Consumer Rights, Consumer Costs, and Justice

The worlds of consumer protection and their powerful antagonists, self-characterized as the financial services industry, are abuzz with the rule proposed yesterday by the Consumer Financial Products Bureau. Read the CFPB press release here. If adopted, the proposed rule would block mandatory pre-dispute arbitration agreements and permit aggrieved consumers to proceed via class action.

As many do not know, virtually every financial contract (e.g., credit card agreements, rent-to-own contracts, payday loan contracts, etc.) into which American consumers enter prohibit the consumer from suing the other party for breach of contract. Instead, consumers who have been injured must proceed to arbitration before an arbitrator chosen by the bank or other sort of lender. The dollar amount of such claims is typically in the hundreds which, when coupled with the expense and low likelihood of success, means that virtually no one even tries. (As many also do not know, most other consumer contracts similarly prohibit litigation as a mean of seeking justice. Read about an example of such a mandatory arbitration agreement in the nursing home industry here.)

Not surprisingly, the sexual financial services industry does not like this. Not one bit. You can read an article expressing their "concerns" in their mouthpiece here. Just as unsurprisingly, the banks' running dogs in Congress are joining the outrage.

Two thoughts. First, routine deprivation of consumers from the system of public justice is simply wrong. Justice is important and a system of justice that is not beholden to one party is a feature of the modern world. (And by "modern" I include the West since the eleventh century. See some of my relevant posts here, here, and here.) Parties should be free to opt out of the public system and arbitration presents one legitimate alternative. Yet opt-out at the will of one party with the power to influence the outcome should not occur before breach in a non-negotiable contract. In other words, non-salient, one-sided terms violate commutative justice.

Second: class actions. Critics of the proposed rule are correct to observe that many--but not all--class action cases redound more to the benefit of the attorneys than the injured parties. A simple solution to this problem would be to provide for an award of reasonable attorneys fees to an individual consumer who prevails in a lawsuit against the financier. The long-standing Magnuson-Moss Warranty Act does so and there's no evidence that it's been abused.

In short, I would take the protestations of concern by the banks and Congressman beholden to them seriously if they showed any evidence that some notion of justice influenced their positions. Until then, I won't.

Straining Toward Natural Law: Margaret Radin and Contract Degradation Part 1.5.1

Last week I posted some initial comments about Professor Margaret Radin's article Access to Justice and Abuses of Contract here. I had planned to get to Part 2 this week but an apposite comment by Eric Enlow, dean of Handong International Law School in Pohang, Korea, has forced me to reconsider two points I made my first time around.

Dean Enlow first questions my conclusion that, just as contracts are means by which humans obtain private goods, so too public remedies for breach of contract are private goods. Quoting myself,

[I]s a right to claim damages for breach of contract a public good? It seems not: the remedy of contract damages--like the practice of contracting--is a private good. 

To which Dean Enlow responds, 

I don't understand why the practice of courts' remedying of breaches of contract concerns only private good. To the contrary, if courts create a state of affairs where the public knows that a breach of a private contract may be remedied, then it creates public conditions where people may contract at lower costs and with greater confidence. Courts thereby facilitate more commercial transactions by lowering transaction costs. Courts may also promote the moral development of personal responsibility in taking responsibility for certain commitments with others and making amends for harms caused by failing in those commitments. 

In other words--my words--provision of a civil remedy for a private wrong (damages suffered as a result of breach of a contract) contributes to the public good in two ways. First, contract law works to increase the frequency of the social practice of contracting and, second, contract law functions as a tutor of private virtue, in particular the virtue of promise-keeping or fidelity. The first promotes an increase in the aggregate number of private goods while the second, the goad of potential civil liability for contract breach, works to increase our individual well-doing, our individual flourishing. In turn, individual flourishing contributes to the flourishing of society as a whole.

In response, I agree with the second of Enlow's points but not the first. With respect to his first criticism, increasing the quantity of private goods (what economists call welfare maximization) may be good for an individual but the effects of American consumerism (my thoughts about consumerism here; even better ones here) suggests that welfare maximization may in fact detract from growth in individual and collective virtue. (Some earlier thoughts on that point here.) In any event, and returning to a point I made in my initial post, I remain unconvinced that welfare maximization is a condition sufficient to identify a public good. I suspect that nothing can be a public good that affirmatively reduces our capacity for private goods but I don't believe the converse follows. In other words, increasing welfare is a necessary but not a sufficient condition by which to identify a public good.

