David A. Hoffman & Erik Lampmann, Hushing Contracts
, __ Wash. U. Law Rev.
__ (forthcoming), available at SSRN
Contracts should not be confused with contract law: contracts are private tools, but contract law is public. This distinction is particularly evident when the legal system provides enforcement services to parties who cannot work out their relationship without seeking state help. What, then, is this legal system supposed to do when asked to enforce a private contract that threatens to harm the public? While this question is centuries old, it has re-surfaced in recent years with unusual urgency. The contemporary rise of the issue may be linked to peak levels of inequality: in their carefully drafted contracts, stronger parties use their power not only at the expense of their counter-parties, but many times also in ways that negatively impact the wellbeing of third parties and the fundamental values that support our social existence.
In Hushing Contracts, David Hoffman and Eric Lampmann provide an important case study of this problem by closely examining the practice of using non-disclosure agreements in the context of sexual misconduct in a deliberate effort to conceal sexual misbehaviors. To elicit our most intuitive ability to recognize the predicament, the authors powerfully open with a reminder of the USA Gymnastics sexual abuse scandal. They invite us to recall the “national furor” that followed the revelation that USA Gymnastics used a contract to buy the silence of McKayla Maroney, a gold-medal winning American gymnast, in an effort to hide the sexual scandal from the public eye. Such national furor in and of itself evidences a core idea of the article: that private contracts have the potential to infringe upon matters the public strongly and justifiably cares about.
Moreover, Hoffman and Lampmann highlight the point that, when exposed, hushing contracts that were drafted to hide sexual misconduct generate an emotional public response of disgust. The reported appearance of disgust, which is a moral emotion, is meaningful. It signals that at least in our #MeToo times the act of burying wrongdoing by contract is widely perceived as morally wrong, as adding an insult to an injury. As the article updates, such view of hushing contracts as wrongful has already induced legislative responses in a variety of jurisdictions. However, the article also makes clear that hushing contracts are “hard to kill” via legislation (read the article to see why). That leaves us with the authors’ main proposal: to revive the doctrine of public policy and use it to invalidate those hushing contracts that create the externality of harming the public. Fears of the unruly horse of public policy aside, the challenge is, of course, defining with enough carefulness and respect for contracts (as private tools) the reasons that may justify a refusal of contract law (as a public institution) to enforce hushing contracts. It is concerning this challenge that the article offers a particularly inspiring analysis.
Victims of sexual harassment may keep their injuries to themselves not only out of fear or shame but also because their lips “[are] sealed with a signature.” Such a mechanism of contractual silencing, the article argues, carries significant antisocial consequences. First and most directly, it allows the original wrongdoing to continue and expand because it operates “to leave in place abusers.” (P. 12.) Second, the investment in concealing the problem by definition impedes any hope for finding solutions such as organizational engagement in preventive interventions. Instead, “firms send a message to would-be harassers that they too will find protection––rather than accountability––in management.” (P. 17.) Ultimately, “a culture of complicity” develops, in which victims more generally feel themselves unwelcome. (P. 14.) In support of these alarming claims, the authors share data that have illuminated some of the possible costs of this contractual way of enabling, or even fostering, sexual harassment. For example, they describe a few studies that show that the problem amounts to “an organizational stressor that has significant negative outcomes,” and additionally cite an estimation that in just two years the damage caused by workplace sexual harassment reached a total of $327.1 million. (Pp. 16-17.) Finally, the authors emphasize the long-term emotional and political consequences of hushing contracts. Drawing a fascinating comparison between LGBTQ people and sexual harassment survivors, they explain how, in both contexts, silencing—as opposed to the freedom to speak by “coming out”—disempowers not only the suppressed individuals but also the social movements that fight for bringing about change on their behalf. For all these reasons combined, the article makes a very persuasive call for limiting the enforcement of hushing contracts.
The last part of the article broadens the discussion and importantly adds to the emerging literature regarding the expressive role of law in general and of contract law, and contract law’s defenses, in particular. The argument on this point beautifully adheres to the theme of favoring voice over silence. Shifting the focus from survivors’ voice to that of the judiciary, the authors posit that “when courts believe that there is significant third-party harm, they ought to loudly proclaim that public policy is violated.” (P. 47)(emphasis added). As powerful social institutions that are heavily involved in the shaping of social norms and deeply impact people’s behavior, courts should send a clear message that contract law is “infused with concerns for social welfare.” (P. 58.) Framed that way, judicial refusal to enforce contracts that threaten fundamental societal values does not stand in conflict with the central idea of freedom of contract but rather operates to enhance it—restoring the social value of the practice of contracting and with it the legitimacy of contract law. Such a re-legitimization project is, according to Hoffman and Lampmann, “an urgent social task” in an era that is flooded by “click-to-consent” agreements and other unauthentic acts of “consenting” that have even become the subject of widespread ridicule (on this point the authors dedicate a footnote to an episode from the satirical show of South Park). (P. 56, 58.) What’s necessary in this moment of increasing suspicion towards the contractual system, is what the authors call “a way to shock the audience”: a judicial creation of “a counter-story” to the myth of consent, one that underscores contract law’s “concern for social welfare.” (P. 58.)
Throughout the article, the authors do not shy away from discussing possible objections to their argument. Indeed, they originally raise one of the most severe problems: that hushing contracts may never get to courts to allow judges to scrutinize them for public policy concerns, as proposed by the authors. The risk stems from the rapidly growing use of arbitration clauses by stronger parties who utilize their dominance to mute their challengers and insulate themselves and their contracts from judicial review. I would therefore suggest that the next step should be to overcome the arbitration problem by applying the article’s proposal to arbitration clauses, especially those that also include one of the most aggressive hushing techniques—class action waivers. In other words, the authors’ compelling conclusion—“that courts should generally refuse to enforce contracts which create particularly egregious third-party harms”—is valuable beyond the scope of their case study. (P. 61.) Courts should be able to exercise similar refusal powers against other methods of using contracts to silence people. First and foremost, the judiciary should take a stand against attempts to contractually to prevent cases from even arriving in courts—attempts that are increasingly threatening to hush contract law itself.
The unique qualities of digital contracts—weightless, easily duplicable—have made them ubiquitous and much longer than their paper counterparts. Consequently, they are everywhere and accordingly, nobody reads them. Yet, courts have consistently argued that digital or “wrap” contracts (shrinkwrap, clickwrap, browsewrap, etc.) are just like paper contracts and that the same doctrinal rules should apply. Sure, tech giants like Facebook and Google use wrap contracts to vacuum our data under the guise of consent, and companies have used them to impose onerous one-sided clauses, but isn’t that just the same old “lack of consumer bargaining power in a capitalist society” problem that we’ve always had dressed up in digital form? It’s not like digital contracts will lead to the end of civilization as we know it—or will they? In Chapter 6 of their fascinating, original book, Re-Engineering Humanity, Brett Frischmannn and Evan Selinger argue that ubiquitous, digital contracts may have profound negative consequences for humanity.
