VOLUME 15 • ISSUE 2
HOW TO USE THE RESTATEMENT OF CONSUMER CONTRACTS: A GUIDE FOR JUDGES
Ian Ayres & Gregory Klass1Ian Ayres, Oscar M. Ruebhausen Professor, Yale Law School; Gregory Klass Frederick J. Haas Chair in Law and Philosophy, Georgetown University Law Center. Mingyi Hua, Richard Peay, and Ronglu Sun provided excellent research assistance.
Many significant changes to contract law over the past hundred years have been driven by changes in the technology of contracting—the mechanisms people use (or try to use) to create or alter their legal relationships. Early in the twentieth century, cheap printing and mass markets paved the way for standard-form contractual writings and adding terms to noncontractual documents, such as purchase orders and parking receipts.
VOLUME 15 • ISSUE 2
A COMPANION GUIDE TO THE RESTATEMENT OF CONSUMER CONTRACTS
Oren Bar-Gill, Omri Ben-Shahar, & Florencia Marotta-Wurgler2Bar-Gill is the William J. Friedman and Alicia Townsend Friedman Professor of Law and Economics at Harvard Law School. Ben-Shahar is the Leo and Eileen Herzel Distinguished Service Professor of Law at the University of Chicago Law School. Marotta-Wurgler is the Boxer Family Professor of Law at the New York Universirty School of Law.
In 2012, we were invited to serve as Reporters for a new and ambitious project of the American Law Institute (“ALI”) – a Restatement of Consumer Contracts. We were charged with the task of codifying the common law governing consumer contracts. This was a gutsy move by the ALI, entrusting a sacred doctrinal enterprise in the hands of outsiders to the ALI culture. We are scholars devoted to studying the effects of laws and whether they achieve their intended consequences. In our research on consumer protection, we studied which regulatory reforms work well, which are futile, and which do more harm than good. Our research harbored only modest ambitions in the study of what the law is.
VOLUME 15 • ISSUE 2
CONSUMERS’ UNREASONABLE TEXTUAL EXPECTATIONS
David A. Hoffman3William A. Schnader Professor of Law, University of Pennsylvania Carey School of Law. I’m grateful to the organizers and participants at the Restatement of Consumer Contracts conference for comments.
The Restatement of Consumer Contracts, at § 4(d), states that “standard contract terms are interpreted in a manner that effectuates the reasonable expectations of the consumer.” As the Reporters note, this language derives from the Restatement (Second) of Contracts § 211, itself largely pulled from the insurance context. As § 211 was until recently thought to be nearly dead-letter, the Consumer Restatement’s interest in revitalizing the reasonable expectations rule (for interpretation and elsewhere in the document) is of particular interest. The Reporters offer a helpfully capacious definition of what consumers reasonably expect: A “totality of the circumstances,” test “in consideration of the ordinary behavior and perspective of consumers engaged in the type of transaction at issue and their interaction with the business, including the representations made to them, the typical purpose of such transactions, and the preservation of value of the nonstandard or core terms of the deal.” But it’s fair to worry that judges will be unable to reliably make this kind of holistic determination in individual cases, as they lack information about consumers’ ordinary practices. In this Essay, I summarize the available evidence of what consumers have in mind when they interpret contracts, and a methodological options judges have before them in making reasoned determinations. Contrary to advocates’ hopes, § 4(d)’s interpretation principle will be—even if adopted—unlikely to produce uniformly pro-consumer outcomes.
VOLUME 15 • ISSUE 2
INFLECTION POINTS IN THE DRAFTING OF THE RESTATEMENT OF CONSUMER CONTRACTS: SALIENCE AND ITS ARC
Patricia A. McCoy4Liberty Mutual Insurance Professor, Boston College Law School. Professor McCoy was an Adviser to the Restatement of the Law, Consumer Contracts.
All Reporters come to Restatement projects with priors, and that was no less true for the Restatement of the Law, Consumer Contracts (“RCK” or “Restatement”). One of the RCK’s Reporters, Omri Ben-Shahar, had coauthored an acclaimed book detailing disclosure’s failure to afford consumer protection. Another Reporter, Florencia Marotta-Wurgler, had conducted definitive research demonstrating that almost no consumers read the terms and conditions in online contracts. The Reporters were concerned about consumer harm, yet skeptical of disclosure as the appropriate regulatory tool.
VOLUME 15 • ISSUE 2
NARROWING THE FRAME: CONSUMER INSURANCE POLICIES AND THE LIMITS OF THE RESTATEMENT OF CONSUMER CONTRACTS
Daniel Schwarcz5Fredrikson & Byron Professor of Law, University of Minnesota Law School.
