of a Pen: Serge Doré Selections Ltd. v. Universal Wines and Spirits LLC, 23509/2007.

My Payment Systems students sometimes struggle with the notion that a check constitutes its own, separate contract and can be an independent means of liability, wholly apart from the contract pursuant to which the check was written. A recent Westchester County, New York Supreme Court case provides a good example.

The case arose from Serge Doré Selections, Ltd.’s sale of about 900 cases of wine to Universal Wine and Spirits LLC for $112,372.92. There is no dispute that Universal received the wine, has resold at least some of the wine, and never paid for the wine. The interesting portion of the case, for the purposes of this posting, concerns the personal liability of two individuals, Jesse Kessler and Carla Lewin, for Universal’s debt to Serge Doré. The court’s opinion does not indicate who Kessler and Lewin are, but a public-records search reveals that Jesse Kessler is one of two manager-members of the LLC and Carla Lewin is apparently his wife.

Universal’s contract with Serge Doré was memorialized by an invoice and a purchase order, neither of which Kessler and Lewin signed. Instead, Leah B. Dedmon, whose name does not appear in any of the public records for Universal that I found, signed on behalf of Universal.

After the wine was delivered, Universal issued a check in the amount of the invoice, then instructed Serge Doré not to deposit the check. Serge Doré complied, and then a lengthy correspondence ensued between Kessler and Mr. Doré, the President of Serge Doré Selections Ltd. In the course of this correspondence, Kessler provided – and then withdrew – a personal check drawn on his joint account with Lewin for the full price of the wine. Universal also later supplied a second corporate check, which bounced twice and was never paid, precipitating the lawsuit.

Ultimately, the court found that Kessler’s correspondence with Serge Doré, coupled with his issuance of a personal check, showed that he had undertaken personal responsibility for Universal’s debt. (The court found that Lewin, however, had no liability to Serge Doré, since she had not signed the check and apparently knew nothing of its issuance.)

Universal was organized under the laws of Florida, which, like most states, has adopted its own version of the Uniform Limited Liability Company Act. Kessler would normally have been shielded from liability for Universal’s debt pursuant to Florida’s version of Uniform Limited Liability Company Act §303 (a) (1995), which states that generally “the debts, obligations, and liabilities of a limited liability company . . . arising in contract . . . are solely the debts, obligations, and liabilities of the company, [and] [a] member or manager is not personally responsible for a debt, obligation, or liability of the company solely by reason of being . . . a member or manager.” Thus, he was not personally liable to Serge Doré under the contract. The personal check he wrote, however, constituted a separate contract under which he undertook personal responsibility as a drawer.

The court’s analysis does contain an error with regard to UCC §3-402 (b) (1), in that it tends to suggest that Kessler could have avoided personal responsibility if the check had expressly indicated (1) the identity of the principal (Universal) and (2) the fact that Kessler was signing only in a representative capacity. While this would have been true in the case of a promissory note, for example, this would not have shielded Kessler from liability in this instance, since he wrote a personal check drawn on his own account and would therefore necessarily face liability as the drawer of that check under UCC §3-414.

The lesson of this case is an important one for businesspeople as well as lawyers and law students, in that it tends to suggest that limited liability can be quite literally wiped out with the stroke of a pen, at least if that pen is used to write a personal check.

Of Settlements and Sales: Hanson Staple Co. v. Ole Mexican Foods, Inc., A08A0658.

In one of the better-reasoned cases on this topic I have read, the Georgia Court of Appeals has explained why settlement agreements that arise from disputes regarding sales of goods should not normally be considered sales contracts, even when those settlements require one of the settling parties to purchase additional goods.

The parties’ dispute centered on Ole Mexican Foods’ decision to stop buying packaging materials from Hanson, and instead to purchase the necessary materials from one of Hanson’s former employees. In its suit for breach of contract, Hanson contended it was left holding more than $300,000 worth of packaging materials that it had customized for Ole Mexican Foods and could not resell. In its counterclaim, Ole Mexican Foods claimed it should be relieved from its contractual obligations due to the fact that Hanson had tendered defective materials. Hanson, of course, vigorously defended against this contention, claiming the goods were merchantable.

The parties negotiated a settlement whereby Ole Mexican Foods agreed (1) to purchase at least $130,000 worth of inventory from Hanson, (2) to test Hanson’s remaining inventory and, if it proved satisfactory, to purchase additional inventory, and (3) to begin to do business once again with Hanson.

Unfortunately, the settlement agreement did not end the parties’ dispute. Instead, Ole Mexican Foods refused to perform, and Hanson moved the trial court to enforce the settlement agreement. In response, Ole Mexican Foods claimed, among other things, that Hanson had violated the parties’ agreement by insisting that Ole Mexican Foods purchase inventory without regard to its merchantability. In support of its claim, Ole Mexican Foods contended that the Uniform Commercial Code’s implied warranty of merchantability found in 2-314 should apply to the settlement agreement.

The trial court accepted this argument, and Hanson appealed. In properly reversing, the Court of Appeals applied the predominant purpose test and held that the predominant purpose of the settlement agreement was to resolve the parties’ dispute regarding an earlier sales agreement, not to create an additional agreement of the kind to which implied warranties of quality would normally apply. Instead of turning on the merchantability of Hanson’s goods, Ole Mexican Foods’ duties under the settlement agreement would be governed by principles of good faith and “honest judgment.”

Although the court did not expressly say so, one reason why the court’s holding is so clearly correct is that a contrary holding would essentially eviscerate the purpose of this particular settlement: since one of the central disputes in the underlying litigation was whether Hanson’s goods were merchantable within the meaning of the Uniform Commercial Code, and since the case was settled rather than having this issue decided by the court, applying the implied warranty of merchantability to the settlement agreement would almost certainly require the parties to relitigate the question of merchantability.

Leaders and followers

An interesting discussion came up on the AALS Contracts List Serve today. Professor Chaim Saiman, University of Villanova, posted the following:

I have this general impression the contract law applicable to government contracts is somewhat hived off from what we call “general contract law” into a smaller category of “government contract law.” More specifically, I think that citations from the Ct. of Fed claims are not often cited by courts of general jurisdiction as “contract law”, and that contracts treatises casebooks., hornbooks etc. tend not to do rely on this body of case law in the formation of general principles (disclaimer: I’ve never actually paid attention to this, so I may be way off). So far as I can tell from some quick research into the Tucker Act, other than the fact that jurisdiction is conferred to the Ct. of Fed. Claims / Fed. Cir., there is nothing special about the substantive law principles of these contracts.

So my questions are:

Are my general impression/assumptions about the distinctness of gov contract law correct?
If so, why is this the case?

My position is that government contracts are just a subset of contracts, subject to the same general rules of contract (including UCC Article 2) unless specific federal law applies. In the case of wartime contracts, the Federal Acquisition Regulations and the Defense FARS are examples of these. The Armed Services Board of Contract Appeals tends to apply general contract principles, in addition to specific federal rules. I would argue that the federal courts handling contract disputes are “followers” of contract doctrine, rather than designers and developers in many cases. In the case of wartime contracts, I find that the lack of more substantive federal regulation has led to some special questions that require a close look at the operation of traditional contract doctrine. For instance, UCC Article 2-615’s provisions on impracticability don’t operate as neatly as I might like when it comes to delay or excuse claimed during wartime due to extreme risk of personal hazard to contractor personnel (for more on this see, Impracticability Under the U.C.C. for Wartime Contracts).

