“I, on the other hand, will not let people push me around” is a post from Overlawyered - Chronicling the high cost of our legal system

We follow the clickstream of 47,399 households to 81 Internet software retailers to measure contract readership as a function of disclosure. We find that making contracts more prominently available does not increase readership in any significant way. In addition, the purchasing behavior of those few consumers who read contracts is unaffected by the one-sidedness of their terms. The results suggest that mandating disclosure online should not on its own be expected to have large effects on contract content.

Regulation, of course, often goes to great lengths to mandate disclosure, and a considerable volume of private litigation is also based on theories that lack of more extensive and prominent disclosure rendered a transaction wrongful. The study is Florencia Marotta-Wurgler, Does Disclosure Matter?NYU Law and Economics Research Paper No. 10-54 [SSRN].

Does disclosure matter? is a post from Overlawyered - Chronicling the high cost of our legal system

“Why Libertarians Should Oppose ‘Shrinkwrap’ Contracts” is a post from Overlawyered - Chronicling the high cost of our legal system

Do not propagate these grapes is a post from Overlawyered - Chronicling the high cost of our legal system

Ever since Carnival Cruise Lines, Inc. v. Shute, 499 U.S. 585 (1991), enforced a forum-selection clause printed in tiny type on the back of a cruise-ship ticket, it has been hard to find decisions holding terms invalid on the ground that something is wrong with non-negotiable terms in form contracts. See also, e.g., Gilmer v. Interstate/Johnson Lane Corp., 500 U.S. 20, 32 (1991) (unequal bargaining power does not justify refusal to enforce an arbitration clause in a form contract); Seawright v. American General Financial Services, Inc., 507 F.3d 967 (6th Cir.2007). As long as the market is competitive, sellers must adopt terms that buyers find acceptable; onerous terms just lead to lower prices. See, e.g., Hill v. Gateway 2000, Inc., 105 F.3d 1147 (7th Cir.1997); ProCD, Inc. v. Zeidenberg, 86 F.3d 1447 (7th Cir.1996); George L. Priest, A Theory of the Consumer Product Warranty, 90 Yale L.J. 1297 (1981). If buyers prefer juries, then an agreement waiving a jury comes with a lower price to compensate buyers for the loss-though if bench trials reduce the cost of litigation, then sellers may be better off even at the lower price, for they may save more in legal expenses than they forego in receipts from customers.

There is no difference in principle between the content of a seller’s form contract and the content of that seller’s products. The judiciary does not monitor the content of the products, demanding that a telecom switch provide 50 circuits even though the seller promised (and delivered) 40 circuits. It does not matter that the seller’s offer was non-negotiable (if, say, it offered 40-circuit boxes and 100-circuit boxes, but nothing in between); just so with procedural clauses, such as jury waivers. As long as the price is negotiable and the customer may shop elsewhere, consumer protection comes from competition rather than judicial intervention. Making the institution of contract unreliable by trying to adjust matters ex post in favor of the weaker party will just make weaker parties worse off in the long run. Original Great American Chocolate Chip Cookie Co. v. River Valley Cookies, Ltd., 970 F.2d 273, 282 (7th Cir.1992) (“The idea that favoring one side or the other in a class of contract disputes can redistribute wealth is one of the most persistent illusions of judicial power. It comes from failing to consider the full consequences of legal decisions. Courts deciding contract cases cannot durably shift the balance of advantages to the weaker side of the market; they can only make contracts more costly to that side in the future, because [the other side] will demand compensation for bearing onerous terms.”).

Arbitration and “coercion” is a post from Overlawyered - Chronicling the high cost of our legal system

If you were to take seriously the arguments of Stephanie Mencimer at Mother Jones and the commenters there, and perhaps the occasional judge, this is an outrageous “contract of adhesion” that should be outlawed: Stencimer didn’t have a choice, didn’t have the bargaining power to make the auto-dealer sell her a three-wheeled car, and was forced to buy an extra wheel. But is this really a problematic failure of the market that requires government intervention?

Mencimer is actually complaining about the insistence of car-dealers to arbitrate claims, rather than the number of wheels on a vehicle. But the principle is precisely the same, and Mencimer’s complaint is just as invalid as Stencimer’s.

When certain choices are absent from a competitive market, there’s usually a good reason for it—such as a lack of consumer demand that makes the provision economically infeasible. After all, if consumers really wanted to pay the extra money for a car contract without a mandatory arbitration clause or a three-wheeled vehicle, car-dealers would have a strong incentive to offer it. Witness the boom in hybrid vehicles: a small percentage of consumers demanded greener vehicles, and they’re selling. It’s not the case that it’s impossible to enter the used-car market: witness the success of CarMax, which went public only ten years ago, and has a market capitalization of nearly $5 billion today. ATLA Autos could put up a big banner: “No Arbitration Clauses In Our Contracts!” the way CarMax made no-haggle sales popular.