Efforts to restate the law must contend with a fundamental framing challenge: Determining how broadly or narrowly to define the area of law to be addressed. This decision inevitably involves trade-offs. Narrow formulations may yield nuanced and precise rules, but risk diminishing the utility of the restatement and obscuring overarching themes and objectives. Conversely, broad formulations may provide a more comprehensive view of the law, but risk oversimplifying its nuances, conflating distinct lines of precedent, and overlooking critical details.
VOLUME 15 • ISSUE 2
A DEMOCRATIC CONCEPTION OF CONSUMER CONTRACTS
Rebecca Stone6Professor, UCLA School of Law. Thanks to Jon Quong and participants at the ALI Sym- posium on the Restatement of Consumer Contracts for helpful comments. Thanks also to Raj Ashar and the editors of the Harvard Business Law Review for excellent editorial assistance.
I sketch and briefly evaluate two standard ways of conceptualizing the problem that is posed by consumer contracts and defend a third view, which is based on my democratic conception of contract. According to the first, the power asymmetry between sellers and consumers means that we should not view consumer contracts as genuine contracts but rather as illegitimate exercises of private law-making by sellers for their consumers. According to the second, which broadly aligns with the approach of the Restatement of Consumer Contracts, consumer contracts are genuine contracts but of a procedurally defective kind. On the view I defend, the essence of the problem is not the compromised assent of consumers, but rather the tendency of sellers to set terms without regard for consumers’ interests.
VOLUME 15 • ISSUE 2
RESTATEMENT OF THE LAW, CONSUMER CONTRACTS AND THE “TOTALITY OF THE CIRCUMSTANCES”
Steve Weise7Partner, Proskauer Rose LLP; UCLA School of Law, Lecturer in Law; Member, Council of the American Law Institute; Member, Permanent Editorial Board for the Uniform Commercial Code.
The concept of using the “totality of the circumstances” plays a central role in the Restatement of the Law, Consumer Contracts (Restatement). The Restatement regularly uses this approach to evaluate the matters identified in the following paragraph. The Restatement uses a “totality of the circumstances” test to determine when a “feature of the parties’ conduct or communications” is “reasonable” (when required to be “reasonable” by the Restatement), and identify a consumer’s reasonable expectations in connection with the interpretation of a consumer contract.
VOLUME 15 • ISSUE 2
THE PSYCHOLOGY OF MISLEADINGNESS: A STUDY AND A RESEARCH AGENDA
Tess Wilkinson-Ryan8Golkin Family Professor of Law, University of Pennsylvania Carey Law School. I am grateful to Oren Bar-Gill, Omri Ben-Shahar, and Florencia Marotta-Wurgler for hosting the symposium and for their feedback. I am also thankful to David Hoffman, Michael Morse, and Ben Sirolly for generous comments and discussions. Finally, I am indebted to Selma Halal and Cristina Bermudez for their excellent research assistance.
Traditional contract doctrine, at least as it exists in the casebooks, seems surprisingly indifferent to the problems of deception. Contract law has one big move to protect against deception: a strict liability approach to breach that grants expectation damages whether the promise was untruthful or just optimistic. Unlike showing fraud in tort, which includes an intent element, the uniform approach of contract doctrine is to hold fraudsters to their promises whether or not the injured party can prove a promise was a lie. But once we move past contract’s big move—the plaintiff-friendly protection of the expectation interest irrespective of deceptive intent—the indifference to deception can be a doctrinal gift to the would-be deceivers.
VOLUME 15 • COLUMNS
IS YOUR DEBIT CARD THE REASON EVERYTHING IS SO EXPENSIVE?
Robert Pedersen9Robert Pedersen, J.D. Candidate, Harvard Law School. I would like to express my gratitude to the Editorial team for their help in reviewing and editing this Column.
Cost of living was the top financial concern for in the 2024 presidential election. The Department of Justice (DOJ) points to an apolitical culprit for some of the elevated cost of living: your debit card. In its September 2024 civil antitrust lawsuit, the DOJ alleges that Visa has amassed monopolistic power in the debit network industry, thereby stifling competition. Therefore, the suit states, Visa is able to charge higher fees than it would be able to in a competitive market, which result in higher prices for consumers. In its defense, Visa claims that there are myriad sources for consumers to pay for goods, and the suit ignores these competitors. The outcome of this antitrust suit will impact the roughly 100 billion debit transactions completed in the U.S. annually.