If we accept that the federal government is more of a “follower” when it comes to the default contract rules behind regulations, the really interesting part of Chaim’s question is the “why”. Sure, the contract formation aspect of government contracting is highly regulated by the bidding processes (even if not always followed by the government itself). This would certainly distinguish the “relational” aspect in some areas of government contracting where there is only one buyer. Yet, many of us have ample complaints about Article 2, so this would seem to be the perfect opportunity for the federal government to work an “end run” around it when it comes to performance of sale of goods contracts . Then, once the federal courts apply Article 2 in a different way at least as a leader, the opportunity for others in non-government contracts would be ripe for the same. Article 2 and the common law of contracts have been with us for some time and the mass privatization (particularly defense oriented) came later.

There does not seem to be enough incentive to rewrite the law of contracts, but there are so many specific privatization "patches" that need regulating as issues come up. So, the opportunity to be a leader would seem to arise primarily in the court setting, either between the government and a contractor or a contractor and a sub. There certainly are some cases that are "leaders" (ie. Transatlantic Financing on impracticability). Why there are not more case leaders, I am not sure that I can say, but I will give it some thought. There may be opportunity for leading in the wartime contracts area as we see these cases hit the courts.

Credit Card Fee Regulation: Could Disclosures Stimulate Competition?

Taking a break from blogging about merchant fees, this week’s post looks at the current debate with respect to credit card regulation. Although some in Congress have been thinking about merchant fee regulation, the hot action currently seems to be on the cardholder fee side.

For the last several months, Congress has been kicking around whether new regulation should prohibit certain practices or simply mandate more effective disclosure. Senator Ron Wyden is pushing the disclosure angle through an interesting star rating system, while Senator Carl Levine, among others, favors prohibitions. In May, the Federal Reserve proposed regulations aimed at some of the same concerns, and this weekend, a New York Times article indicated that the tide seems to be turning away from disclosure and in favor of direct regulation. Although a number of practices pop up in the various bills and regulations – mandatory arbitration provisions; charging interest on debit paid within the grace period; over-the-limit fees for approved transactions; fees for paying the bill by phone – every proposal takes aim at the practice of first allocating payments to lower interest rate debt.

I agree that this practice can be particularly egregious. A card company can lure a consumer into transferring a large balance with the promise of a low interest rate while charging “transaction fees” on the balance transfer that will be subject to interest. A consumer who spots the transaction fee may miss that the deal includes a relatively high interest rate on all new purchases. Even the wily consumer who catches both the transaction fee and the high rate on new purchases may mistakenly assume that she can simply pay off her new purchases within the grace period, avoiding interest. If the card company allocates payments first to the low interest balance transfer, however, the account will accrue interest at the high new purchases rate until the entire old transferred balance is completely paid off. Even if the cardholder paid more than the sum of the minimum payment on the balance transfer and the cost of all new purchases for that month, interest would begin accruing on the new purchases because the entire payment would be allocated to the low interest balance transfer. Yikes, by the time the old balance is paid off, the cardholder is likely to have a new one that is just as large and probably at a higher interest rate. Would you have caught all that? I admit, I’ve been caught a few times, and I’ve been studying credit card offers for over a decade.

One can debate how well the various proposals would actually protect consumers given the flexibility that card companies have in structuring their offers. Ironically, a disclosure requirement could be more effective in combating the payment allocation concern. Some may argue that card companies already disclose transaction fees and the allocation of payments among varying interest rate debt. Of course, the current methods of disjointed, fine print disclosure leave consumers who are not financially sophisticated unable to understand the terms of their agreement.

What’s needed is a disclosure along the lines of those provided by mutual fund companies. Those companies provide a return and fee breakdown based on a hypothetical investment. Credit card companies should be required to do the same. They should disclose all of the charges that they would assess on a hypothetical balance transfer and new purchase balance of, say, $1000 each. In addition to interest charges, the card company should be required to include all transaction fees and other fees that a cardholder might be expected to pay over the course of a year. For example, if the average cardholder pays one late or over-the-limit fee annually, that fee should be included. If the card company offers a reward or rebate, it could incorporate that into the disclosure as well. Most importantly, in type as large as the largest on the mailing or other offer, the card companies should be required to disclose the effective net interest rate – calculated pursuant to a formula developed by Congress or the Federal Reserve – that a typical cardholder would pay if the hypothetical balances were maintained for a year.

By mandating this sort of disclosure, even unsophisticated consumers would be able meaningfully to compare offers from various issuers. The comparison would be nearly as simple as comparing differing annual fees. The resulting competition might well protect consumers more effectively than prohibiting any particular practice.

Butchering Credit Cards

In my last post, I explained that all credit card systems in the United States charge merchants a fee above marginal cost and that the systems use this revenue to stimulate card use. The Visa and MasterCard systems call this increment above cost their interchange fees, but all systems effectively do the same thing. At first blush, this sort of above cost pricing suggests serious antitrust concern. Aren’t card systems extracting supra-competitive profits from merchants? And even if they compete these profits away simulating card use, doesn’t overcharging merchants distort resource allocations? This post explains why the answers may be no.
In a typical market in which a producer competes for a single type of customer, an efficient price – one that will lead to an optimal consumption level – will generally approximate the marginal cost of production plus the profit necessary to attract investment to the industry. This pricing model is efficient because it maximizes short-run output consistently with the producer earning sufficient revenue to continue providing the product or service.
Credit card markets are not typical, however, in that card systems must price their products in a way that appeals to two inter-related sets of customers, merchants and cardholders. In such a two-sided market, a purely cost-based rule – such as “set the price charged to the cost-causer at marginal cost” – is unlikely to produce an optimal pricing structure. Although the economic literature is riddled with papers written by consultants for the card systems – not that there’s anything wrong with that – economists on all sides generally agree on this basic point. Compare Meg Guerin-Calvert and Janusz Ordover’s analysis with Michael Katz’s take, from which I quote above.
In a two-sided market, efficient pricing must take account of both total cost and the relative elasticities of demand between the two customer sets. If customers in such a market were charged the marginal cost of serving them, they would fail to internalize the benefits of their decisions to the customer set on the other side. If demand elasticities diverge to any significant degree, industry output under a marginal-cost pricing policy would be inefficiently low. To obtain an efficient output level, a producer must charge the customer set that is more sensitive to price less than marginal cost (effectively enabling those consumers to internalize the benefits to both sides of the market).
The classic example is the daily newspaper. Readers have many sources of news, including television, magazines, and the internet. Reader demand for newspapers is thus likely to be quite elastic, leading them to turn away from the morning paper if the subscription price were to approach the marginal cost of producing and delivering it. By contrast, advertisers perceive significant benefits in print advertising (so long as readership is high) and are thus willing to pay substantially above the newspapers’ marginal cost of printing and providing associated services. As a result, readers pay significantly below marginal cost and advertisers pay substantially more. Competition between newspapers and other media for advertising space still drives pricing, but not to marginal cost plus normal profit for each customer set.
This pricing pattern efficiently optimizes newspaper circulation, satisfying both the advertisers’ need for broad exposure and the readers’ need for information. Assuming that newspapers have little market power, both advertisers and readers would be worse off if pricing were forced into line with marginal cost. Were advertising fees to drop, and reader fees proportionally increased, prices would move toward marginal cost on each side of the market. Because reader demand is more elastic, however, readership would drop more than advertising would increase, and advertising rates would thus fall. As a result, the paper would (1) earn lower overall revenue; (2) be less valuable to advertisers because readership would fall; and (3) be less valuable to readers because the paper would have less revenue for newsgathering.
To the extent that the elasticity of demand varies significantly between merchants and cardholders, credit systems resemble newspapers. Assuming that merchants, like print advertisers, are willing to pay significantly above the marginal cost of credit card acceptance services, but cardholders, like newspaper readers, would be unwilling to pay the marginal cost of providing credit cards and associated services, then efficient credit card pricing should place a greater share of the costs on merchants.
One might question whether this analysis explains the array of interchange fees that the card systems now charge. Even if efficient pricing requires merchants to pay more, why should they pay more still for reward cards used primarily by wealthy customers who would arguably make roughly the same purchasing decisions with a simple basic credit card? The answer may be that price discrimination can result in competitive markets. Michael Levine’s work is instructive. He uses the example of cattle, which are generally sold as whole animals in a competitive market. The butcher’s cost of preparing particular cuts does not vary in any significant way, and those cuts are again sold in quite competitive markets. Yet, ultimate consumer prices vary considerably depending on the desirability of the cut of meat. Although the comparison between wealthy customers and filet mignon may be somewhat crude, the value of high spending consumers to merchants may justify higher card acceptance fees for the cards used by big spenders in much the same way that the desirability of the tender cuts leads to higher prices despite competition.
All this suggests that interchange fees and price discrimination based on type of card would exist in an efficient and competitive credit card market. But these pricing practices do not ensure that the market we have is in fact efficient and competitive. If above cost pricing and discrimination are not determinative, what can we look to in order to evaluate the competitive performance of credit card markets? My next post will comment on that issue.