It may seem an odd choice to select a non-contract specific book for a contracts section JOT, and even more so to focus specifically on a particular chapter in that book. Even though Re-Engineering Humanity is about more than contracts, it is also and importantly about contracts. Frischmann and Selinger argue that contracts are doing something much more sinister than implementing one-sided bargains and deleting our rights with a click. They argue that contracts are actually erasing our humanity and turning us into simple machines.
Their focus is on electronic contracting and how the “design of this environment might incline people to behave like simple stimulus-response machines” that become “increasingly predictable and programmable.” (P. 60.) They note that contracting practices have changed to “accommodate changes in economic, social, and technological systems” so that instead of enhancing individual and group autonomy, contracts “implemented in electronic architecture” may actually be “oppressive.” (P. 60.)
Frischmann and Selinger characterize the “contracting problem” in two ways: First, they argue that the “electronic contracting environment should be understood as a techno-social tool for engineering human beings to behave automatically, like simple machines.” Their second characterization is a bit abstruse and requires a foray into Frederick Taylor’s theory of scientific management (which they discuss in the preceding chapter). Basically, Taylor turned the late 19th century workplace into the more efficient and productive 20th century workplace. He did so by focusing on how workers could be better managed to be made more efficient, essentially viewing them as tools whose efficiency could and should be maximized. Often, this required workers to perform repetitive, discrete tasks without considering the dehumanizing effect that this might have on the worker, or how it might degrade the worker’s skills, essentially treating the worker as a machine. (Pp. 53-59.) Frischmann and Selinger describe the problem of electronic contracting as “a system of scientific management that’s directed toward consumers” in much the same way that laborers in Taylorist workplaces were conditioned to behave like efficiency machines. (P. 61.)
Contracts were intended to be tools to implement autonomy but in the electronic environment they have the opposite effect, “they condition us to devalue our own autonomy,” (P. 61.) by making us act like automatons, clicking and swiping as obediently as well-programmed robots. Their argument “is not about the goodness or badness of contract terms per se. Nor is it about the outcomes in specific contracts, transactions, or cases. Rather, our concern is with the social costs associated with rampant techno-social engineering that devalues and diminishes human autonomy and sociality.” (P. 62.) In Appendix E, they engage with contract theory more directly, finding that “even if electronic contracting perfected markets by lowering transaction costs and improving efficiency, society might nonetheless be much worse off.” (P. 316.) In their view, the real threat to society is not from the substantive terms in a given transaction, but from the design of digital contracts which is intended to make us humans act like “simple stimulus-response machines.” (P. 78.)
Frischmann and Selinger present a compelling argument that digital contracts are actually erasing our humanity and turning us into simple machines. The ubiquity of contracts and their design mean that we are constantly clicking and swiping without thinking. Frischmann and Selinger offer a unique and very big picture perspective which should disabuse those who might think of contracts solely as tools of efficiency. They urge that the law of electronic contracting should be reformed because more is at stake than the (unread) terms and conditions—it is the concept of human autonomy itself. Chapter 6 and Appendix E alone are worth the price of the book, but the other chapters of Re-Engineering Humanity are equally compelling. I urge you to put down your phone and give it a careful, non-tech distracted read.
Uri Benoliel, The Impossibility Doctrine in Commercial Contracts: An Empirical Analysis
, __ Brooklyn L. Rev.
__ (forthcoming), available at SSRN
The use of theoretical economics to analyze legal rules faces a special challenge in contract law, particularly when applied to default rules rather than mandatory ones: it has to match up with what contracting parties are actually doing. One of the foundations of the economic analysis of contract law is that business parties ordinarily know what’s in their own best interests, so economic prescriptions about default, gap-filling rules are also ordinarily predictions: they are statements of what parties actually wanted but didn’t express or what they would have wanted if they had thought about a particular problem in advance.
Economic pronouncements about rules of contract law, therefore, are subject to a particular type of empirical verification unavailable in at least many other areas of law: we can simply look at what sophisticated business parties are doing and see if it matches up with what economists predict they will do. This is precisely what Uri Benoliel has been doing. And the result of his recent empirical study on the impossibility doctrine in contract law, The Impossibility Doctrine in Commercial Contracts: An Empirical Analysis, bears out Grant Gilmore’s famous observation in The Ages of American Law that “no historian, social scientist, or legal theorist has ever succeeded in predicting anything.”
The specific prediction that Professor Benoliel analyzes and helps disprove comes from Richard Posner and Andrew Rosenfield’s foundational legal-economic analysis of the doctrine of unexpected circumstances (mainly impossibility and impracticability) in contract law. Posner and Rosenfield’s analysis is subtle, but its core is that the law should assign the risk of unexpected events to the party best able to avoid or bear them. As an example of avoiding a risk, the seller of goods may more easily be able to take precautions to reduce the risk of fire while the goods are still in its possession; as an example of bearing a risk, the government, or a party able to purchase insurance, may be able to absorb it at lower cost than its counterparty. Posner and Rosenfield argue that the party best able to avoid or bear a risk should be made to bear it because that is what rational contracting parties do, or would do. As Posner and Rosenfield explain, if a draft of a contract assigns the risk differently, the parties can produce a new contract that is better in the aggregate, for both of them, and they can simply adjust the price accordingly so that each party is better off than under the original draft agreement.
Though this argument remains immensely influential, there are many theoretical objections to it. As Mel Eisenberg has pointed out, the rule that Posner and Rosenfield propose would probably be impossible to administer in practice. As I have argued, there is no reason to assume rational parties are focused on particular cost-reductions associated with impossibility or impracticability, and once we recognize that parties may have other considerations, the cleanliness of Posner and Rosenfield’s argument falls apart and it becomes extremely difficult to make predictions about their views on impossibility or impracticability.