VOLUME 15 • COLUMNS
IS FEDNOW THE SOLUTION, A SOLUTION, OR NO SOLUTION
Muhui Shi10Visiting Researcher, Harvard Law School; SJD candidate, University of Michigan Law School. I would like to express my heartfelt gratitude to Professors Howell Jackson, John Pottow, and Jeffery Zhang for their invaluable guidance and insightful advice. I am also deeply appreciative of Professors Eric Christiansen and Julian Arato for their unwavering support and warm encouragement.
The new FedNow system promised to restore the U.S. payment system to its rightful place with once-in-a-generation innovation. Against popular belief, this paper, based on recent data on FedNow’s operation, argues that this proclaimed game-changer is an empty promise. The failure of FedNow—going beyond structural designs, consumer protection, or governance level—was rooted in the Fed’s involvement. The Fed’s involvement in the real-time retail payment market was both unnecessary and poorly timed. FedNow, offering almost identical service to its private counterpart, RTP, is now stuck in an awkward place; it should have been implemented before RTP entered the market or waited for RTP to fully develop the market.
VOLUME 15 • ISSUE 1 • PRINT
“PRICE DISCRIMINATION” DISCRIMINATION
Talia B. Gillis11Associate Professor, Columbia Law School. The author would like to thank Ian Ayres, Nikita Aggarwal, Neil Bhutta, Matthew Bruckner, Jessica Bulman-Pozen, Raul Carrillo, Kelly Cochran, Luke Herrine, Howell Jackson, Madhav Khosla, Ela Leshem, Wenli Li, Dorothy Lund, Justin McCrary, Lev Menand, Vitaly Meursault, Haggai Porat, Jeff Sovern, Eric Talley, Rory Van Loo, and participants in the Cardozo Law Symposium on Automating Bias, the Wharton FinReg Conference 2022, the Alabama Law Faculty Colloquium, the Wayne State Faculty Workshop, the NYU Public Law Workshop and the NYU Colloquium on Innovation Policy for thoughtful comments. Brent Allen, Elena Carroll-Maestripieri, Susie Emerson, Sean Kwon, DanLan Luo, Ryan Sandler, Sahil Soni, and Reece Walter provided excellent research assistance.
Credit price personalization, where lenders set prices based on individual borrower and loan characteristics, is a common practice across many loan types, with conventional accounts of its harms focusing on the ways in which risk-based pricing, or setting prices based on borrowers’ credit risk, can lead to disparities for protected groups like racial minorities and women. This Article examines an often-overlooked yet potentially harmful form of price personalization—charging borrowers different rates based on their willingness-to-pay, known as price discrimination—and argues that this practice can exploit vulnerable borrowers, including protected groups like racial minorities and women, by imposing higher costs unrelated to their credit risk, resulting in what I term “price discrimination” discrimination. Beyond entrenching financial disparities, price discrimination can exacerbate default risks, especially as the use of big data and artificial intelligence can make price discrimination more pervasive.
VOLUME 9 • COLUMNS
HEALTH INSURANCE PLAN REGULATION AFTER THE AFFORDABLE CARE ACT: A COST-BENEFIT ANALYSIS COMPARISON
Marlan Golden
In a rapidly evolving healthcare landscape, particularly since the enactment of the Patient Protection and Affordable Care Act (ACA) in 2010, regulators have confronted a number of challenges in crafting general rules of prospective applicability for health insurance plans. These challenges include quantifying costs and benefits of regulatory actions that seem difficult to predict, monetizing certain benefits, satisfying the demands of a robust cost-benefit analysis regime, and accounting for heightened uncertainty in the healthcare markets and recently, on Capitol Hill.
VOLUME 9 • COLUMNS
THE CFPB ARBITRATION RULE
Andrew Palmer
This paper analyzes the recent enactment and subsequent rescission of the Arbitration Agreements Rule12Arbitration Agreements, 82 Fed. Reg. 33,210 (July 19, 2017) (to be codified at 12 C.F.R. pt. 1040).(Arbitration Rule or Rule) promulgated by the Consumer Financial Protection Bureau (CFPB or Bureau), which bans the use of mandatory arbitration clauses in many types of financial contracts. Specifically, the paper will examine the life and death of the Rule through the lens of the types of cost-benefit analyses (CBA) undertaken by the Bureau in issuing the Rule. This analysis will consider the unique structure and administrative position of the CFPB, and use its authorizing legislation in the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act13Formally, the statute is the Dodd-Frank Wall Street Reform and Consumer Protection Act, Pub. L. No. 111-203, 124 Stat. 1376 (2010).(Dodd-Frank or DFA) to compare and contrast its cost-benefit analysis procedures with that of other administrative agencies, particularly in the financial regulatory space. Beyond the narrow scope of the application to the Arbitration Rule—and its rescission—this analysis will necessarily touch on larger constitutional, procedural, and governance challenges to the existence structure of the CFPB, a major contributor to the ire over the Rule in question.