I stand corrected by Enlow's second observation. Promotion of the virtue of fidelity is a public good and contract law can promote fidelity. It is particularly vexing to have overlooked this point because I've made it on previous occasions (see my posts here and here). We all must admit that we need socially instantiated practices to grow in virtue, a habitual turn to the good, and contract law is one such practice. Thus, I affirm that contract law is a public good.

In conclusion, I am grateful to know that someone reads what I write and takes the time to respond thoughtfully to it. Dean Enlow raised an additional point about my Aristotelian account of justice to which I hope to respond soon.

Straining Toward the Natural Law: Margaret Radin and Contract Degradation Part 1

Speaking Aristotelian-ish, the social practice of contracting is an example of a formal means [cause] by which human beings achieve their natural end of flourishing. Flourishing entails growth in the virtues, one of which is justice. And among the components of justice is "commutative," which entails a rough equality in exchange. In other words, when all is said and done, a contractual exchange of money (or information) for goods or services should be a fair one. (Caveat: a fair exchange need not be on arithmetically equal terms; it need only be a fair chance at arithmetical equality.)

Contract law exists in part because sinful human beings sometimes fail to contract in a just manner. It's unlikely that contractual assent produced at the end of a gun represents a fair exchange. Contract law thus concludes that the party under duress need not uphold her end of the bargain. (Indeed, the law of unjust enrichment goes one step further than contract law and permits such a victim to recover what has already been transferred.)

But what about contractual assent to terms that a party had no knowledge and, even if the terms had been known, wouldn't have been understood? I'll Margaret Radin provide an example taken from Access to Justice and Abuses of Contract (download here):

Facebook promulgated new terms of service in January 2015. Many readers of this essay, perhaps a large majority, are users of Facebook. But very few users know that new terms were imposed recently, and fewer have read them.

If someone did read the terms and wished to disconnect and delete her account, she would discover that certain things will nevertheless stay in Facebook’s power: “Information associated with your account will be kept until your account is deleted, unless we no longer need the data to provide products and services.” [italics added] Moreover, “information that others have shared about you is not part of your account and will not be deleted when you delete your account.” In other words, Facebook will continue to feature your stories and photos in advertisements. You are deemed to “agree” to Facebook’s terms by having continuing to use Facebook after January 1, 2015.

Facebook's terms of service are relatively benign, and use of Facebook is without charge to its users. (It's marketers to whom Facebook sells information that make it extremely profitable.) Nonetheless, all of us have clicked "I agree" for goods or services that we have purchased that include sets of terms we have not read, and at least some of which limit our rights (e.g., to complain publicly about shoddy products or to litigate if the other party breaches). Are such terms a legitimate part of the social practice of contracting? In other words, do they represent a rough equality in exchange? And, even if they don't, should the law of contracts do anything about it?

On the one hand, contemporary contract law is agnostic about the legitimacy of such terms. In other words, the law doesn't care about (or perhaps doesn't believe in) commutative justice. And even if a judge believed that a contract was using terms in an unjust manner, he must conclude that contract law as it now exists provides no recourse. Unlike an unfair exchange produced at the end of a gun, an unfair exchange produced by terms is beyond the power of the law to redress.

Radin, on the other hand, says no, such terms are not legitimate; and yes, the law of contracts should do something about them. But, one asks, how does she know any particular term and the resulting exchange is illegitimate? And how does she argue that the law of contracts should do something about it?

With respect to the first question, she suggests that terms in contracts for goods or services for which there is market failure are almost certainly so one-sided as to be wrong. Market failure occurs in the presence of two factors: (i) when a rational consumer cannot acquire sufficient information about the product to evaluate its value and (ii) the term disclaims liability for damages caused by the product's defects. Consider Radin's example:

Fine print embedded in a composite product may be deployed in a non-competitive market or in a market in which too many consumers lack information about the product, a situation that leads to a race to the bottom. If consumers do not have the information needed to evaluate a product (a situation known as information asymmetry, because the firms themselves do have the information about their products), firms can lower quality without lowering the price, or can lower the price but lower quality more. When that happens, firms that do not lower quality will receive lower revenues and perhaps be driven out of the market.

Even if we agree that there's something "wrong" about that, what should contract law do about it? Are civil governments in the business of reversing races to the bottom? Surely, no one wants to pay more and get less but why should courts or even legislatures get involved in fixing this problem? At this point Radin provides no argument relying, it appears, on moral intuition. (For the limits of moral intuition as a basis for human rights, not to mention contract remedies, see my piece Looking for Bedrock.)

Is there an argument that would warrant Radin's desire to modify the rules of contemporary contract law and forbid certain disclaimers? As I suggested in Who Bears the Burden? The Place for Participation of Municipal Residents in Chapter 9, public choice theory may be that argument. Can disallowing disclaimers in conjunction with defective goods be justified by application of public choice theory?