The Ubiquity of Interchange Fees

I am very pleased to join the Commercial Law Blog as a guest, blogging about credit card payments. Before discussing the economic effects of current fee structures and how card pricing might be improved, this post lays some groundwork, suggesting that these fees are best understood as the portion of the merchant discount fee that a credit card system uses to support card issuing. Viewed in this way, all credit card systems in the United States charge the economic equivalent of interchange fees.

Back in the early days of credit cards, virtually all banks in the associations both issued cards and signed merchants to accept them, a function known as merchant acquiring. The systems then required that the entire merchant fee go to the issuing bank. Over time, this fee structure, channeling all revenue to the issuer, did not provide sufficient incentives to add merchants to the network. To remedy the problem, the two bank associations that became Visa and MasterCard adopted a system-wide formula for dividing the merchant fees between issuers and acquirers.

Functionally, acquirers paid merchants a discounted price for credit card paper and then sold that paper to the card-issuing bank at a somewhat lower discount. The total merchant fee came to be called the “merchant discount” and the portion passed on to the card-issuing bank was labeled the “interchange reimbursement fee.” The amount retained by the acquirer never got a formal name, but might have been called the short-end-of-the-stick fee. From early on, interchange raised antitrust concern because it enabled card-issuing banks to avoid competition on the fees that they effectively charged to merchants. Nevertheless, it has withstood legal challenge for more than three decades.

Over the years, the interchange fee has evolved. Although Visa’s and MasterCard’s fees differ in some ways, they have both followed a similar path. Initially, each charged a single fee to all merchants. In the 1980s, the associations developed separate fees for paper and electronic transactions. The 1990s brought different fees for certain merchant types, as the systems sought to bring in lower margin retailers such as supermarkets. They also added a separate fee for situations in which the magnetic stripe could not be swiped, reflecting perceived fraud risks. Today, interchange fee schedules are a complex array of charges that vary depending upon the type of merchant and its card sales volume, the type of transaction, and the type of card used. The most significant factor may now be what one might term the incremental reward fee, a higher interchange fee that applies when a customer uses a card that rebates cash, awards airline miles, or provides some other benefit for using the card. In addition, as technology has improved and merchant acquiring has become more competitive, acquirers have reduced their margins at the same time that the systems have increased interchange fees. As a result, the percentage of the merchant discount paid to issuers has increased.

Because the phrase interchange fee was created by the bank-card associations, and antitrust challenges -- including the on-going merchant litigation -- principally attack the lack of competition among Visa and MasterCard issuers, it is often assumed that the economic implications of interchange are limited to the bank card associations. But that isn’t true. Although American Express and Discover do not have a formal interchange fee, they have the functional equivalent: A merchant fee that exceeds the marginal cost of providing the retailer with card-acceptance services plus normal profit.

The four-party (issuer/cardholder & acquirer/merchant) nature of a Visa or MasterCard transaction makes this economic equivalence in fee structure apparent. Visa/MasterCard acquirers now operate profitably on about one quarter of the merchant discount that they take from retailers, passing the remaining three quarters to card issuers. Three-party systems (joint issuer-acquirer/cardholder/merchant), such as American Express and Discover, charge merchant fees that exceed substantially the revenue that Visa and MasterCard acquirers retain. Surely, the three-party systems, like Visa and MasterCard banks, use this excess merchant revenue to stimulate card use. For example, American Express now uses some of its merchant revenue to pay banks to issue AmEx cards. Although the percentage of the merchant fee used to support card issuing varies across systems, in all cases more than half of what retailers pay probably supports card issuing. Next time, I will blog about the economic effects of generating revenue from merchants that is used to stimulate card use.

Why just go when you can Boingo? Just be careful you don’t go when you don’t want to!

This morning, I was reading Bob Lawless’ post on Creditslips about his own tale of bad things that can happen with credit cards (see Unauthorized Charges Go Wild on Me). Bob’s tale reminded me of a nagging matter of my own that I’d found on my checking account statement this week for a $15.90 charge to my debit card for Boingo Wireless. Back in February, I created a Boingo Wireless account while travelling back from the AALS Contracts Conference so that I could use the Internet at the airport. Fortunately, I don’t travel too often because the Boingo service would log me on and charge my debit card whenever I visited anywhere with service. So, when I stayed at the Marriott Residence Inn in Pittsburgh recently, Boingo charged me for two days of service even though the wired Internet service I used was free at the Residence Inn.

Boingo does not send invoices, so unless you check your credit/debit card statements, you are not likely to notice the charges or any errors. Boingo uses another little trick that Bob mentioned . . . they keep the charges small. They never charged me more than $15.90 at one time and spread them out over time.

Inspired by Bob Lawless, I called the Boingo folks this morning (and removed the software from my computer). Knowing my travel history, I kindly explained that this must be a billing error. The first line representative I spoke with employed the “confuse the caller” tactic by discussing the initial set up of the account back in February. Then, she explained their method of billing whereby charges are not made at the time of usage, but later. I call this the “confuse the user” tactic to make it hard for customers to know what charges relate to what days you might have used the Boingo service. She finally agreed to send me an invoice. Then we arrived at the heart of the matter, the Residence Inn charges. I explained to her that the Residence Inn provides free Internet, there would be no reason to need the Boingo service.

Here’s where we arrive at the automatic login feature that Boingo has. Once installed on your computer, Boingo is always looking for service for you. And, it saves your sign-in information conveniently for you. Since the customer signs up for the service which enables the “easy” re-login on other dates, you have used the service and the charge is valid. The customer must pay. At that point, I requested a supervisor, who told me the same story. When I raised issues about whether this results in truly “authorized” charges to credit/debit cards, whether Boingo was misusing customer credit cards, and fraudulent charging of cards, the supervisor immediately agreed to refund my money (and close my account). Not sure how good my claims were, but the Boingo supervisor had surely heard them before. Next time, my desperation for Internet service will have to give way to my fear of others automatically hitting any of my accounts. "Power tends to corrupt, and absolute power corrupts absolutely.” The morality of some vendors surely lessens once we give them our card data.

Commercial Law Welcomes Steven Semeraro as Guest Blogger

Steven Semeraro of Thomas Jefferson School of Law joins the blog as a Guest Blogger for the summer. Steven’s two recent papers, Credit Card Interchange Fees: Debunking Six Myths and Credit Card Interchange Fees: Three Decades of Antitrust Uncertainty argue that the current interchange-fee-setting system poses no substantial competitive threat. His work also takes on the issues of consumer welfare created by the effects of interchange fees. My favorite of the “Six Myths” is that the easiest solution to problems arising from the pricing of interchange fees is to permit merchants to surcharge credit card transactions. One of my complaints in the area of interchange fees is the lack of transparency in how much credit card use actually costs consumers even under the current system.

