Consumer Psychology and the Problem of Fine-Print Fraud.

Author:Furth-Matzkin, Meirav

Taken together, these findings suggest that consumers who would otherwise complain about being cheated become demoralized when they discover they have signed a contract whose terms contradict what they were promised. We posit that this occurs because many people are intuitive contract formalists: They assume that all contracts--even those induced by fraud--are binding. The implications, we argue, are that prevailing methods of addressing deceptive business practices, which often put the onus on victims of fraud to complain, fail to take account of consumer psychology.

Introduction I. Fine-Print Fraud in Consumer Markets A. Legal Responses B. Lay Formalistic Intuitions: A Problem for Consumer Protection Efforts? II. Study 1: Impressions of Contract Enforceability--Laypeople vs. Experts A. Study Design B. Results III. Study 2: The Effect of Fine Print on Consumers' Willingness to Complain A. Study Design B. Results IV. Study 3: Fraud vs. Fine Print A. Study Design B. Results V. Study 4: How Knowledge About the Law Affects Attitudes A. Study Design B. Results VI. Implications A. Consumer Welfare and Policing Fraud B. Consumer Contracts Conclusion Appendix A. Materials for Study 1 B. Materials for Study 2 C. Materials for Study 3 D. Materials for Study 4 E. Demographic Differences Introduction

A defining feature of modern-day contracts is that almost no one reads the terms before signing or clicking through. (1) Consumers are confronted with an impossible amount of fine print in their daily lives, and it is neither practical nor efficient for them to read all of their contracts thoroughly. (2)

Widespread non-readership leaves consumers open to exploitation by underhanded firms. When consumers do not read their contracts, unscrupulous sellers can exaggerate or lie outright about their products and services while contradicting, qualifying, or disclaiming these assertions in the fine print. (3) For instance, the marketing company Vertrue enrolled consumers in "buying club memberships" over the phone, offering to send enrollees a $25 gift card in the mail as part of a "free trial" and promising that membership would be "risk-free." (4) Unbeknownst to consumers, their credit cards or bank accounts would be perpetually charged monthly membership fees if they failed to contact Vertrue to cancel within a designated trial period. (5) The details about these charges, as well as instructions for how to cancel the membership, were buried in the fine print. (6) Vertrue perpetuated this fraudulent scheme (among others) for over two decades before it was ordered to pay over $30 million in restitution to over 500,000 consumers for billing them without their knowledge. (7)

Cases involving "fraud and fine print" schemes like Vertrue's have recently garnered attention from scholars, (8) enforcement agencies, (9) and consumer advocates. (10) Experts estimate that over 25 million Americans each year are victimized by fraud. (11) Deceptive business practices are especially likely to target low-income, minority, and elderly adults. (12)

Few consumers will notice at the time of signing that they have been misled about the terms of a transaction; many will realize this only after the fact when they are hit with a nasty surprise. At that point, they may revisit the contract and discover a fine-print clause that contradicts what they were told. Previous commentary has assumed that consumers will complain at this point because they were deceived about a material aspect of the transaction. (13) This Article challenges that prevailing wisdom. it shows, on the contrary, that the inclusion of fraudulent fine print leads laypeople to assume that they are stuck with what they signed.

Across four studies, we presented lay respondents with fraud-and-fine-print cases, in which a seller induces a consumer to buy a product or service by making a false representation. The false representation is directly contradicted by the written terms of the contract, which the consumer signs without reading. Using this experimental paradigm, Study 1 shows that laypeople, unlike legally trained individuals, strongly believe that fraudulent fine print is consented to and will be enforced against the deceived party. (14) Study 2 shows, moreover, that the presence of fraudulent fine print discourages consumers from wanting to take legal action, complaining to the company, or posting a bad review online. (15) Remarkably, Study 3 finds that the presence or absence of seller deception has little effect on laypeople's intuitions about whether fine-print terms will be, or should be, enforced: Consumers seem to focus on what the contract says, not on whether the formation process was marred by fraud. (16) Finally, Study 4 shows that providing respondents with information about antideception consumer protection laws leads them to question the legal status of fine-print fraud, although such information does not completely counteract their formalistic intuition that whatever the contract says is enforceable. (17)

