Choice of law for internet transactions: the uneasy case for online consumer protection.

• Author: O'Hara, Erin Ann
• Position: Choice of Law and Jurisdiction on the Internet

INTRODUCTION

An impressively large number of consumer transactions are occurring online these days. Today, millions of consumers buy billions of dollars worth of goods online in a single year, and the numbers continue to grow. Presumably, the benefits to online purchases are all about efficiency. Vendors can conserve on the costs of maintaining stores and hiring employees to properly staff them. Consumers can conserve on the time and travel costs associated with shopping; and, unlike their offline counterparts, the online stores never close. To this extent, Internet transactions have been a huge success.

Despite this success, states might not be doing all that they can to increase vendor competition and thereby decrease the prices paid by consumers. Empirical studies indicate that significant price disparities for the same or similar products still exist online. Moreover, unknown and new online vendors typically must pay an extra five to ten percent of the consumer's purchase price to third-party intermediaries who help ensure that the transaction goes smoothly. The numbers suggest that known vendors might well take in more revenues at lower expense to provide the same goods to consumers that unknown vendors provide.

This Essay explores the possibility that the market for online purchases fails to work as efficiently as it can because consumers lack trust in unknown vendors, and it argues that consumer distrust in unknown vendors can and often does take the form of categorical avoidance of other unknown vendors. This avoidance of unknown vendors as a class results from the fact that trust and distrust, as cognitive phenomena, are subject to the same biases and limitations as are other cognitive phenomena. Unknown vendors often are willing to incur some costs to signal their trustworthiness to individual consumers. Unless the other unknown vendors adopt similar trust-promoting practices, however, the unknown vendor who incurs these costs might not experience a proportionate increase in consumer trust. Instead, the investing vendor can continue to be plagued by consumers' categorical resistance to unknown vendors. Put differently, consumer distrust of unknown vendors represents a negative externality that the actions of a single vendor are often powerless to resolve.

To be sure, some unknown vendors have been successful in adopting online sales practices that promote consumer trust. When successful, previously unknown vendors become known vendors for purposes of their relevant consumer market. For many goods and consumer market niches, however, unknown vendors remain at a competitive disadvantage relative to known vendors, and the question explored in this Essay is what, if anything, contract law should do to enable unknown vendors to compete more effectively. More specifically, this Essay explores the extent to which the contract doctrine applied to online transactions, if carefully developed and uniformly applied by courts, could serve a coordinating function for vendor behavior that might work to promote consumer trust in unknown vendors. If contract doctrine could successfully aid trust enhancement, then unknown vendors could compete more effectively online at lower expense, and consumer welfare would increase. For reasons explained in this Essay, contract doctrine may prove to be too indirect a tool for promoting consumer trust, but some experimentation could nevertheless be worthwhile.

Part I of this Essay describes trust as a cognitive phenomenon and presents an informal model of the relationship between trust and the law. Part II describes the problem of online trust by consumer purchasers. Part III explores the possible ways that contract doctrines can work to enhance consumer trust. It explores conspicuousness and clarity rules designed to better notify consumers of the terms of standard-form contracts, advocates close scrutiny of arbitration clauses and blanket warranty exclusions, promotes generous damage awards, and explores several possible rules regarding the provision of information and assent to terms on websites. Each of the rules or doctrines explored exists in at least one jurisdiction, but this Essay recommends that all of the proposed legal treatments be adopted in all jurisdictions. In the United States, this bundle of contract protections will likely be more generous to consumers than the bundle that currently exists in any one jurisdiction, but the enhanced protections might help facilitate online competition and therefore be warranted.

Part IV explores ways that these contract rules can be applied uniformly across jurisdictions to better promote consumer trust and briefly examines the success of harmonization efforts. Part IV also advocates that in the interim states should follow a place-of-consumer-residence or place-of-delivery rule for choice of law in order to provide the best incentives for states to adopt efficient protections for online consumer contracts. Even if harmonization of the online consumer protections could be achieved, however, it is not clear that consumer trust in online vendors would be significantly enhanced. To avoid the costs of consumer opportunism, the reforms advocated in this Essay are quite modest, and perhaps too modest, given the remoteness of contract law to consumer decisions, to have the effect of enhancing consumer protection in unknown vendors. Nevertheless, a summary section in Part V argues that experimentation with these modest reforms could prove worthwhile.

1. TRUST AND ITS RELATIONSHIP TO LAW

   1. Trust as a Cognitive Phenomenon

      Law and psychology is an exciting field these days. Legal scholars have focused recently on empirical and theoretical questions surrounding the incorporation of insights about the psychology of human actors. (1) The motivation for much of the early work in one subfield of law and psychology, behavioral decision theory, was to challenge the rational actor assumption underlying virtually all of the scholarship in law and economics. (2) More recently, these alternative theories of human decision making have become fruitful areas of study in their own right, and have generated a lively debate about the policy implications of this new knowledge. (3)

      Separately, a rich body of norms scholarship has recently developed that attempts to explain the extralegal influences on behaviaor. (4) According to this scholarship, norms come in two forms: social norms and internal (or personal) norms. (5) Social norms are premised on the idea that humans evolved in groups as a necessary means for survival, (6) and, as a result, they are often highly influenced by the reactions of other group members to their behavior and views. No doubt we seek both formal and informal membership in those groups that are accepting of our views and our way of life. (7) But the group itself also influences, at least at the margins, the views and actions of its members. (8) Any legal efforts to control, influence, or modify behavior must take these social norms and private reward and sanction systems into account. Norms scholars have also focused on internal (or personal) norms, or rules of conduct that individuals develop as part of their moral and ethical beliefs about appropriate conduct. (9) The presence or absence of internal norms can also have profound effects on the degree of legal sanction necessary to effectively influence behavior. Legal rules and sanctions can in turn affect the development and strength of both internal and social norms, because the positive law provides a signal about the harmfulness or desirability of behavior and about the normative judgment of that behavior by the larger social/political/economic group to which a member belongs. (10)

      As these two bodies of scholarship--norms theory and behavioral decision theory--have developed, a few legal scholars have turned their attention to interpersonal trust, a subject that incorporates insights from both the personal norms and the psychology literature. (11) Interpersonal trust is primarily a private phenomenon that has caught the attention of social scientists and lawyers alike. (12) Most trust scholars seem to agree that interpersonal trust is key to the healthy functioning of our social, political, and economic systems. While trust scholars disagree to some extent about the nature of trust, all seem to accept that trust involves a willingness to make oneself vulnerable to another despite a risk that the other will exploit that vulnerability. (13) From a psychological perspective, trust as a concept fits comfortably into "the family of such notions as knowledge, belief, and the kind of judgment that might be called assessment." (14) In short, trust is beginning to be understood as an essentially cognitive phenomenon. (15)

      Once trust is conceptualized as a cognitive phenomenon, it becomes possible to analyze trust as a judgment or assessment that is subject to the same types of biases to which other reasoning processes are subject. For example, the experimental literature indicates that people act as though they trust one another even in one-shot, anonymous, experimental settings where lack of trust might instead seem appropriate. If these subjects can be said to "overtrust" from the perspective of the rational actor, then we need an explanation for this systematic tendency to behave irrationally. Evolutionary theorists posit that initial tendencies to cooperate, at least where the stakes are small, help to foster the development of cooperative relationships, which are essential to human survival. (16) Norms of cooperation, whether social or internal, can help to strengthen these tendencies. Other cognitive biases appear to be present in the context of trust. For example, distrust of another person in one context can spill over into distrust of that person in other contexts (17) as well as into distrust of others associated with that person. (18) When trust is treated as...