Either way, however, Posner and Rosenfield’s argument comes down to a relatively simple prediction: rational parties will assign risks to those best able to bear them. This is what Professor Benoliel’s study tests. And he finds, after reviewing a database of almost 2000 commercial contracts disclosed to the SEC, that parties do not behave in the way that Posner and Rosenfield have predicted. Commercially sophisticated parties are free to choose, explicitly, the rule that Posner and Rosenfield have identified—or to adopt a clause that roughly mirrors it. But they do not. They seem, in other words, to be happy with the traditional legal rule, with all its potential ex post fuzziness and admission of noneconomic criteria, than with the structured variant that Posner and Rosenfield have proposed. That is, the contracts in Professor Benoliel’s study came from sophisticated firms that easily could have allocated the risks of impossibility as Posner and Rosenfield suggest, but in fact a majority chose not to contract around the traditional default at all—and of the minority that did, none explicitly used the superior-risk-bearer formulation, and few seemed consistent with it. The findings, as Professor Benoliel succinctly puts it, “cast significant doubt on the validity of the existing economic analysis of the impossibility doctrine.”
In May 2019 the ALI is scheduled to vote on the 5th Draft Restatement of the Law of Consumer Contracts (“5th Draft Restatement”), a project that seeks to help courts balance the integrity of contract doctrine and commercial reality. Two recent empirical studies in the Yale Journal on Regulation have convinced me that the ALI Council should click “pause” on its adoption because the 5th Draft seems more like a normative statement of what the law should be than a restatement of the common law of contracts in this area.
The truly committed would benefit from reading letters submitted to the ALI that express concern about the Draft Restatement from Consumers Union, state Attorneys General, Sen. Elizabeth Warren, and a variety of other organizations.
The Reporters say in the Introduction to the September, 2018 Draft “[i]t is both irrational and infeasible for most consumers to keep up with the increasingly complex terms provided by businesses in the multitude of transactions, large and small, entered into daily.” To resolve this tension between contract doctrine and commercial realities, the Restatement proposes what the Reporters have called a “Llewellynian Grand Bargain” that would jettison the common law requirement of mutual assent in consumer contracts in return for beefing up defenses to enforcement.
The Klass and Levitin articles seek to replicate the Reporters’ interpretation of the caselaw by reviewing the same dataset of cases. But the exercise did not validate the Reporters’ findings. Instead both articles conclude that the data set is largely irrelevant to the rules proposed by the 5th Draft Restatement. While between a third and one-half of the cases do take the view of law propounded by the Reporters, the trend is not nearly as strong nor as uniform as the Reporters represent it to be.
Faulty Foundation is an offshoot of the drafting process for the Draft Restatement. Its authors are eight Advisors and members of its Consultative Group: Adam Levitin, Nancy Kim, Christina Kunz, Peter Linzer, Patricia McCoy, Juliet Moringiello, Elizabeth Renuart, and Lauren Willis. After becoming aware of Klass’s attempt to validate the Reporter’s interpretation of cases that address whether privacy policies are binding contracts, they sought to confirm the match between the Grand Bargain and case law in the two datasets regarding contract modification issues such as whether the right to unilateral change terms defeats contract formation and cases on clickwrap contract formation.
That review failed to replicate the Draft Restatement’s claims regarding these two datasets. First, the review showed that between half and two-thirds of the cases are not relevant (i.e., were business-to-business cases or vacated decisions) or based on statutory rather than common law principles (i.e., the Federal Arbitration Act or state statutes allowing credit card agreements to contain unilateral modification clauses). Second, the remaining cases revealed a lower rate of courts disregarding contract doctrine re: modification and enforcement in consumer contracting than the Draft Restatement claims. Levitin et al see these gaps between the Reporters’ claims and the cases holdings as “clear errors on a massive scale.” These errors “raise questions about the accuracy and soundness of the entire project and [have] the potential to undermine the legitimacy of the ALI Restatement drafting process.” (P. 451.)
Here’s the big take-away from the Klass & Levitin articles: the 5th Draft Restatement is grounded on a faulty empirical foundation. The ALI’s Annual Meeting in May 2019 should set aside time for thorough discussion of these two studies. ALI Members alarmed by the Levitin and Klass articles could move to change the Restatement to a Principles project that would better reflect its “Grand Bargain.” In the alternative, the ALI Council could direct the Reporters to revise the 5th Draft Restatement and update the data set to include cases since 2014. Third and finally, the ALI could put the project on hold until the law in the area is sufficiently clear to restate. An “as is” adoption of the 5th Draft Restatement would endanger the reputation of the ALI and the larger Restatement drafting process by publishing a “Restatement” that does not actually restate the law.
Faulty Foundations Tested Restatement Claims by Replicating Reporter Study
The Reporters justify their Grand Bargain of disregarding contract formation requirements in consumer contracting by asserting that the courts already take this position. They claim that a data set of 353 cases support that conclusion. Levitin and his co-authors conducted a blind review of the two largest datasets: 88 modification cases, and 98 clickwrap cases. (P. 455) Although the authors are skeptical that dicta “restate” the law, they, like the Reporters, treated dicta as well as holdings as relevant. They built in verification for their case interpretation by having between two and three of them code each modification case, and between one and three of the authors code the clickwrap cases. (P. 455.)
Because the Faulty Foundation article replicates the Reporters’ review, their data set excluded cases decided after 2015. More recent cases suggest a definite minority position in which courts follow conventional contract formation requirements to consumer contracting. (A list of some recent cases appears at the end of this Jotwell entry.)
Faulty Foundations separately reports on each data set. Here’s the breakdown of errors in the modification dataset:
Problems with the Modification Data Set
Levitin et al identify two main reasons that the modification dataset does not justify the 5th Draft’s approach to consumer contracting: (1) more than half of the cases are simply irrelevant to the common law doctrine re: modification; and (2) the remaining cases are either atypical or not precedential. Together these revelations greatly weaken the Reporters’ claim that their Grand Bargain restates the law of consumer contracting.
First, irrelevance. The authors of Faulty Foundations found that more than half—61%—of the 88 modification cases are “irrelevant” to the issue of when a consumer has adopted modified standard terms in a contract. The biggest set of inapplicable cases—26 cases—were decided on statutory rather than common law analysis, as when state statutes permit unilateral modification terms in a credit card agreement. The Faulty Foundations authors also identified other factors that made 28 other cases in the modification data set inappropriate for designating trends in common law doctrine re: modification of standard-form contracts between businesses and consumers. They found that the irrelevant cases:
- focus on the substance of the contract clause instead of modification;
- concern multiple contracts instead of modification;
- involve business-to-business disputes instead of consumer contracts;
- follow statutory cases on stare decisis grounds;
- address only retroactive modification;
- address illusory promise doctrine instead of modification;
- refuse to evaluate the contract as modified because it wasn’t entered into the record;
- involve a consumer’s effort to enforce a modified contract, instead of the business;
- appear twice in the data set (a case counted at the intermediate appellate and supreme court level);
- reserve the modification question for determination in arbitration; or
- are no longer good law (i.e., vacated).