We look forward to hearing Steven’s thoughts on a variety of payment issues, including the Federal Reserve’s plans to alter Regulation Z (see What's in your wallet?).

Whither Economics?

In an interesting post on Critical Mass, Erin O'Connor confesses her ignorance about "how money works." She writes: "But I'm like most of us. . . . Everybody thinks he is an authority on how money ought to be managed and spent. But few of us really understand what money is, how it works, or what kinds of consequences can come from certain kinds of financial decisions."

It's no wonder, she says, so few of us have a clue about financial matters. Nobody studies economics. A study of leading universities' degree requirements (ACTA, The Hollow Core, 2004) showed universities don't require a course in basic economics as part of the core curriculum.

O'Connor attributes our nation's staggering financial ignorance to "academe's broadly socialist monoculture." Universities embrace "collectivism and cooperation, redistribution of wealth, government-run social programs, single-payer health care," but are hostile to capitalism and the infrastructure that makes markets work. "You don't have to look hard at all to find colleges and universities that press students, in course after course, to make moral determinations about how economies ought to be run--but you would be hard pressed to find a school that requires students to ground those determinations in actual economic knowledge."

The Treasury Department's Financial Literacy and Education Commission should take note. Instead of requiring disclosure of more information to consumers who cannot interpret it, Treasury should focus on introducing all Americans, inter alia, to the guns 'n butter tradeoff, the speed and time value of money, and the effect of marginal change in supply or demand on the price of widgets. I'm not expecting that any time soon.

What's in your wallet?

Not that any of this is a surprise to me, but Consumer Reports just came out with a new report about credit card reward programs. Not only does Consumer Reports conclude that we spend more with rewards cards, but also that complicated rules and restrictions makes most cards pretty troublesome. Consumer Reports also found that many of these cards also carry annual fees and higher interest rates. So why do consumers like them anyways? It must be the lure of getting something for free. Or, at least thinking it is free. Of course, one must ask whether the airline miles or charitable donation are worth the potential interest if you carry a balance. It might be easier just to make a donation and take the tax deduction!

While not tackling this particular problem, the Federal Reserve has announced plans to alter Regulation Z’s provisions regarding: (1) bank increases of rates on pre-existing balances; (2) bank practices of applying payments in ways to maximize interest charges; (3) certain practices that impose interest charges using the “two-cycle” method to increase the amount of interest due; and (4) the amount of time consumers have to make payments. Of course, the banks have not welcomed these changes by the Federal Reserve. While I give the Federal Reserve kudos for beginning to tackle the complex credit card fee issues, it would seem that this should only the beginning. In addition to fees associated with carrying a balance on a card, the fees associated with using credit cards are far from clear (see Good Results For Visa). I hate to be a cynic, but I would guess that the final result after wrangling with the credit card industry will be a watered down version of some modest consumer protections.

Ding, Dong, the Which* is Dead

At its annual meeting last week, the American Law Institute approved an amendment, which NCCUSL (a.k.a. the Uniform Law Commission) had previously approved, replacing the oft-jilted text of Revised UCC § 1-301 with language consistent with pre-Revised UCC § 1-105:

§ 1-301. Territorial Applicability; Parties’ Power to Choose Applicable Law.
  (a) Except as otherwise provided in this section, when a transaction bears a reasonable relation to this state and also to another state or nation the parties may agree that the law either of this state or of such other state or nation shall govern their rights and duties.
  (b) In the absence of an agreement effective under subsection (a), and except as provided in subsection (c), [the Uniform Commercial Code] applies to transactions bearing an appropriate relation to this state.
  (c) If one of the following provisions of [the Uniform Commercial Code] specifies the applicable law, that provision governs and a contrary agreement is effective only to the extent permitted by the law so specified:
    (1) Section 2-402;
    (2) Sections 2A-105 and 2A-106;
    (3) Section 4-102;
    (4) Section 4A-507;
    (5) Section 5-116;
    [(6) Section 6-103;]
    (7) Section 8-110;
    (8) Sections 9-301 through 9-307.

In so doing, the bodies responsible for the Uniform Commercial Code followed the lead of thirty-two of the thirty-three states that have enacted Revised Article 1 to date. Only Louisiana — deferring to its Civil Code to ascertain the applicable law where the transaction does not fall within the scope of a more specific choice-of-law provision elsewhere in the UCC — has enacted a version of Revised § 1-301 that differs non-trivially from the new official version.

* - As in, "Which state's law do you want to govern our contract?"

2009 AALS conference on transactional law

Transactional law in Long Beach, California

To: Faculty Members interested in Transactional Law

From: Planning Committee on 2009 AALS Conference on Transactional Law

• Lisa Fairfax, University of Maryland, Chair
• Victor Fleischer, University of Illinois
• Peter Pitegoff, University of Maine
• D. Gordon Smith, Brigham Young University
• Alfred Chueh-Chin Yen, Boston College

Subject: Requests for Proposals on Transactional Law Scholarship and Innovative Methods of Teaching Transactional Law

We are planning the AALS 2009 Mid-year Program on Transactional Law, which will be held on June 10-12, 2009 in Long Beach, California. "Transactional law" refers to the substantive legal rules that influence or constrain planning, negotiating, and document drafting in connection with business transactions, as well as the "law of the deal" (i.e., the negotiated contracts) produced by the parties to those transactions. We are seeking proposals from (1) faculty members interested in presenting on innovative methods of teaching transactional law, and (2) faculty members interested in presenting new scholarship that relates to transactional law.

About the Program

In 1994, the AALS held a Workshop on Transactional Approaches to Law which inspired significant innovation and experimentation in transactional teaching and scholarship. This Program provides a unique opportunity to take stock of developments in this area since that influential workshop. One important goal of the Program is to bring together faculty from different doctrinal areas of law to exchange ideas and information on teaching and scholarly innovations in the area of transactional law. Toward this end, we encourage proposals from faculty members with an interest in transactional law in any discipline including such specialties as bankruptcy, business associations, clinical law, contracts, commercial law, intellectual property, international business, labor and employment law, real estate transactions, securities regulation, and taxation.

Please note that the AALS 2009 Mid-Year Meeting will include three programs: A Program on Business Associations: Taking Stock of the Field, followed by Concurrent Programs on Transactional Law and Work Law. As a result, you may have received, or be receiving, Request for Proposals in connection with these other Programs. We would encourage you to submit proposals to any or all of the programs in which you have an interest in participating. We also encourage submissions from junior faculty.

Request for Proposals on Transactional Law Scholarship

In keeping with the conference theme, the Program will host a series of concurrent works-in-progress sessions designed to give interested faculty members an opportunity to present new scholarship related to transactional law. We are seeking works-in-progress proposals on transactional law scholarship broadly understood. Thus, we are seeking proposals on scholarship that focuses on the legal, financial, and practical implications of business transactions in a variety of different settings. In addition, we welcome proposals on the transactional side of the legal profession and the role of lawyers in consummating such transactions. We do not mean to limit the range of proposals in this area, and would welcome proposals on transactional scholarship of all types.

