Viewing unconscionability through a market lens.

• Author: Gilo, David

ABSTRACT

This Article calls for a move to a new phase in courts' attitudes toward consumer contracts. Currently, courts applying the unconscionability doctrine to consumer contracts focus on the characteristics of the parties and the transaction. We suggest that rather than examining each consumer contract in isolation, courts should inquire whether there is competition, or potential competition, over contracts in the supplier's market. As we show, competition over contracts is different from competition over products or services. In order to assess the degree of competition, or potential competition, over contracts, courts should look at the particular features of the supplier's market identified in this Article, as well as examine the potential strategic interaction among competitors. We argue that when competition, or the threat of such competition, over consumer contracts is sufficiently strong, these contracts should be deemed efficient and fair, and courts should not strike down clauses incorporated into such contracts. Interestingly, and counter-intuitively, this conclusion holds even when consumers are uninformed.

We offer workable guidelines for courts as to how they could implement the market-based approach proposed in this Article and demonstrate how this approach could produce outcomes opposite to, but fairer and more efficient, than the ones courts conventionally adopt or legal scholars offer. We also identify oppressive techniques suppliers employ in their contracts with consumers that are currently ignored completely by courts and are expected to survive even vigorous competition over contracts. We suggest that courts should be particularly suspicious of such oppressive techniques and scrutinize them with special care.

TABLE OF CONTENTS INTRODUCTION I. OPPRESSIVE TECHNIQUES A. Traditional Oppressive Terms 1. The Technique 2. Suppliers' Possible Motivations 3. Welfare Concerns B. Selectively Oppressive Terms 1. The Technique 2. Suppliers' Possible Motivations 3. Welfare Concerns C. Selectively Beneficial Terms 1. The Technique 2. Suppliers' Possible Motivations 3. Welfare Concerns D. Complexity 1. The Technique 2. Suppliers' Possible Motivations 3. Welfare Concerns E. Summary II. COMPETITION OVER CONTRACTS AND THE INFORMATION GAP A. How Can Competition over Contracts Close the Information Gap? 1. Traditional Oppressive Terms 2. Selectively Oppressive Terms 3. Selectively Beneficial Terms 4. Complexity B. Factors Preventing Competition from Closing the Information Gap 1. Backfiring Competition 2. Attracting Unwanted Consumers 3. Benefit Externalization 4. Irresponsive Consumers C. Sufficiency of a Competitive Threat III. HOW SHOULD COURTS HANDLE TRADITIONAL OPPRESSIVE TERMS? A. Courts' Existing Attitude Toward TOTs and the Proposed Change B. Guidelines for Intervention Under the Market-Based Method 1. The Type of TOT or Transaction a. Does Exposing the TOT Reveal Information About the Product or Service? b. Effects of Exposing the TOT on High-Cost Consumers c. Scope of Transactions d. Does the TOT Qualify a Default Rule or a Contractual Benefit? 2. Characteristics of the Supplier's Market a. Number of Suppliers in the Market Not Using the TOT b. The Existence of Sales Representatives in Contact with Consumers c. Is the Product or Service Essential to Consumers? d. Alternative Parties Likely To Expose the TOT CONCLUSION INTRODUCTION

Suppose you buy a computer from a manufacturer of electronic equipment, and, after a few days of use, the computer breaks down. Even though you purchased a warranty from the seller, you find out that it does not cover your losses: a clause in the fine print limits recovery to losses caused by some components of the computer but not by others. The question of whether to strike down such a clause is generally determined by courts according to a combination of three considerations, mostly under the doctrine of unconscionability: (1) first, the information gap between the supplier and his consumers, which exists when consumers are not aware of the full-value loss the clause entails; (2) second, whether the supplier enjoys superior bargaining power; (3) third, the degree of harshness, or one-sidedness, of the clause. (4)

