/Consumer Contracts Restatement Delayed: Consumers Win…For Now

Consumer Contracts Restatement Delayed: Consumers Win…For Now

By Jerri-Lynn Scofield, who has worked as a securities lawyer and a derivatives trader. She is currently writing a book about textile artisans.

Over the last several decades, US corporations have succeeded in making the legal system more business-friendly. Earlier this month, on May 21, consumers scored a small win, when the American Law Institute (ALI) delayed vote on its Restatement of the Law of Consumer Contracts – effectively shelving the project until at least this time next year.

For the non-lawyers, this topic may appear to be abstruse and technical. Please stick with me. It’s important. And precisely because it is abstruse and technical – and to be honest, may appear gobsmackingly boring – many of those who would have been hurt by this proposal remain unaware that it was pending, and if passed, would have further circumscribed consumer rights.

The ALI  periodically publishes restatements of the law: these catalogue and summarize how courts have ruled on particular issues. Judges (and their clerks) rely heavily on ALI restatements to inform their understanding of the state of the law in deciding cases. The content of ALI’s obscure, highly technical tomes shapes (or skews) the subsequent course of  judicial decision-making.

Consumer Contracts Restatement

Now, the recent news on the consumer contracts front has not been good. Just one area where consumers have been harmed:  US courts have handed down several decisions that permitted the wider use of mandatory arbitration – which tends to result in pro-business decisions. The Consumer Financial Protection Bureau (CFPB) enacted a mandatory arbitration ban, to prohibit the use of a pre-dispute arbitration agreement to prevent a consumer from filing or participating in certain class action suits. This remains the most consumer-friendly initiative the agency adopted to date; unfortunately, the CFPB waited until the Trump administration to finalise its rule, and the Republican-controlled Congress and Trump used the Congressional Review Act (CRA) to overturn that rule-making. CRA procedures block the same agency from proposing a further rule on the same topic, so unless Congress steps in and puts the kibosh on mandatory arbitration, there will be no limits in this area for the foreseeable future (see my post, RIP, CFPB Mandatory Arbitration Ban, which includes links to earlier related posts).

The ALI scheduled a final vote for May 21 on its Restatement of the Law of Consumer Contracts – which has been percolating for several years.  In a Credit Slips post entitled ALI Consumer Contracts Restatement-What’s at Stake, Georgetown law professor Adam Levitin zeroed in on the crux of what was wrong with that proposal:

Let me recap why you should care about this project:  it opens the door for businesses to use contract to abuse consumers in basically any way they want.  The Restatement would do away with the idea of a “meeting of the minds,” as the touchstone of contract law for consumer contracts, and allow businesses to impose any terms they want on consumers, even if the consumers are unaware of the terms and haven’t consented to them.

Under the proposed Restatement, a consumer would be bound by any and all of a business’s standard form terms if the consumer (1) assented to a transaction, (2) had notice of the terms, and (3) had a reasonable opportunity to review the terms. In other words, the consumer would not actually have to know or agree to any of the terms to be bound by them.  The Restatement would replace meaningful assent with a legal fiction of notice.  That opens the door to consumers being deprived of all sorts of rights by contract, starting with arbitration, but then going on the privacy rights and continuing to disclaimer of warranties, etc.  If you think I’m being paranoid, go look at Walmart.com’s Terms of Use. Few, if any, of those terms exist when you buy something from Walmart at a storefront, but the cost of larding on an extra term on the Internet is so low, that there’s no reason for a business not to bury its whole Christmas wishlist in linked on-line terms and conditions [Jerri-Lynn here: emphasis added].

The Restatement strangely believes that courts will somehow police abuses of contract through unconscionability and deception, but this presumes (1) that consumers will litigate in the first place, and (2) that courts will stretch these constrained doctrines to prevent the enforcement of not just outrageous terms, but also quotidian unfair terms.  Do I have a nice bridge to sell you in Brooklyn if you think that’s a trade-off that will help consumers….

Now, in a world where most judges are business-friendly, Levitin’s (2) – that courts would interpret  “constrained doctrines”  in a pro-consumer direction – is unlikely. Also, various “legal reform” measures have made his (1) equally unlikely, with consumers lacking the resources and wherewithal to litigate (see Skilling Released from Prison After A Decade of Doing Time: A Reminder of a Not So Distant Past, When the Rule of Law Applied to Corporate CEOs for further background and context). So, if the Restatement had been adopted, it would have been much more likely that consumers would have been bound to terms of contracts to which they had, in theory, notice, but to which they never agreed.

Opposition Organizes

The ALI effort triggered major pushback from pro-consumer forces – including Levitin – as well as some from the pro-business side – a point also reported in this account in The Verge, A contentious legal debate over user agreements has been delayed after Elizabeth Warren called it ‘dangerous’

“One of the interesting facets of this project is that there’s actually opposition both from the consumer advocates side and from the business side,” says Cardozo School of Law professor Matthew Seligman, a non-member who also attended the ALI meeting.

