Reporters of the Restatement of Consumer Contracts Provide a Guide

In 2012, the American Law Institute (ALI) invited Oren Bar-Gill (left), Omri Ben-Shahar (below , right) , and Florencia Marotta-Wurgler (below left) to serve as Reporters for a new Restatement of Consumer Contracts Law (the Restatement). Now, three years after the ALI adopted the Restatement and one year since its publication, they have posted on SSRN A Companion Guide to the Restatement of Consumer Contracts. As the Reporters note in their conclusion, what they provide is not a guide to the text of the Restatement; rather they provide a guide to its subtext, both literally and figuratively. They articulate the methodological and social scientific apparatus that they brought to their work and explain what they tried to achieve through their Reporters’ Notes.

They begin by explaining three methodological innovations that they brought to the project. First, they used data and replicable statistical methods to identify the most influential precedents in areas of conflicting decisions. Second, they  relied on scholarship, including their own, to prioritize rules that protect consumers. In particular, the Reporters were skeptical of mandated disclosure rules. Omri Ben-Shahar and Carl Schneider long ago explained convincingly that disclosure regimes are ineffective in a book that was subject to one of our online symposia. Instead of mandatory disclosure regimes, the Reporters instead favor doctrines like unconscionability and prohibitions on deceptive practices. However, they concede that courts still make limited use of unconscionability doctrine and more often strike down clauses that the courts regard as inadequately disclosed. Finally, they elucidated causes of harm in consumer markets relying on social science literature and behavioral economics.

Many of the insights derived from the Reporters’ methodological interventions reside in their Notes to the Restatement and do not represent the ALI’s official position. The Companion Guide foregrounds the perspectives that the Reporters hope will guide courts in the 21st century. They waded into a challenging legal environment as technology and innovation got out in front of the law. Businesses were quick to adapt to the new world of electronic contracting. They experimented with form contracting in ways that enabled them to impose increasingly one-sided terms on the consumers whose data they were harvesting. Previous ALI attempts to guide courts towards more consumer protection had minimal impact.

Rather than try to correct problematic precedents, the Reporters instead found and described the wide variety of decisions by surveying not only high courts and leading opinions but all court rulings that touched on consumer issues. Their project was more challenging than similar Restatement projects. There was plenty of precedent, but, as they put it, “the dust had not settled,” necessitating “subjective and perhaps ideological judgment calls.” They sought to limit subjectivity through quantitative measures designed to identify the most influential precedents.

For example, prior to the Restatement, it was received wisdom in the academy that privacy policies, which set out business’s data collection practices, should not be treated as contracts. The Reporters found that outcome difficult to square with basic principles of contract formation. Sure enough, their empirical methods disclosed that courts were overwhelmingly enforcing privacy policies as contracts.  They discovered similarly surprising patterns in other areas of law, including the finding that federal courts often set the tone for establishing rules for the law of consumer contracts. State courts followed the federal courts, often years later.

The Reporters discuss disclosure rules at length in the context of pay-now-terms-later (PNTL) contracts. Judge Easterbrook’s influence looms over this area, and despite the objections of a few courts and the vast majority of the academy, he has won the day. PNTL contracts are enforceable, so long as there is notice that terms are coming and consumers have a reasonable period to reject the goods without penalty. Based on their review of the caselaw, the Restatement § 2(b) reflects that practice for PNTL contracts, even though the Reporters know that (a) the notice that terms are coming will not be effective and (b) the consumers will not read the terms during the period when they could return the goods without penalty. But notice provisions allow courts to refuse to enforce one-sided terms by finding that the notice was faulty. The Reporters note that businesses will learn how to navigate disclosure requirements. Worse, as we discussed earlier this month, businesses can flip the tables and require that consumers provide written notice of complaint or forfeit their claims.

Finally, the Reporters provide two examples of what they call their social science realism — their attempt to use the tools of psychology and economics to inform the doctrines of procedural unconscionability and deception. The hallmarks of procedural unconscionability are lack of meaningful choice and unfair surprise. The Reporters used the tools of social science to pinpoint when courts would exercise their discretion to determine there was a “meaningful” lack of choice or an “unfair” surprise. Because consumers do not read form contracts, all terms that are not bargained for are surprises, subjectively speaking. However, for the Reporters, market forces can correct for some surprises. The doctrine of unconscionability is only needed when the terms are so non-salient to the consumers that there is no market trade-off when a business includes such terms. For example, consumers understand that they can get a lower monthly price in exchange for early termination fees, and they calculate the trade-off to which they are agreeing. Consumers do not know how to price an arbitration clause and so it, and many other “non-salient” standard terms are procedurally unconscionable, according to the Reporters.

Salience is also key to the Reporters’ take on deception. The situation is a familiar one — a seller makes oral representations that are then either not included or disclaimed in the integrated, written sales agreement. Courts are already quite adept at finding ways to allow evidence of such warranties to be introduced notwithstanding the parol evidence rule. However, the Reporters offer a justification for the admission of the evidence that does not rely on an allegation of misrepresentation. Misrepresentation  can be tricky, because one has to establish intent. Salience is a better way to handle the situation. Courts should reverse the usual hierarchy and give priority to oral statements over written statements because the former are more salient to consumers than the latter. Similarly, courts should refuse to enforce contracts in which consumers are induced into bad deals through other forms of deception such as manipulative contract design or obfuscation that prevents consumers from noticing salient terms.

The guide is a very valuable and brief synopsis of the methodological innovations of the Restatement. I appreciate the work of the Reporters and their methodological commitments. I just want to sound two   notes of caution. One criticism of the Restatement was that it was premature. As the Reporters acknowledge, “the dust had not yet settled.” Neither courts nor scholarship had caught up to business innovations in the realm of electronic consumer contracting. As our co-blogger Nancy Kim argued here, there was a danger that the Restatement could “stunt the development of the law of consumer contracts at this very dynamic period.” Critics of the Restatement questioned whether they had gotten the case law right. My concern is a little different: The case law was informed by old common law approaches that evolved for a world of negotiated contracts and was not suitable for the world of electronic contracting. Judge Easterbook’s influence on PNTL contracts imports two erroneous statements about contract law — that there can be no battle of the forms when there is only one form and (more shockingly) that the “vendor is the master of the offer.” The Reporters’ methodology is commendable; the timing of its deployment is questionable, because it can freeze the doctrine at a time when it needs flexibility.

I also want to highlight a tension between the Reporters’ commitment to having the Restatement reflect actual caselaw and their aspirational social scientific interventions. They make a strong argument for why procedural unconscionability should be re-conceived, but their arguments there do not seem to be reflected in the caselaw. They note that they have confined their social scientific pronouncements to the non-binding Reporters Notes, but the point of such notes ought to be to move the law, and I see no reason to think courts will be more inclined to adopt social scientific models presented in non-binding Notes to a non-binding Restatement than they would be to adopt the same ideas presented in traditional legal scholarship. Of course, the Reporters have their platform, and they are free to use it, but I think the most successful Restatements use Notes to favor interpretations of doctrine that have some foundation in the caselaw. They seem to be on firmer ground with their social scientific take on deception, in that courts do refuse to enforce contracts entered into through deceptive practices. I’m just not sure that courts adopt their focus on salience. More helpful than more law review article or Reporters notes would be model legislation to jolt courts away from their common-law preference for unread, one-sided boilerplate terms and towards giving effect to oral promises. 

That said, the Reporters took up a thankless task and executed it with social scientific rigor and candor. Their work has already had an impact, and I think it has focused the attention of the legal profession on consumer contracts in a way that could not have been achieved without their work. For that, we do owe them thanks and continued productive engagement.