Let's start with the first question: What is public choice theory?  Public choice theory provides a framework of analysis to identify public goods, goods that that should be provided by civil government at taxpayer expense. Other goods are private and need not be provided by civil government. Public choice theorists posit two markers to distinguish public goods from private ones: First, quoting from Who Bears the Burden?: "A public good is one which should be produced, but for which there is no feasible method of  charging the consumers." Second, provision of such goods at public expense prevent the problem of free riders, those who would take advantage of a good, such as residential streets, without paying. If non-payers can't excluded from using a good without paying, free market participants won't provide (much of) it.

On such an understanding, is a right to claim damages for breach of contract a public good? It seems not: the remedy of contract damages--like the practice of contracting--is a private good. Thus, public choice theory does not justify disallowing contract disclaimers. (Indeed, as I argued in Principled Pluralism and Contract Remedies, civil government need not provide a remedy for breach of contract although it certainly may do so.)

Well, if not public choice theory, is there any other foundation on which to base a rule disallowing disclaimers? There might be, and that's where the need for a substantive account of natural law becomes necessary. Radin and other Progressives are onto something--enforcing unbargained-for disclaimers of remedies for breach of contract may be unjust--yet the thinness of the Progressive account of justice fails to provide warrant for their disallowance. By contrast, a natural law account offers a basis for limiting the ability of one party to use the form of contract to deny its substance.

Subcontractor Blues

WARNING: A bit on the lawyerly side.

The risk subcontractors undertake when bidding on public jobs came up the other night at a men's meeting. I regularly teach Drennan v. Star Paving and SoCal Acoustics v. CV Holder in first-semester Contracts so I asked a local electrical contractor what his experiences had been. In case you've forgotten, the California Supreme Court held in Drennan that a subcontractor could not withdraw its bid if the general contractor had relied on it in submitting its own successful bid to the owner of the project. However, not many years later the same court held that under the common law a sub could not rely on the GC's non-rejection of the sub's bid even where the the the GC had used the sub's bid in preparing its own, the owner had awarded the GC the job, and the GC had published the names of its anticipated subs pursuant to a state "naming statute." What was good for the goose was most definitely not good for the gander. (Note that SoCal Acoustics ultimately prevailed in its action against the GC under a California statute addressing public contracts that specifically protected subs in this situation.)

My local electrical subcontractor sputtered. Several times he had submitted what the GC told him was the lowest bid only to have the GC shop it around and get someone else to do it for less. Just the sort "bid shopping" that the California statute was designed to prevent.

Not nice, of course, but did the GC breach an agreement with the disgruntled sub? It doesn't appear so and that's Victor Goldberg's conclusion in his lengthy article Traynor (Drennan) Versus Hand (Baird): Much Ado About (Almost) Nothing (download here.) In short, unless the sub gets the GC to promise to award the sub its contract if the GC gets the project, the sub should not have a contractual claim against the GC if matters don't go as hoped.

But what about the flip side: Should a GC be able to hold a sub to a bid in the face of the sub's revocation before the GC's acceptance? In other words, should freedom from contract go both ways? The answer I believe, and I'm glad to see that Goldberg agrees, is that unless the sub has explicitly offered to make its bid irrevocable, it isn't. If one isn't bound, then neither should the other. Foisting an obligation on one who has not assented to it is no more consistent with contract law than it is with constitutional law.

Economic Liberty, Contracts, and the Constitution

Randy Barnett is an excellent writer. He is, moreover, as many folks now realize, the intellectual father of the attacks on the the constitutionality of the Patient Protection and Affordable Care Act (popularly known, among its opponents at least, as Obamacare). Barnett is out with a new essay, Does the Constitution Protect Economic Liberty? (abstract here) in which he argues briefly and cogently that the answer is a resounding yes.

Beginning with the Ninth Amendment (“The enumeration in the Constitution, of certain rights, shall not be construed to deny or disparage others retained by the people.”), amplified with judicious references to State constitutional ratifying debates, Barnett shows how economic liberty, along with personal liberty, was not far from the hearts of the Founding generation. Good stuff but nothing new.

Better is Barnett's deft analysis of the interplay among the Thirteenth Amendment (abolishing slavery), the Civil Rights Act of 1866, and the Fourteenth Amendment (protecting the privileges and immunities of citizens). He grounds his conclusion that with the Civil War Amendments the states too are prohibited from denying their citizens the benefits of economic liberty. Of course, Barnett acknowledges, the Supreme Court obtusely rejected what was obvious only five years later in The Slaughter House Cases and has never gotten things back on track.

