Monday, May 27, 2013
This is the twelfth in a series of posts reviewing Margaret Jane Radin's Boilerplate: The Fine Print, Vanishing Rights and the Rule of Law.
Jean Braucher is the Roger C. Henderson Professor of Law at the University of Arizona.
Peggy Radin in Boilerplate gives a rich, comprehensive account of contract law and theory as applied to standard form terms. For anyone inclined to focus on the common law of contract as the primary way to think about the problem of nasty form terms, this book is an obvious go-to source.
My critique may seem odd for a contracts blog, but here goes: I don’t think the common law of contracts is the right place to focus when thinking about unfair deals, except as a history lesson to understand the origins of regulation that is now more rigorous. Emphasis on the common law tends to put a “freedom of contract” ideological spin on problems that are already regulated otherwise and in more effective ways, based on more sophisticated theory. Radin includes perspectives other than those of standard contract theory, so my objection is a subtle one about emphasis.
We live in the age of the regulatory state and administrative agencies. The theory and practice of this type of regulation are now at the core of the law governing contracts, with judge-made common law playing a minor, residual role. Most important types of contracts are regulated by more than common law. Radin devotes her last chapter to regulatory solutions to overreaching in boilerplate, so she has certainly not missed that regulation matters, but she gives primacy of place to the common law of contracts and its theory. Contracts scholars often do this, but we need to change if we are to theorize about current reality and not give law students the misimpression that the common law provides a nearly complete system of law for contracts, only touched up around the edges with a little regulation. In the 21st century, and after an economic collapse brought on by mass exploitation by contracts, we should be spending less time on offer and acceptance or even unconscionability and more on the vast existing statutory and administrative regulation of the substance of contracts.
Consumer contracts illustrate well the point that statutes, often administratively applied, dominate the law applied to contracts. In her discussion of boilerplate, Radin features many consumer contract examples—Part I of the book is headed “Boilerplate, Consumers’ Rights, and the Rule of Law.” Consumer contracts are governed by thousands of federal, state, and local consumer protection statutes that provide stronger remedies than those of the common law. Some statutes are very specific and others use general standards. When consumers’ lawyers draft complaints, they put common law causes of action at the end, after statutory theories; statutory remedies often could be better implemented (judges sometimes undermine them), but they are already way better than those of contract law. Public enforcement is also more powerful. When the Federal Trade Commission and state attorneys general bring enforcement actions against unfairness and deception, they don’t have to worry about arbitration and forum clauses or class action prohibitions. They aren’t parties to the contract.
So, when thinking about problematic consumer contracts today, two key points bear emphasis: (1) the common law of contracts is typically not the best or first resort for protection of consumers and is therefore residual law, and (2) the Dodd-Frank Act recently gave consumer protection law a huge shot in the arm by creating a new regulatory power to address exploitation of consumer misperceptions in credit contracts. Consumer misperceptions are not limited to form terms but also come into play with salient terms such as price (a point also made by Oren Bar-Gill in his comment for this symposium).
Dodd-Frank created the Consumer Financial Protection Bureau (CFPB) and gave it broad power to regulate not just unfair and deceptive acts and practices (as federal and state statutory law has long done for many consumer contracts) but also abusive consumer credit contracts. (And, by the way, as Radin notes at the end of her book, CFPB also is required to study mandatory pre-dispute arbitration and has power to decide whether it serves consumer interests and regulate if not.)
The powerful behavioral economics theory for the CFPB’s anti-abuse power is likely to suffuse consumer law over time. For a fuller discussion, see my paper Form and Substance in Consumer Financial Protection. This theory, backed up by extensive research by many empirical scholars, is that consumers not only make systematic misperceptions, but also that businesses are forced by competition for investors to study and exploit the patterns of these misperceptions to maximize their returns. Regulation is thus essential both to free businesses from a race to the bottom so that they can be straightforward with their consumer customers and to empower vulnerable consumers to get deals they understand.
The CFPB does not use common law methodology. It addresses exploitative practices through the responsive regulation tool of examination of financial institutions, backed up by enforcement actions. CFPB examiners now pour through the records of financial institutions and consumer complaints for evidence that consumers don’t understand credit products with complex tricks and traps. The power to regulate abusive practices is not limited to those set in boilerplate; it also applies even if the exploitation is in plain sight but consumers do not understand their credit products, including how they will use them. When we think about abuses in consumer contracts, we should start with the theory underlying the CFPB’s new power, not with stale ideas about consent or choice.
Contracts teachers as well as law reformers, such as the American Law Institute in its newly-launched Restatement Third of the Law of Consumer Contracts, should not forget that consumer protection law is the central and most powerful part of the law governing consumer contracts. ALI’s project description shows that it understands that consumer law is heavily statutory and administrative, but the question remains whether ALI will embrace our vast, popular statutory and administrative law of consumer protection or inaccurately try to treat it as incidental to the common law.
Similar points to these concerning consumer contracts could of course be made about the regulation of many other types of contract. The general point is that the law of contracts is much broader than contract law, and the common law is not the primary way to address overreaching in contracts, whether in boilerplate or not. Radin ends in agreement with this policy direction, but her focus on theory underlying common law rather than the theory of regulation makes the analytical journey more difficult than it needs to be. Contract theory needs updating to embrace regulatory theory as part of its core and not as an afterthought or add-on.
Some acknowledgments: Nearly everything worth saying about consumer contracts was said long ago, and much of the above is inspired by earlier work of others. In 1933, based on lectures given in 1928-29, Karl Llewellyn wrote in The Case Law System in America (in German, only published in English in 1989; see at 67-68 for the discussion in the English translation) that case law is inadequate to address the enormous problem of consumer protection. See also Arthur Leff, Unconscionability and the Crowd—Consumers and the Common Law Tradition, 31 U. Pitt L. Rev. 349 (1970) (arguing that common law litigation will not root out unfairness and that administrative regulation is necessary to deal effectively with consumer contracts), and Stewart Macaulay, Bambi Meets Gozilla: Reflections on Contract Scholarship and Teaching vs. State Unfair and Deceptive Trade Practices and Consumer Protection Statutes, 26 Hous. L. Rev. 575 (1989) (noting that consumer protection regulation is more powerful than contract law in providing remedies and that contracts teaching should introduce that key point).[Posted, on Jean Braucher's behalf, by JT]