The no-reading problem in consumer contract law.

• Author: Ayres, Ian
• Position: Introduction through II. Analyzing Consumer Expectations F. The Consumer's Search Strategy, p. 545-576 - Author abstract

INTRODUCTION I. PRIOR ACADEMIC THEORIES AND LEGAL RESPONSES TO THE UNREAD CONTRACT PROBLEM II. ANALYZING CONSUMER EXPECTATIONS A. Efficiency and Mistakes B. Summary of the Analysis. C. The Benchmark Case of Correct Demand D. Mistaken Demand. E. The Term Optimism Problem F. The Consumer's Search Strategy G. An Application to the Warning Box III. THE DETAILS OF OUR PROPOSAL A. Institutional Implications and Warning Principles B. Expected Terms: The Carrot C. Small Sellers D. A Relevant Precedent IV. A PRELIMINARY TERM-SUBSTANTIATION STUDY OF THE FACEBOOK EULA A. Background and Methodology B. Core Results C. Regression Results CONCLUSION APPENDIX A: RESPONDENT CHARACTERISTICS INTRODUCTION

Consumers seldom read the form contracts that firms offer. This failure is said to cause two problems. First, the consumer cannot be taken actually to consent to the legal relationship the form contract creates if the consumer is ignorant of that relationship. Second, competition cannot cause firms to improve contract quality because consumers cannot shop comparatively for terms of whose existence they are unaware. We focus here on the consent aspect of the "no-reading problem."

Consumers failure to read occurs not only when consumers are understandably rushed, as at the rental car counter, but also when there is time. People rarely read the forest of trees that are harvested and mailed in the form of credit card and cell phone contracts, insurance policies, gym membership agreements, or mutual fund prospectuses. The data also suggest that people do not read important parts of one-time contracts such as home mortgage agreements. (1) More recently, evidence suggests that consumers seldom read Internet contracts, which contain many controversial provisions. Apple's iBook author end-user license agreement (EULA), for example, initially included a provision requiring any book created with its software to be sold through Apple. (2) Google Chrome's original EULA granted Google virtually all rights to display and distribute content transmitted through its browser--"a perpetual, irrevocable, worldwide, royalty-free, and nonexclusive license to reproduce, adapt, modify, translate, publish, publicly perform, publicly display and distribute any Content which you submit, post or display on or through, the Services." (3) As a dramatic example, PC Pitstop included a provision in its EULA that awarded "[a] special consideration which may include financial compensation ... to a limited number of authorize licensee [sic] to read this section of the license agreement and contact PC Pitstop." (4) Four months passed before a user noticed the clause and claimed the $ (1000) prize. (5)

Turning to data, Florencia Marotta-Wurgler has detailed across a series of empirical studies the miniscule proportion of Internet contractors who read the terms of their contracts. (6) In one study tracking the Internet browsing behavior of 45,091 households on sixty-six online software sites, Yannis Bakos, Florencia Marotta-Wurgler, and David Trossen found that "only one or two out of every thousand retail software shoppers chooses to access the license agreement, and those few that do spend too little time, on average, to have read more than a small portion of the license text." (7) Moreover, Marotta-Wurgler has found that enhanced disclosure of terms via "clickwrap" contracting (which requires buyers to click "I agree" near a hyperlink to the underlying terms) increases reading by only 0.36% more than "browsewrap" contracting (which allows buyers to purchase without seeing a prominent hyperlink to the underlying terms). (8)

Contract law addresses the no-reading problem with the duty to read doctrine. (9) Under this doctrine, parties are taken to agree to terms that they had the opportunity to read before signing. (10) The doctrine "creates a conclusive presumption, except as against fraud, that the signer read, understood, and assented to [the] terms." (11) The presumption has long been justified as a necessary attribute of contracting regimes grounded in both efficiency and equity. For example, in Lewis v. Great Western Railway, the Court of Exchequer unanimously rejected counsel's argument that the plaintiff should not be bound to unread terms of the contract:

It would be absurd to say that this document, which is partly in writing and partly in print, and which was filled up, signed, and made sensible by the plaintiff, was not binding upon him. A person who signs a paper like this must know that he signs it for some purpose, and when he gives it to the Company must understand that it is to regulate the rights which it explains. I do not say that there may not be cases where a person may sign a paper, and yet be at liberty to say, "I did not mean to be bound by this," as if the party signing were blind, and he was not informed of its contents. But where the party does not pretend that he was deceived, he should never be allowed to set up such a defence. (12) The duty to read doctrine is contract law's analog to the assumption of risk doctrine in tort law. A buyer who could have read but did not assumes the risk of being bound by any unfavorable terms.