Does all this mean in Barnett's view of the matter that there is no role of the states in regulating economic liberty or, more germane to my interests, contracts? No. Just as states may impose reasonable time, manner, and place restrictions even on freedom of speech, so too may they impose limits on contracts ("prescribing the manner of the exercise" of the right to contract).

All very invigorating to those bent in the libertarian direction but what about Art. I, Sec. 10, cl. 1 of the Constitution? (Which, as I'm sure everyone knows, provides that "no State shall ... pass any law ... impairing the obligation of contract.") Are we to understand by Barnett's elegant trail from the Ninth to the Fourteenth Amendments that since 1868 the states have had less power over contracts than they had for the preceding 80 years? Seems a bit of a stretch, if you ask me.

I have no doubt that the Supreme Court made a seriously wrong turn in The Slaughter House Cases; the Privileges and Immunities clause of the Fourteenth Amendment--and not Due Process or Equal Protection--was intended to protect our liberties from legislative overreach. And I also have no doubt the Thirteenth Amendment provided a constitutional basis for the Civil Rights Act of 1866. What I doubt is that the Fourteenth Amendment meant to protect (whatever exactly "protect" means) anything as broad "economic liberty."

All hat and no cowboy? No, I won't go that far but, as much as I'd like to conclude otherwise, I think Barnett has overshot the constitutional mark in this essay.

Limits on Freedom of Contract: Some Instructions From the Torah

Following my brief allusion to Ayn Rand and moral objectivism, I wish to consider some specific laws found the Hebrew Scriptures or Torah: the first is found in the Book of the Covenant (the chapters immediately following the Ten Commandments) and the other from Deuteronomy, the second giving of the Law to God’s people on the verge of entering Canaan.

Loans in Israel were not commercial but charitable, granted not to enable a trader to set up or expand a business or to allow a consumer to enjoy yet more material goods but to tide a peasant farmer over a period of poverty.  The Israelite economy remained predominantly agricultural up to the end of the monarchy.  Hence, the Mosaic judgments do not contain mercantile regulations but standard by which to live as the Society of God.  Israelites who enjoyed financial security had an obligation to ensure that their less fortunate compatriots were not deprived of the necessities of life by force of circumstance.  It was not charity in the sense of alms-giving that was being called for; rather, the Torah required a charitable disposition coupled with  righteous conduct toward a needy person who pledged to repay a loan.  Israelites were expected to mirror the compassionate and righteous nature of the God they worshiped.

Exodus 22:26-27 falls within the category of Cases of Oppression.  There are 42 “judgments” listed in Exodus 21:1-23:  These are called “judgments” because of their form; a required finding of fact (typical of mishpatim): “If you take . . .” followed by a conclusion of law: “You shall return . . . .”  The laws, or judgments, in this section of Exodus express the grundnorm under-girding the covenantal relationship.  Whereas the Ten Commandments provided a general statement of the basic principles of justice which God demanded of his people, the examples here demonstrated how those principles were to be applied to real life situations.  The reference in Exodus to a person’s cloak is significant.  The cloak or garment was not simply one’s outerwear for the day.  Rather, it was the average person’s bedroll and protection from the elements rolled into one.  Not to return someone’s cloak at night would be to subject them to great inconvenience and perhaps illness or even freezing.  Personal autonomy did not extend to contracting to endanger one’s life.

Deuteronomy in turn reveals an updating and renewal of the Sinaitic covenant in light of a later situation.  Deuteronomy 24:10-13 further minimizes the oppressive power of taking pledges.  The creditor must wait outside until the debtor brings out the pledged item.  This instruction served a twofold purpose: it preserved the privacy of the borrower’s home and, by leaving the selection of the pledge to the borrower, it prevented the creditor from pressuring the borrower into payment by carrying off something the poor person could not spare or that was worth more than the debt secured by the pledge item.

Deuteronomy’s reference to the millstones speaks to an agrarian lifestyle into which the people would be entering.  Note that the pledge of the cloak was permitted on a limited basis but that a pledge of millstones was not allowed under any circumstances.  A cloak was not necessary to preserve a borrower's life during the daytime but millstones were required; no poor Hebrew family could live more than a day or two without grinding grain for their daily bread.

God’s laws were intended to contribute to the wellbeing of the Society of Ancient Israel.  On the one hand, they encouraged lending to the needy poor rather than creating dependency through mandatory “gifts.”  On the other hand, there was provision for the life and privacy of the poor in spite of their poverty.  Parties could undertake consensual obligations but absolute freedom of contract was not permitted.