Twenty-three State Attorneys General circulated a letter urging Members to withhold support from the Restatement of the Law, Consumer Contracts. The criticism expressed in the AGs’ letter is founded on a misunderstanding of the rules in the draft Restatement.

The AGs’ criticism is focused on Section 2 (Adoption of Standard Contract Terms) and Section 5 (Unconscionability). We address the critique of these two Sections in turn.

Section 2. The AGs criticize the draft Restatement for abandoning the mutual assent doctrine. And yet Section 2(a) states that a standard contract term is adopted only “if the consumer manifests assent to the transaction after receiving reasonable notice of the standard contract term…, and a reasonable opportunity to review the standard contract term.” Furthermore, all of the cases that are cited in the AGs’ letter, in support of their view, are referenced in the draft Restatement and are entirely consistent with Section 2.

The AGs question the draft Restatements endorsement of pay-now-terms-later (PNTL) contracts in Section 2(b). The majority of courts have endorsed PNTL contracts and the draft Restatement reflects this jurisprudence. But the draft Restatement also emphasizes the safeguards adopted by the most-consumer-protective decisions, requiring that “the consumer receives a reasonable notice regarding the existence of the standard contract term intended to be provided later…, a reasonable opportunity to review the standard contract term, and… a reasonable opportunity to terminate the transaction without unreasonable cost, loss of value, or personal burden….”

Section 5. The AGs criticize the draft Restatement’s formulation of procedural unconscionability. It is helpful to cite the black letter formulation (in Section 5(b)): “A contract or a term is unconscionable if at the time the contract is made it is… procedurally unconscionable, because it results in unfair surprise or results from the absence of meaningful choice on the part of the consumer.” This is the classic formulation of procedural unconscionability, harkening back to Williams v. Walker-Thomas Furniture Co., 350 F.2d 445 (D.C. Cir. 1965) and repeated ever since by courts all over the United States. The AGs seem to endorse this black letter formulation. Their criticism focuses on Comment 6, which offers guidance on the proper implementation of the black letter rule. The AGs’ letter quotes two sentences from the Comment: “A term that affects the contracting decisions of a substantial number of consumers is more likely to be subject to forces of market competition… Such a term may be policed by market forces, and so policing by courts – through the unconscionability doctrine – may be less necessary….” The AGs argue that “market forces alone are often insufficient to redress unfair provisions.” They continue: “We regularly bring cases where businesses attempt to justify their unlawful conduct on the ground that the conduct was purportedly disclosed in the fine print of a contract….” But this is entirely consistent with the draft Restatement’s position. A few sentences down, in that same Comment 6, the draft Restatement explains: “Ordinarily, non-core standard contract terms do not affect the contracting decisions of a substantial number of consumers. This observation applies most forcefully when the standard contract term is part of a long list of fine-print terms.” The draft Restatement directly addresses the type of cases that the AGs are concerned about and states that the requirements of procedural unconscionability are satisfied in such cases.

The AGs are also concerned that the draft Restatement would prevent courts from recognizing an unconscionable price. They argue that, since price often affects consumers’ contracting decisions, the draft Restatement would preclude a finding of procedural unconscionability. According to the AGs, “this possibility [is] particularly troubling based on our experience protecting consumers from false and misleading pricing practices such as negative option billing, teaser rates, and hidden fees.” But, once again, a careful reading of the draft Restatement reveals that the AGs’ concerns are misplaced. The draft Restatement, in Comment 8, expressly allows for the possibility of a procedurally unconscionable price. The Comment explains that consumers can be unfairly surprised by a price term and that a high price may result from the absence of meaningful choice. The Comment specifically refers to teaser rates and to complex pricing schemes with hidden fees – the examples noted by the AGs.

It is also important to correct another misunderstanding: The AGs’ letter suggests that the consumer awareness test (whether a term affects the contracting decisions of a substantial number of consumers) is the only standard for procedural unconscionability in the draft Restatement. It is not. As noted above, unfair surprise and the absence of meaningful choice are the primary doctrinal formulations and traditional questions of bargaining power and consumer sophistication continue to play an important role in the draft Restatement (see, e.g., Comment 6(c) and Comment 8).

Summary. The AGs urge Members not to support the draft Restatement, based on several concerns about Section 2 and Section 5. A full reading of the draft Restatement reveals that these concerns are misplaced.

A final note: At the end of their letter, the AGs argue that, in some cases, we cannot rely on private litigation brought by consumers to police bad actors. We acknowledge the limits of private action based on consumer contract law. (Although we reject the implication that the draft Restatement makes it harder for consumers to bring private actions.) And we recognize the importance of public action brought by state AGs enforcing consumer protection laws. Consumer contract law, as distilled in the draft Restatement, complements consumer protection law; it does not replace it.

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Oren Bar-Gill

Reporter, Restatement of the Law, Consumer Contracts

Oren Bar-Gill is the William J. Friedman and Alicia Townsend Friedman Professor of Law and Economics at Harvard Law.  His scholarship focuses on the law and economics of contracts and contracting.

Omri Ben-Shahar

Reporter, Restatement of the Law, Consumer Contracts

Omri Ben-Shahar is the Leo and Eileen Herzel Professor of Law and Kearney Director of the Coase-Sandor Institute for Law and Economics at University of Chicago Law School. He teaches contracts, sales, trademark law, insurance law, consumer law, e-commerce, food law, law and economics, and game theory and the law. He writes primarily in the fields of contract law and consumer protection.

Florencia Marotta-Wurgler

Reporter, Restatement of the Law, Consumer Contracts

Florencia Marotta-Wurgler is a professor of law at New York University School of Law and the director of NYU Law Abroad in Buenos Aires. Her teaching and research interests are contracts, consumer privacy, electronic commerce, and law and economics. Her published research has addressed various problems associated with standard form contracts online, such as the effectiveness of disclosure regimes, delayed presentation of terms, and whether people read the fine print.

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