Request for Proposals on Innovative Methods of Teaching Transactional Law

We are planning a 75 minute plenary session on innovative methods of teaching transactional law, and are seeking proposals for faculty members interested in presenting in the session. Many law professors teach transactional skills in a variety of contexts, from stand-alone "Deals" or Business Planning courses to in-class exercises as part of doctrinal classes. A number of law schools have developed innovative courses or programs in transactional law. We are interested in hearing discussion of the various approaches with an eye towards discovering what works and what doesn't. To anchor the discussion, participants may wish to explore how they use (or choose not to use) case studies as a method for teaching transactional law. We welcome proposals from faculty members who wish to share their insights on using case studies and other innovative techniques and the manner in which those techniques enhance student development of transactional skills. As with the request for works-in-progress, we do not mean to limit the range of proposals in this area.

Submission Guidelines

Interested faculty should submit a 300-500 word written proposal of the proposed work-in-progress or proposed presentation not later than July 15, 2008. Faculty may submit proposals for both the work-in-progress and the presentation. In addition, as noted above, faculty who has submitted proposals in connection with the Business Association's Request for Proposals also may submit to the Program on Transactional Law. Please submit the description by email to transactional@aals.org. The presentations will not be published.

Chosen presenters must register for the Workshop and will be responsible for their own travel and other expenses. Any questions should be directed to Professor Lisa M. Fairfax, University of Maryland School of Law, Lisa M. Fairfax.

Tennessee Enacts Revised UCC Article 1; Illinois SB 2080 Makes Further Progress

On May 15, Tennessee Governor Phil Bredensen signed SB 3993, subsequently designated Chapter 930, making Tennessee the thirty-third state to enact Revised UCC Article 1 since the ALI and NCCUSL promulgated it in 2001.

Prospects look reasonably favorable for Illinois to follow suit in the near future. The Illinois Senate unanimously passed SB 2080 on April 9. On May 20, the Illinois House Judiciary Committee recommended passage and the bill was placed on the House's "short debate" calendar. On May 23, the House extended the final action deadline until May 31.

Revised Article 1 is already in effect in twenty-eight states: Alabama, Arizona, Arkansas, California, Colorado, Connecticut, Delaware, Florida, Hawaii, Idaho, Indiana, Iowa, Kentucky, Louisiana, Minnesota, Montana, Nebraska, Nevada, New Hampshire, New Mexico, North Carolina, North Dakota, Oklahoma, Rhode Island, Texas, Utah, Virginia, and West Virginia. It will take effect in Pennsylvania on June 15 and in Kansas, South Dakota, Tennessee, and Vermont on July 1.

As I have discussed previously, the two primary bones of contention during the enactment process have been uniform R1-301's choice-of-law rules and uniform R1-201(b)(20)'s "good faith" definition. None of the thirty-three enacting states has adopted uniform R1-301; instead, all have chosen to either leave their pre-revised 1-105 in place or to enact a substitute 1-301 with language consistent with pre-revised 1-105. (Louisiana subsequently amended its substitute 1-301 to diminish the distinction between choice-of-law rules applicable to UCC and non-UCC transactions; but, a fuller exploration of that amendment is another topic for another day.) There had been less uniformity with regard to defining "good faith." Twenty-three states have enacted uniform R1-201(b)(20)'s "honesty in fact and the observance of reasonable commercial standards of fair dealing" definition; while ten states — including Tennessee — have retained pre-revised 1-201(19)'s "honesty in fact in the conduct or transaction concerned" definition, reserving the requirement of commercial reasonableness for merchants under 2-103(1)(b) & 2A-103(3). If enacted as it currently reads, Illinois SB 2080 would make uniform R1-301 0-for-34 and would make Illinois the eleventh enacting state to retain the bifurcated good-faith standard.

Loaded Questions

On April 2, the Institute for Legal Reform released the results of a consumer survey that indicated consumers oppose legislation regulating the use of binding arbitration in consumer disputes (the proposed Arbitration Fairness Act). The telephone poll found that 71 percent of likely voters oppose efforts by Congress to ban arbitration agreements from consumer contracts. 82 percent actually prefer arbitration to litigation as a means to settle a serious dispute with a company. The American Association for Justice says its survey shows the opposite. 81 percent of Americans express disapproval of mandatory binding arbitration. 64 percent of voters favor the legislation, 26 percent oppose it. How can this be?

Here's one of the statements made as part of the American Association for Justice poll:

"As you may know, consumers are sometimes required to sign a contract with a company when they buy certain services or products such as automobiles, cell phones, or nursing home care. Today, these contracts often include a binding arbitration provision, which says that the consumer agrees to have any dispute with the company decided by an independent arbitrator in binding arbitration, rather than by a judge or jury in a civil legal proceeding. Do you approve or disapprove of these binding arbitration provisions in consumer contracts?"

Now here's one from the Institute for Legal Reform poll:

"Now suppose for a moment you had to sign a contract with a company when you purchased their goods or services. If you could choose the method by which any serious dispute would be settled between you and the company, which would you choose? Arbitration, which does not require going to court ...or... Litigation, which does require a lawsuit and going to court. "

Hat tip to Consumer Law and Policy Blog.

Neither statement provides an intelligent person with the information necessary to answer the question. If I ever get a call from a poll taker, I'd want to know what my "right to go to court" costs me in terms of the price I pay for consumer goods and services. I'd ask about the odds for consumers in arbitration vs. judicial resolution of their disputes. I'd want to know what was in it for me — apart from empty rhetoric about my right to "go to court" or vague inferences about the relative "fairness" of arbitration vs. adjudication. And, in the extremely unlikely event that I did not hang up on the poll taker within seconds after he mispronounces my name, I'd resent being used as a tool for others whose stake in the controversy dwarfs that of the average consumer.

Good results for Visa

Despite troubles in the economy and the financial sector generally shares of Visa are up forty-six percent (46%) since going public just two months ago. Quarterly profits for Visa came in at $314 million, or 52 cents a share. Not bad results. The position of Visa and Mastercard is different from Discover and American Express in that the two former companies do not lend money to consumers. Visa and Mastercard only process charges made by companies that use their systems. Since they don’t lend, Visa and Mastercard don’t assume the risk of consumer default during harsh economic times. Instead, that risk is taken by the banks that issue the cards. It would seem that these companies should experience business success so long as people continue to use their credit and debit cards with the Visa and Mastercard label.

For my part, I often find little cash in my wallet. No worries. I know that I will be using the ‘ole debit card to pay for gas, groceries and the like. About half of Visa’s profits come from debit card purchases (a quarter for Mastercard). As payments become increasingly dependent on electronic systems, Mastercard and Visa should continue to do well. Of course, there is that nagging issue of the staggering consumer debt that could dull the continued success of the system operators. The primary issue that comes to my mind, though, is that of the per transactions fees Visa and Mastercard set for merchants and banks that use their systems. Will Visa and Mastercard begin to turn profits that resemble the big oil companies? Should the government regulate the fees set by the system operators?

Although more than twenty countries, including the EU and Australia, have taken up the interchange fee issue in terms of anti-competitive behavior, the issue is not resolved here in the United States. About $30 billion of interchange revenue is at stake according to a recent report by the Kansas City branch of the Federal Reserve Bank. The many lawsuits over the fees have been consolidated before the U.S. District Court of the Eastern District of New York for trial later this year. Moreover, the “Credit Card Fair Fee Act of 2008” is currently pending in Congress. This seems to set up the classic conflict between market forces and regulation. With a recent National Retail Federation report that the interchange fees cost families about $400 per year, I find myself surprisingly drawn to the idea of regulation. Hidden fees always get my ire going. Just something else for me to think over as I pull out my debit card to fill up the gas tank again.

