We Must End “Rule By Contract”

When was the last time you closely read the fine print on a wireless contract, credit card account, or mobile app? Probably never. Yet, we enter into agreements every day. Contracts are impossible to avoid. As consumers, workers, and business owners, we are subject to a dense web of contracts that grant us—or (more often) deprive us of—rights. When purchasing health insurance, opening a checking account, or starting a job, we accept terms that are presented to us by a corporation. Some of these terms are things we might expect to see and are likely to be prominently presented—for example, the monthly premium for health coverage. But others are far more insidious. And we assent to many of these restrictions for things as simple as using a free app or clicking through to a webpage, and as serious as forfeiting our right to switch jobs, to seek legal recourse in court, or be free from arbitrary decision-making. Due to disparities in power and our limited time and capacity to review pages of font size nine, we typically do not agree to these contracts in any meaningful sense of the word, but, as legal scholar Margaret Jane Radin has written, merely acquiesce to them. In other words, the fine print dominates us all.

Yet, for the last century, and especially in recent decades, legal doctrine and education have painted a picture quainter than the domination model. The contract is characterized as a realm of freedom and choice, as if we all approached transactions with the power possessed by large and sophisticated corporations. Judges routinely decide cases based on the assumption that a critical mass of consumers, workers, and small firms review terms and shop around for a better deal. Take for instance Judge Frank Easterbrook, the prominent federal appellate judge and leading proponent of making policy based on neoclassical economic theory. Articulating the prevailing view of contract, Judge Easterbrook has described contractual terms as only one feature of a product, akin to its price or quality. Accordingly, he cautioned, courts should avoid depriving consumers of the right to choose the fine print that works best for them. The underlying belief there is that firms compete against each other on every level—including on contractual terms—to win over customers or workers.

With these assumptions as their foundation, courts generally resolve disputes by defaulting to the contracts between the corporation and the customer, or the employer and the worker. Rarely do they decline to enforce them, even under the most unfair of circumstances. In a case concerning a defective computer ordered by phone, Judge Easterbrook theorized how we can protect ourselves against contractual overreach even when we can’t see the terms in advance:

Shoppers have three principal ways to discover these things. First, they can ask the vendor to send a copy before deciding whether to buy. . . . Concealment would be bad for business, scaring some customers away and leading to excess returns from others. Second, shoppers can consult public sources (computer magazines, the websites of vendors) that may contain this information. Third, they may inspect the documents after the product’s delivery. . . . By keeping the computer beyond 30 days, the plaintiffs accepted Gateway’s offer, including the arbitration clause.

Of course, the reality of contracts is very different from this ideal of choice and freedom. The very premises of the mainstream, the “free market” and “private sector,” are myths. The market is a product of rules made and enforced by the state. Private property, the foundation of a capitalist economy, is itself an institution created and protected by the state. The ownership of land and attached structures depends on the state first granting property owners particular rights and delegating to them its coercive power. These same owners can then stop others from interfering with their “quiet enjoyment” of the land by calling on the police, or rely on the government to enforce the private bargains they made through contract. As the Supreme Court made clear as it struck down racially-restrictive housing covenants in a 1948 ruling, these private efforts to maintain racial segregation in housing “are cases in which the States have made available to such individuals the full coercive power of government to deny to petitioners, on the grounds of race or color, the enjoyment of property rights in premises which petitioners are willing and financially able to acquire and which the grantors are willing to sell.” Succinctly put, private agreements require public power.

In a democratic society, this should lead to a better story than our current lot, in which contracts are made against a background of deep inequality. Indeed, employers, insurers, wireless carriers and other corporations often operate in highly concentrated markets and offer essentials—work and vital goods and services—that we need to survive and fully participate in society. This gives them broad power to impose their preferred terms on us. The English jurist Sir Henry Maine famously described the transition from “status to contract” as an emancipatory part of the historical transition from feudalism to capitalism, but too often, the contract relationship recreates relationships of domination in new garb. This is precisely why the public should have discretion over how and when governmental power should be exercised—and we should demand that it be exercised in support of the common good. It is power that Congress already has, and should wield, by banning abusive contractual provisions.

A ban may sound extreme, but so is accepting the status quo. Even in sectors in which firms face competition, business rivalry cannot be trusted to make contractual terms fairer. With limits on their time and sometimes on their cognitive capacity, the least empowered player in the transaction will tend to focus on the most obvious terms: price and product quality, perks, wages, or benefits. The research shows that consumers typically do not consider, let alone review, additional conditions packaged in wordy legal jargon. In a 2015 study of arbitration in consumer finance contracts, the Consumer Financial Protection Bureau (CFPB) found that consumers shopping for credit cards looked at things such as rewards, fees, and interest rates. The study found that these same customers were either unaware of, or did not consider, whether the offer included a mandatory arbitration clause that would deny them their day in court in the event of a legal dispute. This failure to shop around on terms is neither negligent nor irresponsible. On the contrary, it is highly rational. Just to review the privacy policies of online services, you and I, and everyone else, would have to spend an average 201 hours per year. Reading all the fine print would leave time for little else. The corporations offering these oppressive terms know this. Why should they compete to improve clauses that benefit them, when we will not notice until it is too late?

The practical effect of this power imbalance is that corporations now have the power to regulate our lives through contract. It amounts to an exercise of private regulatory power, one that should frighten us. Consider three important ways in which corporations have already shifted rights from us to them: by restricting our right to find new work, our right to protect ourselves in court, and our right to be free from arbitrary decision-making in general.