In light of the U.S. Supreme Court’s recent cases that impose a heavy thumb on the scale in favor of enforcing arbitration clauses—see e.g., AT & T Mobility v. Concepcion, 563 U.S. 333 (2011)—the dataset’s reliance on cases regarding arbitration clauses is particularly likely to skew the data in favor of enforcing a variety of business-drafted terms. Another error in the modification dataset is that Levitin et al report finding cases that the Reporters should have included in the dataset, but did not.
If Levitin et al.’s case coding is correct, their analysis leaves a much smaller data set of 34 modification cases. According to Faulty Foundations, these remaining cases also make a much weaker case for the 5th Draft Restatement’s approach than the Reporters claim. The vast majority of these cases—82%—involve contracts with express clauses allowing unilateral modification by one party. The cases don’t tell us much about the enforceability of unilateral modification clause at common law because most of them are credit card or deposit account contracts decided under the state statutes that expressly allow courts to enforce unilateral modification clauses. In the many cases—88%—that involved attempts to compel arbitration, federal statutory law also constrains the ability of those cases to reflect the common law of consumer contracting. Finally, the Faulty Foundation authors found that many of the seemingly relevant cases were either unpublished, federal courts interpreting state law, or lower state courts. Startlingly, according to Levitin et al, “only ten of the relevant cases are state court decisions, with only a single decision from a state supreme court.” (P. 460.)
Problems with the Clickwrap Data Set
The Faulty Foundation authors found similar defects in the 98-case clickwrap data set. Nearly half—46%—of the cases were irrelevant, the remaining cases did not strongly support the Reporter’s version of consumer contracting law, and nearly half lacked precedential value because they apply the law of other jurisdictions.
Because of overlap between the defects in the modification and clickwrap data set, I’ll focus on what, according to Levitin et al, make so much of the clickwrap data set irrelevant, and the most glaring defects with the remaining cases.
To my mind, three defects in this data set were most noteworthy:
- 16 of the cases were business to business cases, which may not reflect the law of consumer contracting;
- 11 cases did not address contract formation; and
- 2 did not involve a contract of any sort.
If Levitin et al are right to exclude those cases, the Restatement would rest on 53 remaining clickwrap cases. The authors’ review found a distinct minority position—11% of the cases—in which courts refused to enforce clickwrap terms. Yet the Draft Restatement Reporters found only a 2% rate of non-enforcement. Levitin et al contend that overlooking this minority but important position prevents the Draft Resatement from accurately restating the law.
The defects in the data sets overlap. For example, Levitin et al. criticize the clickwrap contract cases as not-precedential because they apply the law of other jurisdictions. Choice of law clauses that amplify the significance of state statutes enforcing unilateral modification clauses drown out common law patterns in other jurisdictions. Likewise, the fact that 40% of the remaining clickwrap cases involved efforts to compel arbitration shows the long shadow that the Federal Arbitration Act casts across both the modification and clickwrap data sets.
The painstaking replication project undertaken by the authors of Faulty Foundations is all the more credible because of the article’s restraint from any ad hominem attacks or speculation as to why the data set did not reflect the Draft Restatement’s conclusions. The article inspired me to do a quick and dirty investigation of what an updated and cleaned up data set might tell us about the state of consumer contracting.
As of spring 2019, a distinct minority of jurisdictions show a reluctance to enforce standard form contracts that do not meet contract formation requirements, even in cases involving arbitration clauses. Interested readers could check out the Massachusetts and First Circuit cases of Nat’l Federation of the Blind v. Container Store, 904 F.3d 70 (1st Cir. 2018); Cullinane v. Uber Tech., 893 F.3d 53 (1st Cir. 2018); and Kauders v. Uber Tech., 2019 WL 510568 (Mass. Super. Ct. 2019). The California cases include Norcia v. Samsung Telecom. Am., 845 F.3d 1279 (9th Cir. 2017); Metter v. Uber Tech., 2017 WL 1374579 (N.D. Cal. 2017); Velasquez-Reyes v. Samsung Elec. Am., 2017 WL 4082419 (C.D. Cal. 2017); and McKee v. Audible, 2018 WL 2422582 (C.D. Cal. 2018). These new developments should be reflected in any Restatement of the Law of Consumer Contracting.
The articles by Klass & Levitin et al provide readers with a few takeaways. First, the ALI membership should know about these attempts to replicate the case law interpretation underlying the 5th Draft of the Restatement of Consumer Contracts. ALI members who are troubled by the apparent mismatch between the law and the 5th Draft Restatement could speak up at the May 2019 Annual Meeting in a number of ways.
Motions that the ALI could and perhaps should debate and vote on include the following:
- A motion to change the Restatement to a Principles project;
- A motion to delay the Restatement project to reflect closer look at the existing data set and incorporate newly developing law; or
- A motion to put the Restatement of Consumer Contracts on hold and revisit it when trend of common law more clear.
If the ALI instead opts to adopt the Draft Restatement in its current form, contract law will suffer, as will the integrity of the Restatement drafting process as a whole.
The most pressing issue in contract doctrine today may well be what to do about the gap between the ideal of mutual assent required for contract formation and the reality that the vast majority of us click “yes” to agreements every day without reading a single clause. The long and tumultuous history of the ALI’s attempt to update UCC Article 2 to reflect on-line communications shows how difficult it is to do this type of updating. Both the Klauss article & Faulty Foundations should help place this project on accurate foundations.
Cite as: Martha Ertman, Properly Restating the Law of Consumer Contracting, JOTWELL (May 10, 2019) (reviewing Gregory Klass, Empiricism and Privacy Policies in the Restatement of Consumer Contract Law, 36 Yale J. on Reg. 45 (2019) and Adam Levitin et al., The Faulty Foundation of the Draft Restatement of Consumer Contracts, 36 Yale J. on Reg. 447 (2019)), https://contracts.jotwell.com/properly-restating-the-law-of-consumer-contracting.
Jacob Hale Russell, Unconscionability’s Greatly Exaggerated Death
, 53 U.C. Davis L. Rev.
__ (forthcoming), available on SSRN
Jacob Russell has a bone to pick with the contract professoriate, who have consigned unconscionability to a backwater in our courses, trotted out today only in 9th circuit cases that excoriate arbitration clauses before being consigned to an inevitable Supreme Court reversal. In his excellent new draft paper, Russell aims to show that true unconscionability—“rotten deal unconscionability”—didn’t die with the 1960s and 1970s but remains a vibrant part of today’s contracting landscape. The paper offers a compelling account of the functioning of an oft-derided doctrine, and even better, the grist for an enriched classroom exploration of the ways that courts deal with inequality in exchange. You should read it.