These findings unsettle conventional wisdom about how consumers react to fraudulently induced contracts. Previous scholarship has tended to assume that fine print is "at worst, harmless." (18) Robert Hillman, for example, has argued that "consumers are as unlikely to read terms after a transaction as during one." (19) Other scholars have countered that consumers do read their contracts, often once they discover problems and must decide what to do. (20) But these commentators make a second assumption: that fine print empowers consumers. Shmuel Becher and Esther Unger-Aviram, for instance, assert that "reading the contract ex post can prove highly beneficial," because consumers "become familiar with their rights and obligations and ... respond accordingly." (21) Namely, they expect that consumers who read the fine print ex post will begin negotiating with sellers over the terms they have already signed. (22) Commentators expect that sellers, in turn, will be willing to appease aggrieved buyers because they will be motivated to preserve their reputations. (23)

This Article provides evidence for the opposite conclusion. We argue that fine print may disempower consumers who read their contracts ex post. This is because consumers may become demoralized by contractual language and are likely to blame themselves for failing to read at the time of signing. We provide evidence that ordinary consumers are disinclined to renegotiate with sellers, and indeed express little appetite for complaining or even telling others what happened. (24) Thus, consumers' formalistic intuitions about contracts may lead them to "lump it"--that is, absorb the loss--rather than take action against deceptive sellers.

This insight carries legal ramifications. To Lucian Bebchuk and Richard Posner, the possibility that consumers will engage in ex post negotiations diminishes the need to intervene in lopsided bargains. "[S]eemingly one-sided terms may not be one-sided after all," they explain, because such terms can be altered after the fact and "implemented in a balanced way." (25) Becher and Unger-Aviram similarly believe that the phenomenon of ex post negotiating, when "accompanied by sellers' reputational concerns, might deter sellers from drafting egregiously one-sided contracts" or from insisting that consumers abide by such one-sided language. (26) "Generally speaking," these commentators assert, "this potential phenomenon also renders legal intervention less necessary." (27)

We argue, to the contrary, that deterrence through consumer-initiated ex post negotiations is unlikely when the fine print contradicts what consumers were told. Accordingly, sellers may be unlikely to suffer the hypothesized reputational costs--let alone legal or financial costs--for their deception. Thus, legal intervention may be warranted to protect consumers from deceptive business practices. Moreover, the findings raise questions about the effectiveness of legal interventions and consumer protection regimes that put the onus on victims of fraud to challenge the enforceability of their standard form contracts.

This Article proceeds as follows. In Part I, we describe the problem of fine-print fraud in consumer markets and survey the current regulatory efforts to curb such practices. In Parts II through V, we report the findings of four experimental studies that explore consumers' reactions to fine-print fraud. In Part VI, we evaluate various legal approaches to addressing the problem of fine-print fraud in light of our findings. We note that while many commentators have lamented the legal and financial barriers to consumers' pursuit of litigation against unscrupulous businesses, our findings suggest that consumer psychology may play an independent, and underappreciated, role.

  1. Fine-Print Fraud in Consumer Markets

    The fraud-and-fine-print scheme is a common form of deceptive business practice. In this scenario, a consumer is tricked into signing a contract that contains a statement qualifying or disclaiming promises made by the seller. For example, the fine print may include a "no-reliance" or "no-representation" clause stipulating that the consumer acknowledges that the company and its salespeople have made no representations to the consumers other than what is contained in the contract. (28) In other cases, the fine print can directly contradict the seller's prior assertions. (29)

    The American Law Institute's in-progress Restatement of Consumer Contracts singles out fraud-and-fine-print cases as a significant problem in consumer markets. The latest draft identifies "a pattern in which the business draws the consumer in with a false or misleading affirmation of fact or promise, which the business then attempts to undo or qualify in a less noticeable manner." (30) It lists examples such as "represent[ing] that a service is covered by an extensive warranty when the standard contract terms include broad...

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