Thursday, November 21, 2013
This is the fifth in a series of posts on Nancy Kim's Wrap Contracts: Foundations and Ramifications (Oxford UP 2013). Our fifth guest blogger, Michael Rustad, is the Thomas F. Lambert, Jr. Professor of Law and Co-Director of the Intellectual Property Law Concentration at Suffolk University Law School.
Reforming Wrap Contracts
In her insightful new book, Nancy Kim contends that “wrap contracts” take the form of a traditional contract but constitute a “coercive contracting environment.” (Nancy S. Kim, Wrap Contracts: Foundations and Ramifications 1-3 (Oxford University Press, 2013)). Professor Kim contends that the problem with “wrap contracts” is “their aggressive terms.” (Id. at 4.) My Suffolk University Law School research team, focusing on contracting practices in social media websites, found strong empirical support for Professor Kim’s argument that wrap contracts are overly aggressive and in need of law reform. My own empirical work with a team at Suffolk University Law School has uncovered a growing number of social networking sites incorporating mandatory arbitration and anti-class action waivers. (Michael L. Rustad, Richard Buckingham, Diane D’Angelo, and Kathryn Durlacher, An Empirical Study of Predispute Mandatory Arbitration Clauses in Social Media Terms of Service Agreements, 34 University of Arkansas Law Review 1 (2012) (Symposium Issue on ADR in Cyberspace)).
The most pernicious of the waivers are those against joining class actions. In our study of predispute mandatory arbitration agreements in social media wrap contracts, we found eleven of the thirty-seven arbitration clauses preclude consumers from initiating or joining class actions. Class action waivers have the practical effect of denying justice to a large number of consumers by divesting them of the right to join with other aggrieved social media users to pursue relief under state consumer law. Many of the first generation lawsuits against SNSs were class actions or collective proceedings because the damages for any one individual user were too small to make the lawsuit cost-justified. Immunity breeds irresponsibility in the information-age economy, where an increasing number of companies are divesting consumers of any civil recourse by including class action waivers in their terms of service.
The creators of SNS and other wrap contracts are overly aggressive about including anti-class action waivers, in large part, because the U.S. Supreme Court routinely upholds predispute mandatory arbitration clauses and anti-class action waivers. In a 5-4 decision, AT&T Mobility LLC v. Concepcion, 131 S.Ct. 1740 (2011), the U.S. Supreme Court held that the Federal Arbitration Act preempted California’s use of state unconscionability law to render class action waivers unenforceable. Let’s be clear about what Concepcion means for ordinary consumers. With these rulings, the Court is padlocking the courthouse door to elderly nursing home patients harmed by neglectful caretakers. Keep in mind that the typical nursing home resident or his caretaker has probably not even read the arbitration clause buried on page 20 or deeper into an admissions contract. What this means is that if your Mother or Grandmother suffers septic shock from decubitus ulcers caused by neglect, her estate will have no recovery because no lawyer in her right mind will take a case where mandatory arbitration and its running partner, class action waivers are in play. Trial lawyers do not take nursing home cases to arbitration because of the perception that arbitrators will give lower awards for non-economic damages and almost never award punitive damages. In my informal survey of attorneys specializing in nursing home neglect, I have been unable to find a single case where a trial lawyer represented a nursing home patient in arbitration. The Court’s decisions are, in effect, a federal takeover of arbitration, preventing the states and private plaintiffs from challenging one-sided and oppressive consumer arbitration clauses on grounds of unconscionability. When wrap contracts couple mandatory arbitration clauses with class-action waivers they essentially create a liability-free zone in cyberspace. Class action waivers preclude Internet users from filing a class action or even joining an existing one. This de facto immunity shields social networking sites from class actions for violations of privacy, contract, tort, or intellectual property rights that would otherwise be recognized in federal and state courts.
Social networking sites that combine mandatory arbitration with anti-class action waivers ensure that these powerful entities will not be accountable for failing to secure and safeguard their users' sensitive personally identifiable information. Social media sites can use the names, likenesses, and personal information of their users with impunity. Consumer class actions are often the only practical alternative in securing legal representation under the contingency fee system in cases where actual compensatory damages are small or nominal. Class actions enable litigants with slight monetary damages claims to combine actions in a representative action. Without class actions, social networking sites are effectively immunized from the judicial process and may continue unfair practices with impunity.
Professor Nancy Kim’s suggested law reform to police overly aggressive terms in webwraps would be to tip the doctrine of unconscionability on its head. Her proposed reform for webwraps would presume that these standard forms are unconscionable, except if validated by legislative decree or if there were meaningful alternatives in the marketplace. (Id. at 248). However, even a revivified unconscionability doctrine will be preempted by the U.S. Supreme Court’s current reading of the Federal Arbitration Act. (“FAA”). Congress must act to prohibit predispute mandatory arbitration and class action waivers in all types of wrap contracts. In the end, U.S. companies would benefit from mandatory terms constraining or cabining wrap contracts.
The golden age of the broad enforcement of U.S. style wrap contracts will end soon because of the increasingly flattened world where U.S. companies license content to European consumers. In Germany, consumers associations have successfully challenged the terms of CompuServe, AOL, and Microsoft: the first was subject to a default judgment; the other two agreed to a binding cease-and-desist declaration. All three American companies have entered into settlements in which they agreed to change their marketing practices. When it comes to consumer rights for wrap contracts, the U.S. is like Mars—and Europe is like Venus. Europe rejects freedom of contract in consumer transactions, recognizing that this is a legal fiction in non-negotiated standard form contracts. The European Commission takes the position that, even if a consumer assents to an abusive term, it is unenforceable as a matter of law, and European consumers, unlike their American counterparts, cannot be hauled into distant forums and be divested of mandatory consumer protection. Professor Kim has done a superb job in identifying the problem with wrap contracts, but her solution falls short of addressing problems such as predispute mandatory arbitration and anti-class action waivers.
[Posted, on Michael Rustad's behalf, by JT]