Monday, November 30, 2020
The literature that examines the questions surrounding the formation of consumer contracts is prodigious: Do consumers read standard form contracts? Are consumer form contracts even readable to begin with? Do firms incorporate unfair and inefficient contract terms by exploiting consumers’ optimism and other behavioral biases? Do firms deliberately inflate transaction costs so to manipulate consumer attention and divert it from the fine print? How legitimate is it to enforce (“rolling”) terms that are not disclosed to consumers at the time of entering the transactions?
While the focus on the issues that pertain to the ex ante stage makes sense, such a focus leaves many ex post issues underdeveloped. We believe that one of the ex post topics that merits further scholarly attention is the end of the consumer-business relationship, and specifically the termination of consumer contracts.
Interestingly, the psychological literature indicates that the way an experience ends has a disproportionate impact on how individuals perceive the experience and remember it. A sour ending to an experience or a relationship can profoundly impact one’s judgment and mark the entire experience.
For online users who find themselves terminated and banned from their favorite platform or service, this can be a painful reality. That may be equally true in other offline consumer contexts, such as termination of financial services, memberships or club associations.
Consumer termination is not a negligible phenomenon, and firms routinely terminate their contractual relationships with consumers. In 2019, for example, Facebook terminated more than 5.4 billion accounts that were supposedly fake. At the same time, WhatsApp announced that it is terminating 2 million user accounts per month for apparently spreading fake news. Also recently, Discord (an online communication platform) terminated 5.2 million user accounts for allegedly publishing spam and exploitative content. The list of massive consumer terminations goes on and on.
Terminating accounts that facilitate or promote fake profiles, fake news, spam, hatred, improper content, or cheating makes perfect sense. However, past incidents and consumer complaints indicate that firms often terminate their relationship with consumers without any explanation, and often by mistake (for a few examples see “Instagram Apologizes for Deleting Plus-Size Woman's Account,” “Flickr Accidentally Wipes Out Account: Five Years And 4,000 Photos Down The Drain,” and “TikTok Reinstates Live Action Account, Apologizes, Says ‘Human Error’ Caused Ban”).
The practice of terminating consumer contracts without explaining why is socially undesirable for at least three key reasons. First, if firms are not required to explain to consumers the cause for termination, a hasty and mistaken termination is more likely to occur. Second, erroneous contract terminations, fueled by lack of explanation, generate significant costs to consumers. These costs include the loss of sunk investments, the loss of accumulated benefits, emotional costs, and switching costs. Third, termination without explanation may be based on discriminatory, yet non-transparent factors. Such terminations may disproportionately target and harm vulnerable consumers while being hidden from the public.
Given these risks and costs, we sought to empirically examine the contractual mechanisms that govern the termination of consumer contracts. Our initial sample included 500 sign-in-wrap contracts of the most popular websites in the United States, such as Google, Facebook, Flickr, Amazon, Uber, Spotify, TikTok, and Airbnb.
The results of our study show, inter alia, that the vast majority of these contracts – 482 out of 500 (that is, 96.4%(!)) sampled – are termination without explanation contracts. Simply put, they allow firms to terminate consumers without providing the underlying reasons.
We further examined the degree of non-transparency of termination mechanisms more generally. Specifically, we tested three aspects:
- Do firms specify in their contracts the reasons for which termination can be executed? In other words, do firms inform consumers, ex ante, of the reasons that may lead to their termination?
- Do firms contractually promise consumers to provide them with notice of the termination? That is, can firms surprise consumers by terminating them without telling them?
- Do firms allow consumers a voice in the process, so to enable them to contest unjustified terminations? Slightly restated, do firms employ a due process in which consumers can discuss their termination with the firm?
Disturbingly, we found that high degrees of non-transparency are prevalent in termination without explanation contracts.
- More than two thirds of the termination without explanation contracts in our sample (68.5%, 330 out of 482) did not contain exhaustive reasons explaining when termination might occur.
- A solid majority of the contracts (60%, 289 out of 482) included an explicit notice waiver, exempting the firm from informing consumers of the termination.
- Almost all of the contracts in our sample (98%, 473 out of 482) are unclear about whether the terminated consumer has a right to appeal or voice their perspective.
- All in all, out of the 482 termination without explanation contracts we studied, almost half (48.5%, 233 contracts) had all three non-transparent components. About a third of the contracts (31.3%, 151 contracts) had two of them incorporated. Combined, therefore, about 80% of the contracts in our sample had high or medium degrees of non-transparency surrounding contractual terminations.
Considering these results, we propose that “a duty to explain” the reasons for contract termination should be imposed on firms. We also encourage courts to consider the three key non-transparent aggravating factors identified above when deciding termination cases.
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This post is based on our working paper, Termination Without Explanation Contracts, available here. The study is part of our broader project that seeks to empirically examine fundamental aspects of consumer contracts. Previous studies in this project examined the (un)readability of consumer contracts, the (un)readability of privacy policies post-GDPR, and unilateral change-of-terms mechanisms in consumer contracts. Any comments or suggestions are most welcome