At the American Law Institute’s annual meeting next Tuesday in Washington, D.C., members will be voting on whether to approve a Tentative Draft of the Restatement of the Law, Consumer Contracts (the “Restatement”). I had the privilege of participating as a panelist on May 6 in a panel discussion about the Restatement at the Thirteenth Annual Judicial Symposium on Civil Justice Issues in Arlington, Virginia, sponsored by the Law & Economics Center of George Mason University’s Antonin Scalia Law School. Other panelists included Deepak Gupta, a renowned consumer advocate, and Omri Ben-Shahar, one of the Restatement’s Reporters. History was made at the Symposium. For the first time I can recall, Deepak and I agreed on something – namely, that the Restatement was bad for consumers and businesses and should be voted down by the ALI’s members.
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. I do not believe that ALI’s reporters have made the case for creating a special Restatement devoted to select issues arising in the business to consumer (B to C) context instead of amending the Restatement (Second) of Contracts or creating a Restatement (Third) of Contracts. In addition, I have never liked the idea of carving out special rules for B to C contracts as opposed to B to B contracts. While the rationale for doing so is the adhesive nature of B to C contracts, similar asymmetry of power exists with respect to many B to B contracts, particularly when one of the parties is a small business. Also, my belief from the outset was that the Reporters did not intend to restate the common law, but rather, as is demonstrated throughout the draft Restatement’s Illustrations and Reporters’ Notes, to engraft into the Restatement federal and state consumer protection statutes, like UDAP and UDAAP.
I also believe that the project was poorly implemented. While some of the Restatement’s “black letter” statements are unobjectionable, my concerns are principally with the Illustrations and Reporters’ Notes. As is often the case, the devil is in the details. Among my key concerns are the following:
- Several sections collectively override what I always thought was a sacrosanct common law principle – namely that “merger” or “integration” clauses are binding. Those clauses state that there are no affirmations of fact, promises, or agreements between the parties except those found in the writing. The Reporters’ Notes and Illustrations state: “Because consumers are not likely to notice, read, or understand the effect of such merger clauses, they do not control the conclusion of whether standard contract terms constitute a partially or completely integrated agreement, and thus do not preclude a finding that the standard contract terms do not constitute the parties final expression of a particular matter.”
- Section 3, which deals with the modification of standard contract terms, states in subsection (c): “A modification of a standard contract term in a consumer contract is enforceable only if it is proposed in good faith…” The Reporters’ Notes describe Section 3(c) as providing stronger protection for consumers by targeting the substance of the modified terms, rather than the modification process itself. The Reporters cite Badie v. Bank of America, 67 Cal. App. 4th 779 (1998), a California Court of Appeals decision that, according to the Reporters, found that good faith only allowed the bank to make modifications to the consumer’s credit card agreement that were within the reasonable contemplation of the parties at the time of the initial contract despite the agreement’s broad change-in-terms provision. The court used this rationale to not allow the bank to add an arbitration provision to the agreement. Most courts have distinguished Badie on the basis that other card issuers gave cardholders the right to opt-out. The ALI Reporters have failed to note this important distinction and instead have made it appear that certain changes can never be made to an open-end agreement if the subject was not addressed in the original agreement.
- In Section 5, which deals with unconscionability, one of the illustrations of a substantively unconscionable contract term is a class-action waiver if the waiver unreasonably limits consumers’ ability to enforce low-stakes legal rights. The ALI Reporters have failed to consider the possibility of recovering restitution through government enforcement as well as the costs and ineffectiveness of the class action device and its potential impact on price and access.
- In Section 6(a), “a contract or a term adopted as a result of a deceptive act or practice by the business is voidable by the consumer….” Section 6(b) defines “deceptive” as (1) making a material affirmation of fact or promise that is contradicted by or unreasonably limits the standard contract terms; (2) obscuring a charge to be paid by the consumer in the overall cost to the consumer. This is yet another example where the Restatement imports state and federal UDAP statutes into the Restatement rather than looking to the common law. “Deception” is alien to the common law. “Fraud” is compatible with the common law. The Reporters understood that proving “fraud” at common law requires scienter and reliance, two elements which are not part of a deception case.
- I also take issue with several of the Illustrations and Reporters Notes dealing with price unconscionability. The Reporters express agreement with another controversial California opinion, Perdue v. Crocker Nat’l Bank, 38 Cal.3d 913 (1985), where the Court held that a $5 overdraft fee on a checking account is unconscionable. Yet another example is the discussion of payday loans that are rolled-over on multiple occasions and the use of teaser rates on credit cards. In both situations, the Reporters concluded that price unconscionability might exist because consumers may not realize the total interest that they will pay if they elect to do multiple rollovers of payday loans or fail to pay the balance owed before the teaser rate expires.
My colleague Fred Miller, who is special counsel in Ballard Spahr’s Consumer Financial Services Group, has written two articles about the Restatement in which he criticizes the Restatement for going beyond the common law as articulated in court decisions and anticipating future trends as perceived by ALI. A leading authority on Uniform Commercial Code matters, Fred provides specific examples of how the Restatement goes beyond the common law and encroaches on the legislative function. Fred’s articles are available here and here.
Consumer advocates are also opposed to the Restatement. Here’s a link to a podcast released on Tuesday of this week in which I interview Professor Adam Levitin of Georgetown University Law School about the Restatement. Adam, like Deepak, for once was on the same page as me. While Adam and I often had different reasons for opposing the Restatement, we agreed with one another that the Restatement should be voted down. Adam has also published a blog post about the podcast in which he discusses why both consumer groups and business groups are opposed to the Restatement.