Phishing in International Waters: The New Phace of Organized Crime

The U.S. Justice Department and Romanian authorities announced two federal indictments (C.D. Cal. and D. Conn.) against 38 people who allegedly participated in two international phishing operations with ties to organized crime. The charges include conspiracy to violate the Racketeer Influenced and Corrupt Organizations (RICO) Act, and a host of hacker crimes such as conspiracy in connection with account access devices (credit or debit cards), unauthorized access to a protected computer, bank fraud and aggravated identity theft. U.S. Attorney for C.D. Cal., Thomas O'Brien said experts estimate losses at more than $3 million.

Romanian based "suppliers" phished for and obtained credit and debit card account data and personal information from cardholders by baiting more than 1.3 million e-mails. The "suppliers" sent the data to U.S. based "cashiers" who did the tech work, encoding the account data onto magnetic strips on access devices (including hotel key cards that work nicely for this purpose). "Runners" tested the cards and used the ones that worked to draw cash. U.S. participants took a cut and transferred the balance to the Romanian suppliers.

International organized crime is deep into the world payment system and just about everything else. Last month, U.S. Attorney General Michal Mukasey announced the Justice Department's Law Enforcement Strategy to Combat International Organized Crime . He said that mafia-style organized crime as Attorney General Robert Kennedy saw it in 1961 is a thing of the past. Organized crime is international, but that's not all. "They are more sophisticated, they are richer, they have greater influence over government and political institutions worldwide, and they are savvier about using the latest technology, first to perpetrate and then to cover up their crimes. . . . They touch all sectors of our economy, dealing in everything from cigarettes to oil; clothing to pharmaceuticals. These criminals invest some of the millions they make from illegal activities in the same publicly traded companies as we hold in our pension plans and 401(k)s. They exploit the internet and peddle their scams on eBay, and they're responsible for a significant chunk of the spam email we get."

Leave the gun. Take the cannoli. (Clemenza to Rocco)

Testing Secured Transactions Part II

My exams are all taken and graded now, so I wanted to report back my observations from my earlier post on Testing Secured Transactions. I ended up using a three hour examination with 30 true/false questions and five short answer essays. I actually offered up six short answer essays with the students getting to pick five to answer. The true false questions included all the basics of creating and perfecting security interests and priority. Topics on the short answer essays included: double debtors; new debtors; powers of the bankruptcy trustee; PMSI’s and general collateral descriptions in preexisting financing statements; and priority, proceeds, accounts and chattel paper. I must have had old-time television on my mind, as many of the hypos involved Gilligan's Island, Green Acres and Spiderman. Oh, and a little bit of politics thrown in too. After all, it was the "season" in Pennsylvania as I was drafting this exam.

The exam certainly was hard and rigorous from a time perspective. That said, I am a big believer in law school examinations serving the dual purpose of testing and teaching. I would certainly use this format of examination again. The true false gave me coverage of differing fact patterns, as did the short answer. The students had many situations to contend with, but also had to draft some short essays (typically about a page each) and cite to the appropriate code provisions. As for student performance, with a few exceptions, the students tended to do about the same on each part of the examination. The students who did well on the true/false mostly did about the same on the short answer essay.

Overall, I was also pleased with the quality of the answers given by the students. The rules of double debtors and new debtors probably gave the students the most trouble, but this did not surprise me. I find that the rules of 9-325 and 9-326 are hard for students to grasp (even with the examples in the code). But I did give the students a hint in the review session that these rules might appear on the examination. The next time I teach Secured Transactions, I will be mindful of my approach on these issues to see if there are better ways to make this easier for the students. With this exception, though, I am confident that the students do understand the basics of Article 9.

Most of my students this year will be taking the bar examination in Pennsylvania where Article 9 is no longer on the bar exam. But as these issues come up routinely in practice, the examinations give me confidence that they will be able to solve these issues when they arise. I would use this format of examination again, though it was a close call to pair multiple-choice with a long format traditional essay. I hope that you all had a good semester and have your grading done (or at least almost).

Never Allow a Human to Do a Computer's Job

Over on BNA's Electronic Commerce and Tech Law blog, Thomas O'Toole has posted an interesting and timely discussion of several recent online contracting cases. It's well worth reading.

Awarding attorney’s fees (at least in Texas)

Normally, I tell students that it would be unusual to collect attorney’s fees in an Article 2 sales case (and maybe in contracts cases generally). Well, perhaps I might need to rethink my pitch on this. In the recent case of Medical City Dallas, Ltd. v. Carlisle Corp., the Texas Supreme Court upheld an award of $121,277 in attorney’s fees and $110,449 in damages in a breach of warranty case based on a written contract. The case involved a simple roofing job gone-bad where the roof was warranted for twenty years, but leaked within five years and thereafter with some regularity. The Court concluded (I think correctly) that 2-715 consequential damages generally would not include a buyer’s claim of attorney fees. But, thanks to Texas Civil Practice and Remedies Code section 38.001(8), which allows attorney’s fees in cases based on an oral or written contract, this is not the end of this matter.

The Court acknowledged that breach of warranty and breach of contract are separate causes of action with separate remedies, but that observed that breach of warranty is in essence founded on contract. Therefore, the Court settled the issue in Texas by allowing an award of attorney’s fees to the buyer for the defective roof. Having practiced in Texas, the state’s law is filled with many curiosities. I agree with the Court’s conclusion that breach of warranty is founded on contract. As such, it would be in the letter of the Texas statute allowing attorney’s fees in such cases. Yet, access to attorney’s fees in sales cases is a powerful consumer right. I often tell students that many cases involving defective goods are not litigated because the cost of litigation far exceeds the cost of the defective goods. Even in the Medical City Dallas case, the attorney’s fees exceeded the actual damages. If this bothers you, you are not alone. The risk of misuse here would seem to be high.

So, Why the Disconnect?

To date, five states — Florida, Kentucky, Louisiana, South Dakota, and Vermont — have enacted Revised UCC Article 1 without enacting Revised Article 7, while two states — Maryland and Mississippi — have enacted Revised Article 7 without enacting Revised Article 1. (While Tennessee technically falls into this latter group, I am excluding it because both houses of the Tennessee legislature recently passed a Revised Article 1 bill and I have no reason to believe that Governor Phil Bredesen will not sign it in short order.) Why?

Louisiana's failure to enact Revised Article 7 might be explained by some eccentricity of the Louisiana Civil Code's treatment of documents of title. But, why have Florida, Kentucky, South Dakota, and Vermont revised their versions of Article 1 while retaining (conforming amendments excepted) their pre-2003 versions of Article 7; and, why have Maryland and Mississippi revised their versions of Article 7 while retaining (conforming amendments again excepted) their pre-2001 versions of Article 1?

Inquiring minds want to know.

What About Revised Article 7?

To finishing following up on Robyn Meadows's earlier post, when Governor Edward Rendell signed Pennsylvania HB 1152 into law on April 16, Pennsylvania became the twenty-ninth state to enact Revised UCC Article 7 — joining Alabama, Arizona, Arkansas, California, Colorado, Connecticut, Delaware, Hawaii, Idaho, Indiana, Iowa, Kansas, Maryland, Minnesota, Mississippi, Montana, Nebraska, Nevada, New Hampshire, New Mexico, North Carolina, North Dakota, Oklahoma, Rhode Island, Texas, Utah, Virginia, and West Virginia. Nine days later, Governor Phil Bredesen added his signature to Tennessee HB 3950, bringing the number of enacting states to thirty.

Elsewhere, on April 9, the Illinois Senate unanimously passed SB 2080 — which, as has been true in a number of states (including Pennsylvania, but not Tennessee) proposes enacting both Revised Article 1 and Revised Article 7. The bill now awaits a first reading in the Illinois House, which stands in recess until April 29. Massachusetts HB 4302, likewise, combines Revised Articles 1 & 7. As detailed in my white paper on Revised Article 1, HB 4302 has a tortured history and appears to stand little chance of enactment any time soon.