Consumer protection law responds to the doctrine by attempting to induce firms to create a real opportunity for consumers to read. Thus, firms cannot enforce terms that are hidden in fine print or written in obscure language; even prudent consumers who had diligently tried to apprise themselves of the offered terms would later be "surprise[d]." (13) The question whether the consumer plausibly could have read the contract also takes center stage when courts scrutinize Internet contracts. The "clickwrap" (14) cases often turn on whether consumers could realistically have read the entire contract before agreeing to it. (15) Legislatures and regulators commonly respond to the no-reading problem by requiring ever-widening sets of disclosures and initialing procedures that are meant to induce consumers to become informed about particular terms before becoming bound. (16) Some legislatures have required contracting parties to include specific language or "magic words"; (17) others require the prominent disclosure of particularly important terms. (18) These legal requirements attempt to reduce consumers' cost of reading the contract.

The new requirements rest on questionable procedural and substantive premises, however. Procedurally, decisionmakers assume that requiring contract terms to be more conspicuous or written in simpler language, without more, will solve the no-reading problem. This premise founders on the avalanche of real-world evidence that virtually no one wants to read contract terms regardless of how accessibly rendered those terms are. (19) Substantively, decisionmakers assume that consumers only learn terms by reading the contracts that contain those terms; hence, consumers who fail to read cannot know what their contracts say. Recent evidence contests this assumption. Consumers also learn about the deals they make from visiting firms, their experience with similar deals, discussions with friends, their observation of other consumers' purchasing choices, and reading consumer reports. (20)

Because the premises underlying current regulation are questionable, we take a different approach to the no-reading problem in this Article. The data show that consumers are aware of some contract terms but not others. For example, new car buyers know that the warranty does not last forever; that they cannot get a new car if the sound system is out of tune; and that they must take the car to an authorized dealer for service. On the other hand, it is less clear that consumers would expect their mortgage to have a prepayment penalty term or a forum selection clause requiring them to sue in a distant jurisdiction. Therefore, disclosure regulation would use consumers' limited cognitive capacities more efficiently if it directed consumers' attention to terms such as these that have two key features: they are unknown to many consumers; and they disadvantage the consumers. We capture these features in the phrase "term optimism," which exists when consumers expect a contract to contain more favorable terms than it actually provides. (21) A consumer thus would be term optimistic if she believed that her homeowner's insurance policy covered damage from flooding when the policy actually excluded flood damage. Regulation should attempt to make this exclusion salient but ignore terms of which consumers are aware. (22)

More generally, the state should jettison the disclosure project of making all terms accessible to consumers with the expectation that consumers can read the entire document. The read-all-the-terms project is both normatively unattractive and descriptively unattainable. The metagoal of contract formation policy is to make party assent real. The law of contractual assent, we argue, best implements this goal by permitting firms to enforce even poorly disclosed or hidden terms if consumers expect and understand what those terms do while regulating only those terms that consumers incorrectly believe are more favorable to them than they actually are. (23) Our scheme thus flips the traditional notion of the duty to read on its head.

The scheme rests on two key premises and raises two questions. Regarding the premises, as said above, the traditional knowledge prerequisite for "meeting of the minds" consent posits that reading the contract is the sole mechanism through which the nondrafter learns of her contractual rights and obligations. Nondrafters, however, learn of contract content through several channels. Because a party can be taken to consent to terms of which he is actually aware, we initially argue that the knowledge requirement is satisfied for parties who hold correct expectations regarding contract content, even if any such party has not read the terms at issue. Further, and more radically, we propose...