The heart of the paper is a caselaw survey, mostly of state court cases that follow the Great Recession. Hiding, as it were, in plain sight, Russell finds dozens of cases in which courts simply are rejecting deals because they were unequal: interests rates too high, foreclosures procured from vulnerable borrowers, routine overdraft fees on debit cards, and payday loans. Two common themes emerge, both remarkable given the doctrine’s repute: the cases involved “common products…sold by mainstream players in the credit industry,” and the courts themselves characterized the remedies as “routine.” Or to put it differently, unconscionability seemingly is routinely disrupting deals at the center of our credit markets. Why, then, are contract professors convinced that substantive unconscionability is a dead letter?
Russell argues that the conventional wisdom can be “slow to update,” especially when it is built on the backs of contracts casebooks. Second, and here Russell is “necessarily speculative,” perhaps there has been a post-crisis uptick in bad-deal unconscionability which changed how judges saw them. He argues that this change is reflected in the common treatment of unconscionability in consumer protection legislation, and in the American Law Institute’s (ALI) new proposed Restatement of Consumer Contracts, which would go beyond the caselaw in making the doctrine available when terms are not salient.
After describing this stealthy source of unconscionability cases, Russell attempts to give the doctrine more content by discussing its tailoring. That is, which consumer should courts have in mind when applying the doctrine, the “subjective, specific individual sitting in front of the court,” “a typical consumer,” or “somewhere in between.” As Russell points out, the choice of tailoring can be outcome-determinative, but it is rarely discussed explicitly, either by courts or scholars.
Russell argues that particularly in a world of individualized digital contracting, judicial inquiry, too, ought to be targeted at the consumer in the room. That’s so because he believes that unconscionability’s true purpose is “policing merchant misbehavior, not preventing consumer harm.” Russell would cabin the doctrine to those merchants who “know, or should have known, that their contacts were unfair or extremely inappropriate for the consumer,” evaluated ex post. In this way, courts could act as flexible agents for market-wide consumer protection, and might be able to alleviate some of the problems that mass-digitization of contracting has created.
The article thus makes a big move, offering readers a new take on how to police individualized contracts. While I was not entirely convinced of the tailoring story, my priors about unconscionability’s incidence and nature were updated. I won’t be teaching the doctrine the same way again. I like it lots.
Ronen Avraham & Anthony Sebok, An Empirical Investigation of Third Party Consumer Litigant Funding
, 104 Cornell L. Rev.
__ (forthcoming), available at SSRN
Contracting parties often suffer from information problems, lack of expertise, and limited cognitive abilities. They sometimes make decisions under stressful conditions. There are always others happy to exploit these phenomena to make extra profits. One sphere in which such exploitation has attracted much attention since time immemorial is usurious interest rates. In their fascinating empirical study, Ronen Avraham and Anthony Sebok shed new light on this phenomenon in an expanding new market for credit—namely, Litigants Third-Party Funding (LTPF). These are nonrecourse loans, given by commercial firms to individual tort plaintiffs, which are then repaid from the proceeds of the lawsuit.
Avraham and Sebok obtained a unique dataset of about 200,000 plaintiffs’ applications for loans handled by one of the largest firms that engages in such funding. The dataset comprised both approved and refused applications. Among other things, it included the personal details of each applicant; the name of the attorney representing him or her; a description of the case; the amount sued for; medical and insurance reports on the accident; an independent legal assessment of the lawsuit’s likelihood of success and potential value; and information about existing liens on the award that the plaintiff might receive. With regard to approved applications, the dataset included also the amount funded; the monthly interest rate; the length of the legal proceedings; the amount owed when the case was resolved; and the amount actually repaid. (Pp. 6–7.)
The article offers rich and very lucid descriptive statistics of the data, and discusses the policy implications of the findings. Among other things, it was found that only about half of the applications were actually funded, and that the average loan was around 7% of the estimated case value. (P. 10.) The interest was calculated on a monthly basis, with a median interest of 3% per month. In the great majority of cases, the interest was compounded on a monthly basis. In most of the contracts, there was a minimal period for which interest was charged, regardless of the actual length of the funding—usually three months. Beyond this period, the compounded interest was commonly calculated using interest buckets—namely, minimal periods (usually of three months) for which interest was charged, even if the loan was paid back before the end of that period. (Pp. 15–16.) The average period of the loans was 14 months. Most borrowers took only one loan per case, but a considerable minority received two, three, or even more loans per case. (P. 9.) Only applicants whose requests had been approved were charged a processing fee, which was paid along with the principal and interest at the end of the loan period (subject to the same compound interest and buckets). The most frequent fee for the first funding request was $250, with an additional fee of $75 for each additional request in the same case. (Pp. 19–21.) The average total amount of the funding was around $7,000, and the median—around $2,250.
Given what we know about people’s limited literacy, innumeracy, and lack of legal and financial expertise, one could reasonably surmise that most borrowers believed that the effective annual percentage rate (APR) was somewhat higher than 36% (the stipulated monthly rate multiplied by 12). In fact, due to the complex calculation described above, the median APR was 101%! Twelve percent of the borrowers paid back only the principal, or even less than the principal, and many more paid only part of the sum due, as the lender had not insisted on repayment in full (so-called haircuts). Consequently, the median effective APR collected by the lender was approximately 44%. The article shows that the contractual terms offered to borrowers and the haircuts they got ex post depended on whether the borrower’s lawyer had an ongoing relationship with the lender. (Pp. 24–29.)
The article offers a unique, large-scale empirical analysis of the LTPF market, which is crucial for any regulation thereof. It elucidates the relationships between lenders, borrowers, and the borrowers’ lawyers at the formation and performance stages of the contract, and offers insightful policy recommendations.
The authors place much emphasis on the effective APR of 44%. They note that it is considerably lower than some previous estimates (Pp. 4–5), and close to the statutory cap proposed in negotiations between the LTPF industry and its critics (P. 8). However, one might question this framing of the data. First, caps on interest rates refer to the contractual terms, rather than their ex post enforcement by lenders. Gaps between contractual terms and suppliers’ reliance on them serve important functions, but they also have troubling, and potentially harmful implications. As the data shows, while most borrowers get considerable haircuts, 34% pay the full amount due, and 5% apparently pay more than the amount due. (Pp. 21–24.) Those who pay back the full amount will find little comfort in the fact that others do not repay the loans at all, or get considerable haircuts—and from a societal perspective, the redistributive effects of this practice (exacerbated by the existence or absence of an ongoing relationship between the lender and the client’s attorney) are troubling.