Already, non-compete clauses apply to approximately 30 million workers on American soil. Non-competes allow the employer to prohibit current and former employees from working at a competing firm, or in the same industry, in a specified area for a period after leaving their employment. Employers have imposed non-competes on, among others, camp counselors, fast food workers, journalists, tech professionals, and yoga instructors. Non-competes can apply to any profession and can even bar people from accepting jobs in other parts of the world. The behemoth Amazon previously required warehouse workers to sign a non-compete clause, effective for 18 months, that prohibited them from “engag[ing] in or support[ing] the development, manufacture, marketing, or sale of any product or service that competes with any product or service sold, offered, or otherwise provided by Amazon, or intended to be sold, offered, or otherwise provided by Amazon in the future.”

Consider for a moment the breadth of activities covered by a company that sells just about any product known to humanity. Under the terms of Amazon’s non-compete clause, a warehouse worker would be barred from working at any retailer, consumer goods manufacturer, or other business that competes with one of Amazon’s many business lines in much of the world after leaving. To escape the reach of such a contract clause might require them to enter an entirely new area of work, relocate potentially hundreds or thousands of miles away, or accept unemployment until the non-compete expires. Given these unpalatable options and impingements on their mobility, it is no wonder that workers often “choose” to remain in abusive or unsafe work environments.

Mandatory arbitration clauses are another way in which corporations have robbed Americans of the right to pursue legal claims in court by shunting them in front of an arbitrator who does not have to meet public standards of impartiality. These clauses are found in contracts for practically every product, service, and increasingly for many jobs. Today, more workers are bound by mandatory arbitration than are working under a collective bargaining agreement. As this magazine has covered before, arbitration clauses frequently prohibit class action lawsuits with the blessing of the Supreme Court, which has reinterpreted the Federal Arbitration Act of 1925 to permit corporations to enforce class action waivers.

This loss may be mandatory arbitration’s most pernicious effect. Class actions are an effective way to protect the public. No one will sue over an improper charge on their wireless bill because legal fees would swamp any recovery. Judge Richard Posner captured this point memorably in a 2004 opinion: “[O]nly a lunatic or a fanatic sues for $30.” The CFPB uncovered compelling evidence showing that in six major financial markets constituting tens of millions of consumers, only four customers sought and recovered amounts less than $1,000 in individual arbitration proceedings between 2010-2012. Class action lawsuits aggregate thousands or millions of small claims and convert an uneconomical individual lawsuit into a viable collective action. They are especially important at a time when public agencies are underfunded and led by officials strongly inclined to protect industry. Their disappearance has given corporations license to steal small amounts from many people—petty theft on a large scale.

Lastly, unilateral modification clauses grant corporations practically unchecked power over customers and workers. Two scholars have described these terms as “authoriz[ing] the dominant party to make any change it desires, adding whatever term it desires.” Through these clauses, corporations give themselves power to change the price of a service, terms of work, or contractual provisions when they see fit. Although courts have established some formal restrictions on unilateral modification clauses, these limits have little practical effect. Companies continue to routinely include unilateral modification clauses in bills and periodic statements and assert that no response amounts to acceptance of the new terms.

Consider Subway franchise locations, many of which are run by immigrants who have limited education, and are simply trying to establish a foothold and security in American society. Becoming a franchise requires accepting Subway’s 600-page franchising agreement. Buried in there somewhere is a unilateral modification clause that gives Subway the right to “revise its rules ‘at any time during the term of your Franchise Agreement under any condition and to any extent.’” This means that when Subway exercises its unilateral modification power in arbitrary ways, after the franchisee has invested hundreds of thousands of dollars over many years, the latter may face a compromising choice: Either accept Subway’s imperious rule and give into what could amount to extortion, or forsake the money and sweat invested in the place.

It is clear that contract law, and the abusive practices it has germinated, is in dire need of an ideological overhaul. The privately-shaped law that currently governs consumers, workers, and small businesses is the product of radical inequality and defined by domination and dispossession of fundamental rights. It is time to reject Frank Easterbrook’s buyer beware rule that “[a] contract need not be read to be effective; people who accept take the risk that the unread terms may in retrospect prove unwelcome.” Nor should contract law continue deferring to “the market,” and courts to police abuses. This notion that we must devote our lives to reading and making decisions based on the fine print or otherwise accept the unfair consequences is absurd. If contract law professors and civil procedure professors aren’t expected to do that, nor should we.

While piecemeal reforms, like banning mandatory arbitration in mortgage contracts (as Congress did in the Dodd-Frank Act), are valuable, they are woefully inadequate for the magnitude of the problem. Congress should ban abusive contracts, starting with non-compete clauses, arbitration clauses, class action waivers, and unilateral modification clauses, and grant authority to a federal regulator to identify and prohibit abusive contracts in the future. But these are just illustrative examples. Any legislative list is sure to be incomplete and cannot anticipate all future “innovations” in fine print. Soon enough, corporations and their ever-creative lawyers will soon develop new contracts to deprive consumers, workers, and small business owners of their constitutional and statutory rights. To guard against this threat, Congress should also grant a federal regulator the authority to identify and ban novel contracts of abuse through adjudication and rule making. Striking decisively and systematically is the only way Congress can finally end this regime of private rule.

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