Two dozen state attorneys general sent a letter to the ALI, criticising the proposal:

Our views on the Draft Restatement are informed by our substantial experience – as the chief consumer protection officers of our respective States – dealing with the reality of consumer contracts in the digital age, including consumers’ complete lack of bargaining power over contractual terms, consumers’ relative lack of business sophistication, and the nearly insurmountable barriers most consumers face to seeking redress through litigation.

Our offices receive thousands of complaints from consumers and regularly prosecute cases where businesses use unilaterally-imposed contractual terms to engage in predatory and unscrupulous behavior. While we appreciate ALI’s attempt to provide much-needed clarity to an area of the law that impacts millions of Americans on a daily basis, as discussed below, we believe the Draft Restatement represents an abandonment of important principles of consumer protection in exchange for illusory benefits, and we urge ALI members to reject the Draft Restatement [Jerri-Lynn here: emphasis added].

Senator Elizabeth Warren – on the record as opposing the ALI initiative since 2017 –  also weighed in with a tweet:

Levitin noted in another Credit Slips blog post, Podcast on ALI Consumer Contracts Restatement the different objections raised by consumer and business groups:

I did a podcast for the Consumer Finance Monitor Podcast about the American Law Institute’s Consumer Contracts Restatement project.  It’s not often that you will see me on the same side of an issue as the podcast’s host, Alan Kaplinsky, an attorney at Ballard Spahr who represents financial services firms….

Both consumer and business groups are uncomfortable with the ALI acting as a private legislature, unchecked by any constituency. But the real issue is that for consumer advocates, the Restatement is a bad project because it would bind all consumers to contractual terms that they do not agree with or even know about.

In contrast, the concern for business groups is that the Restatement gives that small subset of consumers who litigate somewhat stronger tools.  These tools aren’t strong enough to change the balance of power, but they are enough to be a pain for businesses, specifically a jettisoning of the parol evidence rule (i.e., it doesn’t matter what the written contract says, the salesman’s representations are admissible evidence) and a contract defense of deception that will apply to some contracts where UDAP would not (again, you’ve gotta worry about the sales rep’s communications).  In other words, the concerns here aren’t symmetrical, so this is not a situation where the Restatement is a moderate neutral position.  It’s bad for all consumers, and it creates more litigation problems for businesses without creating meaningful consumer protections.

What Went Down?

In a post in the Consumer Finance Monitor, ALI’s Restatement of the Law, Consumer Contracts: an ill-conceived and poorly implemented project, Kaplinsky identified what he saw as the essential flaw in the ALI restatement proposal:

I served as an Adviser to the Restatement project when it was launched many years ago and felt then, as I do now, that the concept for the project was ill-conceived because it was approached as a law reform project rather than an objective initiative to restate the common law of consumer contracts.

At the ALI annual meeting, it soon became apparent that it wasn’t going to be possible to push this proposal across the line.  As Kaplinsky wrote in ALI annual meeting ends with uncertain future for Restatement of the Law, Consumer Contracts in the Consumer Finance Monitor:

Although the meeting agenda had assigned a four-hour session for consideration of the Restatement, only the first of the Restatement’s nine sections reached a vote. Section One contains the Restatement’s definitions and describes its scope. ALI’s members voted to approve an amendment to Section One to clarify that to the extent the Uniform Commercial Code [UCC]  applies to a transaction and provides a rule, the Restatement does not apply. While not objectionable, the amendment seems unnecessary since to the extent the Restatement sets forth the common law, common law cannot override statutory law such as the UCC.

The remainder of the session was devoted to debate on Section Two, which deals with how a consumer manifests consent to a transaction. No vote was taken on Section Two. A motion to convert the Restatement into a “principles project” was deferred until the 2020 annual meeting.

So the ALI failed to adopt the proposal. But it didn’t  reject it either.

What Happens Next?

The restatement cannot be considered again until next year’s ALI annual meeting, and it seems no one knows what might happen next. Its current status is one of suspended animation – neither formally dead, perhaps barely alive? Or perhaps not. Whatever the case, considerable behind-the-scenes machinations will unfold during the next several months. As Kaplinsky concluded in his ALI annual meeting post:

One thing is clear, however.  Substantial work will be needed to arrive at a redrafted Restatement that is acceptable to both business and consumer groups.

Kaplinsky’s conclusion implies there is a consensus on where the law of consumer contracts stands. Yet in fact, whether the ALI needs to revive the project is contested.  This area of the law is changing rapidly. As The Verge reports:

Levitin believes there’s “no need” for the project. “When you look at the cases, it’s very useless for giving courts guidance,” he says. “No one’s going to know what’s going to be reasonable or not.”

It’s too soon to say whether a silver spike has pierced the heart of this particular vampire. But at the moment, s/he’s lodged in a coffin somewhere, and a weak sun is shining. And we all know: vampires avoid sunlight. Let’s hope this one remains in that coffin.

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