Law and economics scholars have argued that only the consideration regarding the information gap should matter. Even if a supplier possessed superior bargaining power, the supplier would not incorporate an inefficient clause into its standard-form contract if consumers were aware of the clause and its full cost to them. Rather, the supplier would always prefer to have an efficient contract. To the extent that the supplier had superior bargaining power, it would use its power to raise the price, rather than to impose an inefficient clause. (5) It is only when consumers are unaware of the clause, or of the full cost it is imposing upon them, that the supplier can extract value from consumers by incorporating inefficient terms into its standard-form contracts. (6) Therefore, the law and economics literature concludes that intervention is justified if, and only if, consumers lack sufficient information. (7)

Surprisingly, however, the question of how courts should verify whether consumers are informed remains underexplored in legal writings. As a result, courts conduct a transaction-specific analysis as to whether there is a gap of information between the supplier in question and his consumers, and reach decisions accordingly. Determining whether consumers are sufficiently informed in a particular case, or in a particular market, however, is an extremely formidable task for courts.

This Article offers a new method for courts to use when considering whether to strike down an oppressive term. Instead of trying to explore directly whether there is a gap of information between the supplier and his consumers, courts should inquire whether market forces have the potential to close this gap. In particular, we develop tools according to which courts should determine whether the supplier's market encourages competing suppliers, or other parties, to draw consumers' attention to inefficient or unfair terms in the supplier's contract. (8) If the answer is "yes," the contract should be deemed efficient and fair, and courts should not intervene against it; if the answer is "no," courts should be suspicious of oppressive terms in the contract and continue to apply the transaction-specific analysis currently used to evaluate such contracts. Thus, in the computer example mentioned above, it is very difficult for a court to determine whether the buyer of the computer, or many of the supplier's consumers, are sufficiently informed. Nevertheless, we claim that courts should not intervene if they are convinced that the computer supplier's market encourages its competitors, or other parties, to expose to consumers inefficient or unfair exclusionary clauses in the supplier's contracts.

The virtue of our proposed market-based method is not only that it circumvents the prohibitive costs of inquiring whether consumers are informed. The method also helps identify cases in which court intervention is unwarranted even when consumers are known or presumed to be uninformed. In particular, if consumers are uninformed, as long as there is a credible threat that competitors or other parties bring consumers' attention to suppliers' inefficient or unfair terms, no supplier would incorporate such terms in its contract in the first place. Thus, in equilibrium, when the threat of competition over contracts is credible, contracts should be deemed efficient and fair, and any court intervention is unwarranted. To illustrate, in the computer example above, courts should not strike down the exclusionary clause if they are convinced that in the relevant computer market, had the clause been inefficient or unfair, competitors or other parties would have criticized it, and the supplier would have lost market share. (9)

As we show, the effectiveness of competition over contracts in deterring suppliers from using inefficient or unfair standard-form contracts crucially depends on the nature of the oppressive techniques used by suppliers. We distinguish between four oppressive techniques: only the first technique has been attracting courts' scrutiny and attention, while the other three have been, for the most part, ignored by courts, even though they are very common and could be very harmful. The first and most familiar technique is to incorporate terms into the contract that deprive the consumer of a right or a remedy to which she would have been entitled but for the oppressive terms. (10) Clauses limiting the supplier's liability, such as the one described in the above-mentioned computer example, are illustrative of such terms. The second technique is to incorporate terms into the contract that are oppressive only for some consumers but not for others. Typically, those who are not offended by the terms are consumers who were aware of their existence and made some effort to avoid their adverse effects. (11) An example of an SOT is a term that deprives consumers of a remedy, but allows consumers who carefully read the contract to relieve themselves of the oppressive term. (12)

The third technique is to incorporate contract terms which confer benefits on some consumers but not on others. (13) As in the case of an SOT, with an SBT only those consumers who make some effort to attain the benefits will receive them. A typical example is a term, included in the fine print, allowing a discount only for a consumer who is aware of the term and is willing to fill out a certain form to receive the discount. (14) The last oppressive technique that we identify is artificial complication of contracts. Under this technique, suppliers can extract benefits from consumers by making contracts more complex. (15)

This Article demonstrates how among the four oppressive techniques, only the traditional oppressive term...