But the fact of the matter is that arbitration clauses save consumers money, and ex ante, if you ask a consumer if they’d rather have the money or the right to make an extortionate claim in court over a contractual dispute where they’re in the wrong, they’d rather have the money. (If mandatory arbitration clauses weren’t actually money-saving, then, again, the market provides plenty of incentive to cut costs by removing them from the contracts.) A car-dealer that made a point of omitting arbitration clauses for its contract, and passing the higher legal expenses on to the consumer, would quickly find itself out of business.

Let’s make clear why an argument Mencimer repeats is dishonest. Mencimer quotes former Georgia Governor Roy Barnes that “a mandatory arbitration clause is ‘a contract for a crime.’ It’s a sign that the bank knows it’s going to rip us off in some fashion, or if not us specifically, people like us, and it doesn’t want to pay if it gets caught.” Not so. A mandatory arbitration clause is a way to make sure that dishonest consumers don’t raise prices for the honest consumers. The vast majority of arbitrations (as well as court-adjudicated business/consumer disputes) involve default or otherwise uncontested judgments against deadbeats who didn’t pay their bills—which is why you hear so much about the supposed 96% or 99% success rate of business in arbitration, when the actual success rate in contested arbitrations is actually better for consumers than in court. I won’t link to it, but a Google search readily finds numerous products available to people teaching how to use the court system to scam creditors out of legitimate collections by raising their expenses; the only people who benefit from court versus arbitration are those who hope to abuse legal procedures to delay the inevitable (or to make collection so painful and expensive that they can finagle a reduction in debt). By using the mandatory arbitration mechanism to reduce the expense of collections, the auto-dealer or bank can provide a less expensive service to the honest consumer who plans to honor their debts. (Mencimer complains that her car loan was for 9%, but that doesn’t mean that it wouldn’t have been at an even higher rate had arbitration not been available.)

Now, perhaps I’m wrong; perhaps consumers are better off overall if they don’t have mandatory arbitration clauses. But why have Congress dictate that? Why not let the market decide? As CarMax demonstrated by offering a new no-haggle model of selling vehicles and CommerceBank demonstrated by offering banking without bankers’ hours, there’s no monopoly of car dealers or banks prohibiting entry by innovators offering new business models: get some of the trial lawyer billionaires funding Public Citizen screeds against arbitration to instead fund new businesses to offer different choices, and let consumers decide for themselves whether they want the lower prices that mandatory arbitration clauses make possible. Heck, the trial-lawyer-funded businesses could even waive non-economic damages caps, venue reform, and all of the tort reforms Mencimer and Public Citizen dislike. Nothing makes businesses yield faster than competition and consumer demand.

Of course, what’s really happening is that consumers don’t want the expensive legal “protections” that the litigation lobby are railing about. Trial lawyers thus try to get Congress to pass laws to force consumers to take them. If the local auto-dealers association heavily lobbied Congress to legally mandate consumers to force them to buy overpriced “rust protection” or “anti-rhinocerous-trampling” plans that benefited only the auto dealers, consumer groups would quite properly raise an uproar. It’s a sad commentary how badly the consumer movement has been captured by the litigation lobby that the consumer groups are failing to raise a similar uproar at the self-dealing of the litigation lobby regarding the anti-consumer anti-arbitration legislation pending in Congress.

Further reading: Christopher R. Drahozal, “Unfair” Arbitration Clauses, 2001 U. ILL. L. REV. 695; Stephen J. Ware, Paying the Price of Process: Judicial Regulation of Consumer Arbitration Agreements, 2001 J. DISPUTE RESOLUTION 89; Christopher R. Drahozal, Privatizing Civil Justice: Commercial Arbitration and the Civil Justice System, 9 KAN. J.L. & PUB. POL’Y. 578 (2000). Peter B. Rutledge, Whither Arbitration, 6 GEORGETOWN J. L & PUB. POL’Y __ (forthcoming 2008), ExpressO Available at: http://works.bepress.com/peter_rutledge/2. The three-wheeled example comes from Doug Baird’s Contracts class at Chicago, and can be found in Douglas G. Baird, The Boilerplate Puzzle, 104 MICH. L. REV. 933 (2006).

Earlier on Overlawyered: Oct. 18; Nov. 27.

Update, Dec. 16: Further data on arbitration win-rates in contested arbitration.

Update, Dec. 17: As Mencimer documents in her story, she sure showed the car dealers: she bought her desired vehicle on Craigslist from a West Virginia man. And that’s the way the market works: if enough people think like Mencimer does, auto dealers will have the incentive to offer an arbitration-free contract to attract their business. Of course, as commenter JP points out, Mencimer’s irrational hatred of arbitration almost certainly made her worse off:

Note that the practical result of all of her time and effort is that she now has the right to sue an individual (who likely has no assets since he’s selling his car due to a divorce), in court in a different state (where the seller lives and the transaction took place). For that she gave up the right to a local arbitration with a dealership that’s not only likely to be solvent, but also probably has the ability to resolve most issues that might arise.

Arbitration and the free market is a post from Overlawyered - Chronicling the high cost of our legal system