It should be noted that the high median APR of 44% cannot be explained or justified by the risks LTPF lenders take, because this figure already embodies loans that have not been repaid in full or at all. The authors argue persuasively that their findings call for regulation. Their key recommendation—which I find very compelling—is that regulation should neither be content with setting default rules or disclosure duties (both of which may well be futile), nor imposing caps on interest rates (which firms may creatively bypass). Rather, the law should prohibit any contract terms that impinge upon the APR more than a simple interest rate (that is, ban all compounding interest, minimal periods, buckets, and fees paid upon repayment of the loan). (Pp. 34–37.)
One question that must be answered when considering regulation of the LTPF industry is to what extent it enhances access to justice for poor people—a potential major justification for its existence. My own impression is that LTPF has little to do with litigation funding. Since the great majority of tort plaintiffs hire their attorneys on a contingent fee basis (P. 32), they do not need additional funding for the litigation. Presumably, then, they are taking out the loans to finance daily needs that may have risen due to the accident and its possible adverse effect on their earnings. Thus, the expected recovery from the lawsuit serves primarily as collateral. Indeed, the fact that these are nonrecourse loans provides an important advantage to borrowers whose net recovery is smaller than the amount due. However, the contingent nature of repayment (including the payment of the processing fees) may actually allow LTPF lenders to charge much higher APR than otherwise possible. Since repayment is contingent upon the success of the claim, borrowers may view it as protecting them from a possible loss—and loss-averse people are willing to pay much for such protection (just as they are in the context of attorneys’ contingent fees).
Avraham and Sebok’s beautifully executed study lays the groundwork for further empirical work, theoretical analysis, and legal policymaking (further empirical research would be useful because the LTPF market is fraught with traditional and behavioral market failures—hence there may be considerable variance among firms). However, none of my quibbles detract from the important empirical research and thought-provoking analysis that it already offers. More generally, the reality of the LTPF market—apparently a distinctively American phenomenon—should give one pause about the current U.S. economy and its legal system.
Antonia Eliason, Lillian McMurry and the Blues Contracts of Trumpet Records
, 87 Miss. L.J.
279 (2018), available at SSRN
Professor Eliason’s Lillian McMurry and the Blues Contracts of Trumpet Records combines some of my favorite things—contract law, legal history, and Mississippi blues. Through the article, Eliason weaves a narrative of a compelling female protagonist, Lillian McMurry, who founded, operated, and finally closed the Trumpet Records (“Trumpet”) label in 1950s Jackson, Mississippi. This article provides a fantastic historical snapshot of the music industry at the time of itinerant blues artists who created the musical backbone of rock ‘n roll.
My interest in music industry contracting was sparked by Judge Jerome Frank’s dissent in M. Whitmark & Sons v. Fred Fisher Music Co. The majority opinion is relatively straightforward in upholding an artist’s assignment of contingent copyright renewal rights that would mature twenty-two years in the future. In contrast, Judge Frank in dissent exhibited remarkable judicial hubris (as well as, perhaps, the dark side of Legal Realist judging) in attempting to refuse specific enforcement of the original contract on fairness grounds. Specifically, Judge Frank would have substituted his own biased view of the relationship between artists and publishers:
We need only take judicial notice of that which every schoolboy knows—that, usually, with a few notable exceptions (such as W. Shakespeare and G. B. Shaw), authors are hopelessly inept in business transactions and that lyricists, like the defendant Graff, often sell their songs “for a song.”
Frank’s generalization of the ineptitude of artists also has a corollary implication that publishers who exploit this perceived weakness should lose the ability to enforce their contracts in equity. In so doing, Frank illustrates Arthur Allen Leff’s observation that “[T]he benevolent have a tendency to colonize, whether geographically or legally.”
Eliason’s article is useful as a subtle rebuke of Frank’s sweeping schoolboy generalization. Instead of one-sided exploitation, Eliason presents a nuanced picture of Trumpet Records as its contracts developed and its owner built relationships with artists.
McMurry founded Trumpet in 1950, having no experience in the industry. A 28-year-old white woman, McMurry worked with white and black artists across a range of musical styles. As Eliason relates, “At both a contractual and a personal level, McMurry did not distinguish between her white and black artists, and her correspondences demonstrate that she operated without concern for segregationist attitudes in Mississippi at the time.” (P. 282.) Moreover, Eliason’s analysis of the terms of the Trumpet contracts opens a window on the challenges and frustrations experienced by a new business owner trying to create a successful business on principled terms in a highly competitive field.
Eliason’s original historical research delved into the Blues Archives at the University of Mississippi, as well as documents preserved in the Mississippi Supreme Court relating to Trumpet’s contract dispute over copyright with one artist, Sherman “Blues” Johnson. The historical contracts demonstrate that McMurry and Trumpet became increasingly sophisticated in their contracts over the life of the label. Eliason helpfully includes examples of these contracts in appendices to the article.
The Trumpet contracts showed McMurry’s development as she gained experience. For example, early contracts required artists to secure their own copyright permissions to use others’ work, but McMurry later made Trumpet responsible given the lack of sophistication among the Trumpet artists and the general borrowing culture among blues musicians. Similarly, early Trumpet contracts required artists to provide a fixed number of “test records” or auditions every month. Over time however, McMurry reduced the fixed recording requirements, eventually merely requiring such material only “from time to time,” apparently recognizing that artistic works were not well-suited to a fixed production schedule.
Eliason addresses many challenges that McMurry encountered while running Trumpet records. Most notably, Eliason analyzes a 1954 dispute with artist Sherman “Blues” Johnson over whether the Trumpet contract assigned Trumpet copyright to materials created before the contract term. Johnson recorded Pretty Baby Blues for Trumpet. But Saving My Love For You, the song at issue in Trumpet’s dispute with Johnson, was sung by artist Johnny Ace. Ultimately, the Mississippi Supreme Court held the Trumpet contract ambiguous and interpreted the term to apply only to materials created during the term of the contract, an outcome that left McMurry feeling distressed and betrayed. Likewise, Eliason analyzes McMurry’s work to protect the Trumpet artists against piracy even decades after Trumpet closed its doors.
The most intriguing section of the article presents McMurry’s personal interactions with the Trumpet artists. Analyzing McMurry’s correspondence with the artists, Eliason paints a picture of a business owner who truly cared about the artists who worked for her, but at the same time attempted to operate the business professionally. The correspondence shows McMurry insisting on performance of the Trumpet contract terms but also being willing to work with the artists as they encountered difficulties. In one instance, for example, McMurry advanced an artist money to travel home to Mississippi while at the same time noting that the artist was in violation of the contract. In another letter, McMurry attempted to locate the widow of an artist (for whom Trumpet had paid medical and funeral expenses) to ensure the widow received royalty payments. And other correspondence indicates a close personal relationship with artist Sonny Boy Williamson and his wife Mattie during the breakup of their apparently troubled marriage. These letters reveal McMurry as both a hard-nosed businessperson and someone who cared about those who worked with her.