VOLUME 6 • COLUMNS
CAN VOLUNTARY PRICE DISCLOSURES FIX THE PAYDAY LENDING MARKET?
Jim Hawkins
Eric J. Chang’s provocative article, www.PayDayLoans.gov: A Solution for Restoring Price-Competition to Short-Term Credit Loans—which, as its title suggests, proposes to facilitate price competition in the payday lending market by creating a federal online exchange for payday lenders to post lending rates—has sparked thoughtful reactions among consumer borrowing experts. This Response provides constructive criticism to Chang’s proposal, arguing that such an exchange is unlikely to meet its goal of restoring price competition and offering tweaks that would raise the likelihood of doing so.
VOLUME 6 • COLUMNS
WWW.PAYDAYLOANS.GOV: A SOLUTION FOR RESTORING PRICE-COMPETITION TO SHORT-TERM CREDIT LOANS
Eric J. Chang
Much of United States financial regulation has been predominantly based upon using mandated disclosure to facilitate price-competition. However, in the realm of payday lending, disclosure based regulation has received significant criticisms from regulators and consumer advocates. While federal action may be necessary to solve the payday lending problem, this Article argues that a movement towards stricter and more stifling regulations is an overreaction to the statement that disclosure is not working. Instead, this Article proposes a less burdensome but much more effective alternative: a federal online exchange for payday lenders to list and post lending rates.
VOLUME 2 • COLUMNS
REGULATING PAYDAY LOANS: WHY THIS SHOULD MAKE THE CFPB’S SHORT LIST
Nathalie Martin
In response to the nation’s biggest financial challenge since the depression, Congress enacted the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Act”), which in turn created the Consumer Financial Protection Bureau (the “CFPB”). The mission of the CFPB is to ensure that “markets for consumer financial products and services are fair, transparent, and competitive.” The Act prohibits unfair, deceptive, and abusive acts, and charges the CFPB with creating rules and enforcement actions against all covered persons that engage in an “unfair, deceptive, and abusive act or practice.” The Act also requires that the CFPB regulate consumer disclosures and test consumers to see how those disclosures are working.
VOLUME 2 • COLUMNS
DEBIT INTERCHANGE REGULATION: ANOTHER BATTLE OR THE END OF THE WAR?
Stacie E. McGinn and Mark Chorazak
As one governor of the Board of Governors of the Federal Reserve System (the “Board” or “Federal Reserve”) recently observed, “the financial crisis spawned or strengthened many reform agendas—among them consumer protection, securities and commodities market regulation, and traditional bank regulation.” The crisis also created opportunities unrelated to these reform agendas. At least one group—merchants—realized a legislative goal that had been unimaginable a year earlier: giving the Federal Reserve the authority to set debit interchange rates.
VOLUME 1 • COLUMNS
CONSUMER CASUALTIES?
Amy J. Schmitz
On July 21, President Obama signed into law the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank), which among other things calls for creation of the Consumer Financial Protection Bureau (CFPB) to serve as a centralized agency charged with protecting consumers from lending abuses and improper practices. The question is when and whether this agency will come to fruition—or suffer as a casualty of political warfare. This CFPB has instigated a firestorm among liberals and conservatives. Liberals raise the CFPB as an engine for consumer protection from rampant lender abuses and “big bad banks.” Conservatives denounce the Bureau as expensive regulatory fluff in a “leftist” campaign to take over private business.
VOLUME 1 • COLUMNS
FINRA PROPOSED RULE CHANGE WOULD GIVE CUSTOMERS OPTION OF ALL-PUBLIC ARBITRATION PANELS
Barbara Black
Brokerage firms customarily include in their customers’ agreements a predispute arbitration agreement requiring that investors arbitrate their disputes before an arbitration panel of the Financial Industry Regulatory Authority (FINRA). Current rules governing customers’ claims over $100,000 require each three-person panel to include one non-public, or industry, arbitrator in addition to one public arbitrator and one chair-qualified public arbitrator. Investor advocates long have argued that the mandatory inclusion of an arbitrator with ties to the securities industry was unfair to investors and gave the securities industry one decision-maker who would be sympathetic to its position.