All of the enacted versions of Revised Article 7 are in effect except for Pennsylvania's, which should take effect on or about June 15, and Kansas's and Tennessee's, which will take effect on July 1. If enacted, Illinois SB 2080 will take effect on or after June 1.

Upcoming Conferences of Interest

Three conferences next month may be of interest to some of our faithful readers. I know they all interest me. I also know that, by the time I get home from the first of the three, I will have been out of town four of the last five weekends and would risk serious marital discord by attending either of the latter two. But, don't let that stop you from attending.

First up, chronologically, is "A Debtor World: Interdisciplinary Academic Symposium on Debt," May 2 & 3 at The University of Illinois College of Law, which is co-sponsoring with the American Bankruptcy Institute. The conference's self-stated goal is to "explore debt as neither a problem nor solution but as a phenomenon. Many different academic disciplines can make important contributions to help us understand why consumers and businesses decide to borrow money, what happens to businesses and consumers under a heavy debt load, and what norms and institutions societies need to encourage the efficient use of debt. Much of this knowledge is compartmentalized into intellectual silos that are rarely cross-fertilized. The goal of the conference is to promote the sharing of this knowledge." The line-up of speakers is eclectic and impressive and the conference promises to be time well spent. Conference registration is still open; however, the conference-rate block of hotel rooms may well be gone.

On May 22 & 23, the University of Houston Law Center's Center for Consumer Law, under the direction of our friend Richard Alderman, presents "Teaching Consumer Law: The Who, What, Where, Why, When and How." The conference faculty includes academics, advocates, and practitioners from the U.S. and several foreign countries and the program appears designed to appeal to attendees with varying degrees of experience and expertise in consumer law and in related areas of substantive law that have substantial consumer dimensions to them (e.g., bankruptcy, sales, payments). In addition to the inherent pleasure of spending two glorious May days in my hometown, conference attendees will be feted to Texas-style Bar-B-Q (known elsewhere as barbecue) and, for a nominal charge, a Houston Astros home game at lovely Minute Maid Park (formerly known as Enron Field and the Ballpark at Union Station). Conference and hotel registration are still open, as of this posting.

Rounding out the month, on May 30 & 31, Emory University School of Law's Center for Transactional Law and Practice hosts "Teaching Drafting and Transactional Skills: The Basics and Beyond." With panels geared toward both neophytes teaching courses that are ripe for infusing drafting and other transactional skills and those already teaching drafting and other transactional skills in their courses who are looking for fresh ideas, "[t]his conference offers those who teach drafting and transactional skills the knowledge and tools they need to comprehensively train students who are studying these areas of law" and "those at the forefront of developing these new courses a forum in which to exchange ideas about teaching, and promoting the teaching of, transactional law and skills." Among an excellent group of speakers is our friend and colleague Scott Burnham, whose book, Drafting and Analyzing Contracts (LexisNexis 3d ed. 2003), is a must-read and who is a most excellent house- and office-guest. Conference registration is open, as of this posting. Attendees are responsible for their own accommodations. For those who want to compare Texas-style Bar-B-Q to Carolina-style barbecue, at the far end of the Emory campus is a wonderful place called Dusty's. It's worth a visit if for no other reason than to buy some sauce to take back home with you.

The (Next to) Last Shall be (Among the) First

For several years now, those of us who teach UCC Articles 3 and 4 have had to caution our students that New York (the financial and commercial capital of the Western hemisphere) and South Carolina (home to many fine golf courses) had not adopted the 1990 revisions of Article 3 and 4, on which most payments teaching materials focus much of their attention. More recently, we have had to decide how much emphasis to give the 2002 amendments to Article 3 and 4 -- which, until April 15, only five states (Arkansas, Kentucky, Minnesota, Nevada, and Texas) had enacted.

But, wait! In the spirit of Matthew 20:16 (it seems only fair, being Sunday morning and all), South Carolina has vaulted from the rear of the peloton to the lead group. By affixing his signature to SB 936 on April 15, Governor Mark Sanford made law a sweeping revision of South Carolina's Articles 3 and 4 that has the effect of enacting the 1990 revisions as amended by the 2002 amendments.

Meanwhile, New York SB 2410 proposes comparably sweeping changes to New York's versions of Article 3 and 4. However, SB 4120 does not appear to be making any progress since first being referred to the Senate Judiciary Committee in March 2007 (not a typo).

Vermont and Pennsylvania Enact Revised Article 1; Tennessee and Illinois Progress Toward Enactment

Governor Jim Douglas signed Vermont HB 563 into law on April 10. Governor Ed Rendell did likewise to Pennsylvania HB 1152 on April 16. Pennsylvania HB 1152, by its terms, takes effect on or about June 15, 2008. Vermont HB 563, along with Kansas SB 183 (enacted last year) and South Dakota SB 93 (enacted earlier this year), will take effect on July 1, 2008.

Vermont HB 563 and Pennsylvania HB 1152 both eschew uniform R1-301 (making it 0-for-32 for those scoring at home) and adopt the uniform R1-201(b)(20) good faith definition (that tally now stands at 23-to-9 in favor of the new unitary standard).

Elsewhere:

The Tennessee Senate and House have approved slightly different versions of Tennessee SB 3993. The Tennessee Senate is scheduled to vote next Monday (April 21) whether to accept the House's amended version.

The Illinois Senate has unanimously approved Illinois SB 2080, which now awaits a first reading in the Illinois House.

Massachusetts HB 4302 continues to idle.

The bills pending in Tennessee, Illinois, and Massachusetts all reject uniform R1-301. The Massachusetts bill adopts the uniform R1-201(b)(20) good faith definition, while the bills pending in Tennessee and Illinois retain the bifurcated good faith standard currently in effect by replacing the language of uniform R1-201(b)(20) with "honesty in fact in the conduct or transaction concerned."

The Risk of Buying a Boat Off-Season

In the recent case of First Nat. Bank of Litchfield v. Miller, the Connecticut Supreme Court considered whether the Millers accepted a Donzi Z20 boat they purchased for purposes of 2-606. The Millers paid a deposit and executed a purchase agreement on April 30 when the weather was still far too cold for boating in New England and they could not take the boat out into the water. The agreement provided that title and ownership would not transfer until the full purchase price was paid and that delivery would not occur until May 20. The May 12 retail installment contract, though, recited that the seller had delivered the boat to the Millers who had accepted the boat (even though no delivery had in fact occurred), but this representation was in provisions agreed to by the seller and financing company. The seller did not have the boat ready for delivery until May 27 and even then during a test-ride with the Millers there were some mechanical problems. When the Millers sent the seller a letter rejecting the boat and refusing to pay the lender, the lender brought suit.

Reversing the appellate court, the Connecticut Supreme Court found that the Miller’s accepted the boat for two reasons: (1) that the purchase agreement and retail installment forms signed by the Millers stated that they had inspected the boat and were satisfied with it, constituting acceptance under 2-606(1)(a); and (2) that the act of signing an application for a temporary registration for the boat constituted an act inconsistent with the seller’s ownership under 2-606(1)(c). The Court observed that the circumstances of the transaction were key to the issue of acceptance:

The Millers did not purchase any vehicle. They purchased a boat during spring in New England. The trial court particularly found that it is not uncommon for buyers to purchase a boat during the off season, deferring delivery until later. Presumably, buyers who wish to take a boat for a test ride prior to accepting delivery will wait until the weather permits that form of inspection before signing contracts in which they represent that they have inspected the boat and found it satisfactory, and before having the boat customized to suit their needs. Buyers who do not wait until warmer weather permits a test ride essentially have weighed the advantages of a more thorough inspection versus the instant satisfaction of purchasing the boat immediately, and relying on a less reliable means of inspection, and opted for the latter.