As Eliason concludes, in the context of the highly-competitive and often exploitative music industry, “Lillian McMurry was an exceptional individual whose adherence to the letter of her contracts and treatment of her artists was unusual.” (P. 310.) This article is a great piece of legal history that provides valuable real-life information about a fascinating time in music history.
Trade secret law and contract law have a complicated relationship. Every subject of commerce is extensively privately regulated by contracts. Intellectual property is distinct from other things of value, because it provides exclusive rights to its owners, and burdens others with corresponding responsibilities to others. Yet unlike trade secret’s intellectual property cousins copyright and trademark, there is no state or federal public register of trade secret interests to give potential infringers notice of a trade secret. What’s more, trade secret rights are relational, that is, liability for disclosure of a trade secret based on the context and expectations of the owner and the discloser. Therefore in trade secret law, unlike other intellectual property, contracts frequently are key evidence of the substance of the trade secret and the standard of behavior required for former employees to avoid infringing trade secrets.
In The Trade Secret-Contract Interface Professor Deepa Varadarajan argues contract law should not be used to undermine the policy reason the law grants companies intellectual property in trade secrets—to promote the progress of science and the useful arts. And yet, as she chronicles in the article, contract law has increasingly been used to do just that in an economy where some of the most valuable assets are trade secrets, including algorithms and databases. She writes: “Contracts’ centrality to trade secret law provides putative owners ample opportunity to define—and overstate—the boundaries of their trade secret rights, particularly to employees. Trade secret’s intersection with contract law poses particular threats to employee mobility—as employee non-competes and non-disclosure provisions can deter employees from starting new jobs and competition enterprises.” (P. 1547.)
Varadarajan identifies two distinct functions that contracts play within trade secret law. First, she describes the “evidentiary function of contracts.” This is the use of contracts as evidence to support the content of the trade secret and the context of a particular employee’s relationship to it. Second, she describes the “evasive function of contracts.” This is the use of contracts, typically by employers in the context of non-compete agreements, to create rights that exceed or conflict with trade secret protections without disclaiming trade secret protection. Some specific examples she discusses are: enlarging trade secret subject matter, avoiding ongoing reasonable secrecy protections, and eliminating the reverse engineering defense.
Concerns about the moment of contract between employer and employee are paramount in Varadarajan’s analysis. She points out: “[f]irms’ trade secret-evasive uses of contract often occur in employee agreements and mass-market consumer licenses—contexts where the restricted party often lacks the capacity to understand, negotiate, and alter terms.” (P. 1573.) What’s more, most trade secret controversies arise out of contracts that were formed in the context she described, rather than out of espionage or some other form of disclosure.
As a result of these formational concerns, Varadarajan calls for what she calls a “reinvigoration” of contract law’s non-enforcement doctrines. Relying on a series of court opinions, she argues that courts can and should limit enforcement of non-disclosure, non-compete, and other trade secret-related contract provisions in light of “public policies that operate to restrict the scope of trade secret protection.” (P. 1589.) She argues that in some circumstances, the “evasive” uses of contract conflict with underlying trade secret policies, such as promoting innovation. She also cites unconscionability as a possible avenue for non-enforcement of some contracts regarding trade secrets.
Both the problem Varadarajan describes and the solution she sketches ultimately sound in contract law. In effect, contract law has allowed individual actors to distort substantive trade secret for their unilateral benefit. So, correspondingly, contract law must correct itself to prevent such an effect in the context of trade secret.
The Trade Secret-Contract Interface is a significant contribution to the contracts literature. It shows how the thin veneer of formal contractual consent is being used to upend not just the expectations of the less powerful contracting party, which is a longstanding and worsening problem in contract law generally, but also settled, established intellectual policy principles. A future agenda for other scholars inspired by Varadarajan’s work may be to examine how contract law consent’s increasing thinness without a corresponding decrease in formal power may be leading to distortionary effects in other sectors of law, society, and the economy.
Every fall, the second day of my Contracts course is spent discussing the Baby M case concerning the enforceability of a surrogacy contract. The students engage in a moot court exercise for which they assume the roles of legal counsel for the Sterns, the biological father and adoptive mother, and Mrs. Whitehead, the surrogate. Students also serve as state supreme court justices with yours truly presiding as Chief Justice. Over the years, I have found this exercise to be a fun, interactive, and collaborative way to ease nervous angst-filled law students into the study and practice of law. It also affords the class the opportunity to consider and discuss important fundamental principles of contract law including freedom of contract and public policy concerns. During the three decades that have passed since the Baby M case, there has been enormous growth in the number of individuals using contractual agreements to help them meet their reproductive goals. This growth has necessitated a closer examination of the enforceability of such agreements, which Professor Deborah Zalesne undertakes in her thought-provoking article, The Intersection of Contract Law, Reproductive Technology, and the Market: Families in the Age of ART.
Professor Zalesne’s article begins with a very thorough discussion of the controversial ethical issues surrounding alternative reproductive technologies (ART). Although she acknowledges critics’ concerns about commodification, exploitation, consent, and access as they relate to reproductive practices such as surrogacy and gamete donation, Professor Zalesne argues that “these concerns are overstated, often rooted in traditional and untested beliefs about the sacredness of motherhood and family, and should give way to the paramount concern of reproductive autonomy.” (P. 427.)
Throughout her discussion of the tension between individual choice and moral values, Professor Zalesne explains the role of contracts in the reproductive arena and argues for their enforceability when freely entered into by the parties. For instance, in the context of surrogacy, she argues that courts’ unwillingness to enforce such agreements incentivizes exploitation not only by surrogate mothers who may “threaten to renege in order to get more money,” but also by intended parents who may “refuse to pay medical costs unless the surrogate acquiesces to unreasonable demands,” thereby “result[ing] in greater cost to both parties.” When discussing critics’ concerns regarding exploitation of surrogates and their perceived lack of voluntary consent, Professor Zalesne cautions against imposing impermissible limitations on women’s autonomy to freely contract. She also reminds us that contract law defenses such as unconscionability, undue influence, and economic duress protect against unfair and exploitative contract terms by helping to determine whether surrogates knowingly and voluntarily entered into their agreements. Professor Zalesne thoughtfully suggests that “[c]onsent must include extensive counseling about the inherent medical and emotional benefits and risks associated with most forms of ART, and participants must participate voluntarily and without coercion or undue influence.” (P. 442.)
