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Monday, September 22, 2014

Ben-Shahar & Schneider Symposium, Part VII: Nancy Kim

This is the seventh in a series of posts that are part of a virtual symposium on the new book by Omri Ben-Shahar and Carl E. SchneiderMore Than You Wanted to Know: The Failure of Mandated Disclosure Biographies for the second week's contributors can be found here.  The authors' introduction to the symposium can be found here.

Nancy_kimNancy Kim is the ProFlowers Distinguished Professor of Internet Studies and Professor of Law at the California Western School of Law and also a Visiting Professor at the Rady School of Management at the University of California, San Diego.  

Omri Ben-Shahar and Carl E. Schneider ‘s book, More Than You Wanted to Know:  The Failure of Mandated Disclosure (Princeton, 2014), canvasses a wide variety of disclosures and concludes that as a policy, mandated disclosure is a spectacular failure.   Businesses spend resources drafting disclosures that consumers fail to read.  Furthermore, these ubiquitous disclosures may end up harming consumers by providing a protective shield around businesses.  Ben-Shahar and Schneider explain why consumers fail to read, why politicians prefer it as a regulatory scheme, and why they believe that efforts to fix disclosure are destined to fail. 

While I agree with much of what the authors say about disclosure, I disagree that disclosure in an abject failure in all cases or that disclosure as a regulatory policy is destined to fail.  What they call “disclosure” includes all types of information – contracts, prescription labels, credit card statements, food labels - in different type of situations conveyed in different ways.  They sweep too much under the umbrella of “mandated disclosure,” and so paint a picture of a failed regulatory approach with too broad a brush.  In some cases, consumer have benefitted from streamlined presentation, plain English and limited information.  Studies indicate that there are ways to get consumers to read disclosures, such as by making notices shorter, changing the presentation of terms, and allowing them to alter or select terms.  The authors acknowledge that in some cases disclosures has proven effective but don’t delve into details.  Rather than exploring how to make disclosure more effective, the authors say disclosure cannot be made effective.

Morethan Ben-Shahar and Schneider argue that mandated disclosure is a “failure,” and as proof of that, they offer examples of the failure of consumers to read and understand disclosure.  Putting aside for a moment the issue of whether disclosures could be presented in a more noticeable and understandable way, I’m skeptical that the failure of consumer reading is the best way to measure the efficacy of mandated disclosure.  The obligation to disclose, the burdensome task of determining what information should be disclosed and the drafting and disseminating of that information,  likely have benefits apart from whether consumers read the terms.  The requirement of disclosure may deter or restrain companies from acting in socially harmful ways.  It may also force companies to reconsider the way they do business.  Government mandated disclosures concerning the processing of foods and food ingredients have resulted in businesses eliminating certain practices (e.g. caging chickens) or ingredients (e.g. hydrogenated fats).   Thus, the process of disclosing may itself have positive regulatory effects on the business not because the consumer has policed the terms, but because the fear of disclosing has forced the company to self-regulate.  True, disclosure may not always work, but it’s unhelpful to make such broad generalizations about mandated disclosure’s efficacy without honing in on a particular industry or type of discloser. Some disclosure works in some cases and more research should be conducted on how to make certain disclosures more effective.  Lengthy technical jargon and legalese typically fails, but visual imagery, text boxes and concise language may work at least for some Nancy's imageproducts and services. There is a difference between a disclosure that provides consumers with information on a medical procedure and one that seeks to bind a customer to contractual obligations. [In an example of an effective mandated disclosure, I refrained from purchasing this nice baking tin when I saw this notice at right:

The authors provide many useful examples of failed disclosure mandates but they provide no alternatives.  They argue that mandated disclosure “accomplishes so little that eliminating it would deny few people anything.”  In essence, what they mean when they argue that mandated disclosure should be abolished is that the burdens that mandated disclosure places upon businesses and other disclosing entities (such as doctors) should be borne instead by legislators, regulators, the judiciary and consumers themselves.   

The problem with this approach is that businesses are typically in the best position to know what information needs to be disclosed and often in the best position to bear the costs of disclosure.  Consumers may be able to get information about a product or service through online reviews, for example, but that puts the burden on consumers to sift through the reviews and assess their veracity. 

Ben-Shahar and Schneider are unconcerned about the societal ramifications of doing away with mandated disclosure, but there could be serious consequences for both businesses and consumers.  The problems of adequate disclosure (what, how much, when) that Ben-Shahar and Schneider delve into in great detail don’t go away because disclosure is not mandated.  For example, let’s assume that there is a miniscule chance of a serious side effect from taking a prescribed drug.  The drug has great benefits except in rare instances.  If the doctor prescribes the drug to the patient without disclosing the potential for this side effect, and the patient suffers greatly, what would happen?  Neither the physician nor the company has violated a mandated disclosure requirement but that doesn’t mean they won’t be held liable for injuries to this patient resulting from the drug.  If the patient sues, the doctor and/or the drug company are subject to the ex-post analysis of a jury comprised of consumers.  The focus then is on the suffering of the sympathetic plaintiff and who should bear the costs of the suffering, and not the adequacy of the disclosure.  Is this a better net result for society than the current system of disclosure?  Or do the authors intend that “no mandated disclosure” should mean no cause of action and no remedy for the injured plaintiff? To put it bluntly, is a “no-mandated disclosure” regime a free pass for businesses?  Or is it a green light for class action attorneys?  Neither sounds appealing.

The authors use examples of contracts as evidence of ineffective mandated disclosure.  Certain provisions in a contract may be the result of mandated disclosure, such as privacy policies.  Would the absence of a privacy policy actually benefit either businesses or consumers?  In some cases, disclosure in a privacy policy resulted in a company changing course.  Even if the company doesn’t change its policy, it may face backlash from consumer advocates that may raise the salience of the term for the general public.

Again, it’s unclear what would happen in a “no-mandated disclosure” world.  Would the absence of a privacy policy disclosure requirement mean the company would be liable for acting without consumers’ consent – or did the authors mean that the company would be free from liability for privacy intrusions?  Would the authors advise that all online contracts be unenforceable?  The arguments against mandating disclosure in contracts apply with equal force to the other terms in mass consumer form contracts.  Does that mean that no such contract should be enforceable, that mass consumer commercial terms should be subject to ex-post fairness analysis by courts and juries?  Or did the authors mean that online contracts should be enforceable against consumers, but companies are not obligated to disclose anything?  This position would undermine the “no mandated disclosure” rationale.   If the argument against mandated disclosure is that consumers don’t read, then no term in an online contract should be enforceable.

More Than You Wanted to Know is a powerful argument against mandated disclosures.  Ben-Shahar and Schneider exhaustively and effectively chronicle the problems and significant costs of mandated disclosure.  The costs of getting rid of mandated disclosure, however, may be even greater.

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