The Court’s conclusions on the workings of 2–606(1)(a) seem to be against precedent and detrimental to the rights of consumers making purchases on forms prepared by sellers. Before reading this case, I would have told my students that it is a generally accepted principle that seller forms reciting that goods are “accepted” are not effective under 2-606 unless there was a sufficient opportunity for a buyer to perform more than a cursory inspection of the goods. Regarding the buyer’s right to inspection of goods, comment 8 to 2-513 provides that inspection is not regarded as a condition to the passing of title. Comment 9 further explains that inspection is the buyer’s “check-up” to see if the goods are conforming and should not be confused with an “examination” of goods at the time of contracting.

The Miller’s examination of the boat in April would seem to be the type of “examination” at the time of contracting that the code contemplates, rather than an inspection. Moreover, a boat that can only be inspected during the winter while out of the water would not seem to amount to more than a cursory inspection. As such, the Millers would have at least until the test ride with the seller on May 27 to accept or reject the boat (and perhaps longer). It seems a curious proposition to deem acceptance at the date of purchase (or payment) when the parties clearly contemplated a test drive later when the weather warmed up in Connecticut. Similarly, it would not seem that merely signing an application for temporary registration presented by the seller would constitute acceptance either. Car dealerships also have consumers sign temporary registrations, but I would not think that this would be acceptance under 2-606 either.

So, the aspect of this case that remains for me here is the Court’s observation that a boat purchased during winter in New England somehow is special. I have doubts about this reasoning. Nevertheless, buyer’s would be wise to exercise caution when purchasing boats during wintertime in Connecticut. I wonder if this decision will put a damper on off-season boat sales?

Classification of "Financial Services"

The term "financial services" refers to an assortment of institutions that provide the means for people to save for the future, hedge against risks, acquire capital for consumption and organize capital for investment. Actors who undertake this intermediation function facilitate social gains from trade.

The The Department of the Treasury Blueprint of A Modernized Financial Regulatory Structure (March 2008) makes a provocative observation about the "financial services" sector and the term itself. Our current regulatory structure organizes financial services institutions into legally distinct categories, (e.g., commercial banks, other insured depository institutions, insurers, companies engaged in securities and futures transactions, finance companies, and specialized governmental companies such as Freddie Mac and Fannie Mae). These categories in part reflect distinctions in the way these actors function as capital intermediaries. In ways we hardly notice, however, the legal categories both reflect and entrench distinctions that regulation, not function, makes important.

For example, we perceive a legal difference between a commercial bank and an "other depositary institution" because the law that regulates commercial banks is different than that which regulates other depositary institutions. To accommodate the regulatory difference, we invent and deploy different words to describe the differently regulated actors. The most famous example of this may be the "non-bank bank" a term coined in the 1980's for a financial institution that did not meet the regulatory definition of a "commercial bank" and thus avoided the prohibition against interstate banking for commercial banks. The words we use to describe and importantly to think about "financial services" institutions make non-functional distinctions important.

The Blueprint proposes a new regulatory regime for intermediaries in which non-functional regulatory distinctions give way to functional ones. It opens a discussion on the possibility and realization of optimal regulation free of the restraint the current regulatory classification system imposes.

The proposal is both thrilling and terrifying. Mastery of the elaborate financial services classification system, like its biological counterpart, is not cheaply acquired or easily relinquished. For those players who have invested in manipulating the present regime to their advantage, the prospect of change threatens their return. The Blueprint invites financial services lawyers (and others who might be) to abandon the old vocabulary and embrace and create a new legal field that as yet has no name.

Revised Articles 1 & 7 in Pennsylvania

The bill to adopt revised Articles 1 and 7 that had been stalled in the Pennsylvania Senate was unanimously passed by the Senate on April 8 and now heads to Gov. Ed Rendell's desk for signature. I'm sure this Blog's own Keith Rowley will give us a complete update when the bill is finally signed into law. Pennsylvania joins the majority of states that have enacted Revised Article 1 in adopting the uniform definition of good faith for all articles except Article 5, honesty in fact and the observance of reasonable commercial standards of fair dealing.

Testing Secured Transactions

When I went to Vanderbilt law school some years ago, I had Professor Margaret Howard for Secured Transactions. Professor Howard gave us a multiple choice final examination that I recall had elements of short answer format as well. When I’ve taught Secured Transactions in the past, I’ve nearly always given the traditional long format essay exam. But, I’ve not taught Secured Transactions in a few years, so I am revisiting this as I am thinking about this Spring’s rapidly approaching exam. I am leaning toward using a short answer examination for Secured Transactions.

Of course, what do lawyers really need to know about U.C.C. Article 9? Not that they haven’t been taught a great deal in class, but testing forces professors and students alike to give thought to focusing on key issues. It would seem at the least that students must understand the basics of classifying collateral, creating a security interest, perfecting the security interest and sorting out priorities. But then, there are plenty of other good things to learn as well. Should students really know how the “rebuttable presumption” test works for non-complying sales? What should they know about the treatment of inventory that is leased to a lessee where the lessor’s lender has a security interest in the collateral?

Lynn Daggett’s recent article All of the Above: Computerized Exam Scoring of Mulitple Choice Items Helps To: (A) Show How Exam Items Worked Technically, (B) Maximize Exam Fairness, (C) Justly Assign Letter Grades, and (D) Provide Feedback on Student Learning in the recent volume of the Journal of Legal Education makes the pitch for multiple choice generally, but not in the context of commercial law. The most persuasive argument is the ability to have data showing areas where students either mastered the material (or didn’t). Kenney Hegland’s 2006 article On Essay Exams also in the Journal of Legal Education takes the opposite stance. Hegland makes a pretty good case that exams not only evaluate, but also teach. This, of course, is better done with essay format.

The merits of both Daggett’s and Hegland’s arguments are easy to see, but are there reasons to prefer one over the other for commercial law? With the breadth of code provisions, it is tempting to use multiple choice questions in commercial law. In fact, I have used a partial multiple choice format when teaching Sales. But even in this class, I share Hegland’s desire to teach and a general commitment to having students carefully work analysis. The breadth of issues with Secured Transactions would make it easy to weave a single long fact pattern of a transaction in its entirety from the creation of the security interest to default and repossession by a lender. There would certainly be plenty for all students to write about in such a case. But, I find myself drawn to a format that might use the same transaction in a format that breaks it down to shorter 20-30 minute segments. This approach, I believe, would require students that might otherwise skip over difficult code issues to have to take them up because they are set out as separate grading items. There is also a greater potential for using variations on the fact patterns with this format, which is especially helpful for drawing out code nuances. Like Daggett, I like knowing which areas of Article 9 the students had more difficulty with on the examination. But, I am not quite willing to commit to giving the students a pass on explaining their analysis.

For any of you also mulling this over, several other articles that you might want to look at (though not specifically about commercial law) are:

Steven Friedland, A Critical Inquiry into the Traditional Uses of Law School Evaluation, 23 Pace L. Rev. 147, 174-79 (2002);

Linda R. Crane, Grading Law School Examinations: Making a Case for Objective Exams to Cure What Ails “Objectified” Exams, 34 New. Eng. L. Rev. 785 (2000);

Marcella David, A Funny Thing Happened on the Way to the Multiple-Choice Exam: Or, The Schoolroom Lessons from Bush v. Gore, 51 J. Legal Educ. 1 (2001);

Steve Sheppard, An Informal History of How Law Schools Evaluate Students, With a Predictable Emphasis on Law School Final Exams, 65 UMKC L.Rev. 657, 665-88 (1997).