When Professor Zalesne turns her attention to the reproductive technology of pre-implantation genetic testing, she confronts the many ethical issues that accompany such technology, particularly as it relates to trait selection. Whether contracting parties select for gender, race, height, complexion, or hair and eye color, Professor Zalesne generally advocates for protecting individual reproductive choices provided that they are “private choices for private purposes” rather than “centralized choices for the state’s purposes.”
Respecting private choices, as long as they are not against public policy, is a core tenet of contract law and one that is central to Professor Zalesne’s discussion regarding the importance of judicially enforced reproductive agreements. According to Professor Zalesne, such enforceability protects parties’ intentions and ensures that their wishes at the time of contracting are honored, particularly in cases concerning embryo disposal when one party’s desires may change some time after executing the agreement. Enforceability of reproductive contracts also avoids “unintended, and sometimes absurd, consequences” that can be life altering for parties involved and their families.
Because legislation can be slow to keep pace with evolving social values and technology in the context of ART, Professor Zalesne makes a compelling case that “[p]eople should be their own lawmakers when it comes to reproduction and their personal relationships,” (P. 486) and that contract law serves as an efficient and effective mechanism through which to govern these arrangements. Although we’ve “come a long way” since the Baby M case (to quote the decades old Virginia Slims ad), there continues to be much disagreement surrounding alternative reproduction. As the debate continues, as it undoubtedly will, I am confident that Professor Zalesne’s well-written article will inform it, particularly as it relates to the enforceability of ART agreements, for years to come.
Cite as: Eboni Nelson, The Role of Contracts in ART
(November 20, 2018) (reviewing Deborah Zalesne, The Intersection of Contract Law, Reproductive Technology, and the Market: Families in the Age of ART
, 51 U. Rich. L. Rev.
419 (2017)), https://contracts.jotwell.com/the-role-of-contracts-in-art/
David Horton’s Arbitration About Arbitration is a thorough and insightful treatment, with both normative and descriptive elements, of the law’s approach to delegation clauses in contracts calling for arbitration. Delegation clauses assign to arbitrators the question of the validity of an agreement to arbitrate (including defenses such as unconscionability and the like) that would otherwise be decided by courts. A typical delegation clause would go something like this: “Enforceability of the arbitration clause shall be determined by the arbitrator and not by a court” or “[t]he arbitrator[s] shall determine all issues regarding the arbitrability of the dispute.” Horton focuses on delegation clauses in employment and consumer adhesion contracts, where delegation is most troubling.
The article first sets forth a very helpful history detailing the rise of delegation clauses against the backdrop of initial judicial hostility to arbitration, Congress’s enactment of the Federal Arbitration Act (FAA), and the Supreme Court’s recent championing of arbitration, including the enforcement of delegation clauses. As for the latter, in First Options of Chicago, Inc. v. Kaplan, the Supreme Court established that enforcement depends on the parties’ intentions, but the Court required “clea[r] and unmistakabl[e] evidence” of an agreement to delegate. Then in Rent-A-Center, West, Inc. v. Jackson, Justice Scalia diluted the “clear and unmistakable” rule, by observing that courts should enforce delegation clauses if a party merely manifested an intent to delegate. As a result, a court can justify enforcement of a delegation clause by finding that a consumer clicked on an “I agree” button or signed a form contract, even if the consumer never saw or understood the clause. Horton also observes that the treatment of delegation clauses also “rode the wake” of additional Supreme Court decisions, such as AT&T Mobility LLC v. Concepcion, that for practical and legal reasons all but excluded consumers from pursuing rights in court.
Horton is clearly right that the state of the law on delegation clauses in consumer and employee adhesion contracts is problematic. Perhaps most worrisome is the point that arbitrators face what amounts to a conflict of interest when deciding the validity of an agreement to arbitrate. Arbitrators are often paid handsomely for their efforts, so if they decide an agreement to arbitrate is unenforceable, they’ve short circuited their chance for considerable compensation. When this conflict is combined with the common hurdles for consumers and employees in arbitration, such as far-off venues, expenses, and biased arbitrators, a strong argument exists that the threshold issue—whether the case should be arbitrated at all—belongs in a court.
But what is to be done? Horton’s series of solutions is sensible and pragmatic, if somewhat cautious. Despite noting the strong argument that “adhesive delegation clauses never satisfy the ‘clear and unmistakable’ criterion,” (P. 404) he does not go that far. Rather, he calls for treating delegation clauses as “‘lite’ arbitration clauses” (P. 405) that should be “presumptively valid,” (P. 375) but should be subject to various exceptions, including defenses such as unconscionability and “wholly groundless.” Further, despite Section 4 of the FAA’s language that “[t]he court shall hear the parties . . . [i]f the making of arbitration agreement . . . [is] in issue,” Horton finds that the FAA is not “ironclad and unyielding” (P. 403) in part because courts “have insisted for decades that parties can arbitrate arbitrability.” (P. 403.) Instead, the FAA should “exist halfway between inexorable commands and pure background principles,” and its rules should be “hard to draft around.” (P. 403.)
In addition, Horton urges that unconscionability defenses “should have a particularly sharp bite” (P. 406) when the issue is delegation, although Horton points out that a challenger faces a high hurdle to demonstrate unconscionability when the delegation clause alone is the subject of examination. (P. 396.) Finally, although quite critical of the decision, Horton does not argue that Rent-A-Center is simply wrongly decided. Instead, he proposes that courts should read Rent-A-Center narrowly, which would allow a “more nuanced account of delegation clauses.” (P. 399.) Specifically, Horton observes that the “clear and unmistakable” test survives the case, as evidenced by a Scalia footnote. (P. 406.) Further, Horton distinguishes the case on its facts, which he says are atypical and include an unusual delegation clause.
Perhaps, in light of the Supreme Court’s strong sponsorship of arbitration, combined with general contract law’s rather permissive attitude towards assent issues in boilerplate adhesion contracts, Horton’s careful analysis is the best solution. Nevertheless, it is not crazy to argue that, in the context of consumer and employee adhesion contracts, businesses should not have the power to use contracts to avoid the rights of challengers to have courts determine the validity of agreements to arbitrate. Personally, I am most moved by the argument that arbitrators have a strong economic incentive to allow arbitration to proceed. Therefore, delegation clauses in this context should be presumptively unenforceable, not the other way around.
In sum, Arbitration About Arbitration is an excellent article that should be a “must read” for anyone interested in the current treatment of arbitration clauses in the context of adhesion contracts. Though no fault of Horton’s, however, consumers and employee advocates will come away with some trepidation about the state of the law in this area and its future.