Empty promises

Southern California Law Review

Volumn 84, Issue 1, 2010, Pages 1-45

  Oren, Bar Gill ^a   Kevin, Davis ^a  

^a NEW YORK UNIVERSITY SCHOOL OF LAW   (United States)

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EID: 79951967887     PISSN: 00383910     EISSN: None     Source Type: Journal    
DOI: None     Document Type: Article

References (274)

1. See infra notes 56-57 and accompanying text.
2. See infra Part II. B.
3. The relevant literature is vast. For an excellent introduction to the literature, see MICHAEL J. TREBILCOCK, THE LIMITS OF FREEDOM OF CONTRACT (1993). Early contributions include KARL N. LLEWELLYN, THE COMMON LAW TRADITION: DECIDING APPEALS 362-71 (1960);
4. and Todd D. Rakoff, Contracts of Adhesion: An Essay in Reconstruction, 96 HARV. L. REV. 1173 (1983).
5. More recent contributions include Oren Bar-Gill, Exchange, The Behavioral Economics of Consumer Contracts, 92 MINN. L. REV. 749 (2008);
6. and Russell Korobkin, Bounded Rationality, Standard Form Contracts, and Unconscionability, 70 U. CHI. L. REV. 1203 (2003).
7. The small body of recent literature that is on point includes Peter A. Alces & Michael M. Greenfield, They Can Do What!? Limitations on the Use of Change-of-Terms Clauses, 26 GA. ST. U. L. REV. 1099 (2010);
8. Peter A. Alces & Jason M. Hopkins, Carrying a Good Joke Too Far, 83 CHI.-KENT L. REV. 879 (2008);
9. Curtis Bridgeman & Karen Sandrik, Bullshit Promises, 76 TENN. L. REV. 379 (2009);
10. David Horton, The Shadow Terms: Contract Procedure and Unilateral Amendments, 57 UCLA L. REV. 605 (2010);
11. Eric Andrew Horwitz, An Analysis of Change-of-Terms Provisions as Used in Consumer Service Contracts of Adhesion, 15 U. MIAMI Bus. L. REV. 75 (2006);
12. and Daniel Watkins, Terms Subject to Change: Assent and Unconscionability in Contracts that Contemplate Amendment, 31 CARDOZO L. REV. 545 (2009). All of these articles provide detailed descriptions of how these contracts are treated under current law and propose legislative or judicial responses. Most of these articles offer little analysis of the economic implications, either positive or negative, of permitting unilateral modifications of consumer contracts. David Horton discusses some of the negative economic implications but his analysis is limited to modifications of procedural terms.
13. See Horton, supra. In addition, as we discuss infra in Part IV, the responses they propose are unsatisfactory in various respects. Hugh Collins discusses all of these issues, including the economic ones, but his discussion is limited to English law and does not focus on the special concerns that arise in the consumer setting.
14. See Hugh Collins, Discretionary Powers in Contracts, in IMPLICIT DIMENSIONS OF CONTRACT: DISCRETE, RELATIONAL AND NETWORK CONTRACTS 219 (David Campbell, Hugh Collins & John Wightman eds., 2003). We also do not believe that the judicial solution he favors is adequate for the contracts in which we are interested.
15. See id. Our focus on how contractual relationships evolve over time is presaged by the literature on relational contracts. That literature, however, either focuses on business-to-business contracts or examines changes in legal rights that are permitted by open-ended terms of initial agreements or are accomplished by mechanisms other than unilateral modification, including arbitral awards and mutual assent.
16. See, e.g., Charles J. Goetz & Robert. E. Scott, Principles of Relational Contracts, 67 VA. L. REV. 1089 (1981) (analyzing contracts in which the parties are incapable of reducing important terms of the arrangement to well-defined obligations);
17. Ronaldo Porto Macedo Jr., Relational Consumer Contracts: New Challenges for Brazilian Consumer Law, 12 SOC. & LEGAL STUD. 27, 31 (2003) (describing relational contracts as those that establish "institutional processes" for adjustment);
18. Ian R. Macneil, Contracts: Adjustment of Long-Term Economic Relations Under Classical, Neoclassical, and Relational Contract Law, 72 Nw. U. L. REV. 854, 865, 868, 886-87 (1978) (noting in passing the use of "one-party control of terms" in certain consumer transactions, but focusing on flexibility in interfirm and intrafirm contracts).
19. See infra note 80 and accompanying text.
20. Contract law recognizes several ways to modify or discharge a contractual duty with the assent of the person to whom the duty is owed ("the obligee"). See RESTATEMENT (SECOND) OF CONTRACTS § 89 & ch. 12 introductory note (1981). The language of section 89 is ambiguous on this point, but the accompanying commentary makes it clear that only situations involving assent of the obligee-or, more typically, express agreement between the parties-are contemplated. The Restatement (Second) of Contracts makes no provision for modifying a contractual duty based solely on the assent of the person who owes the duty (the "obligor"). To the contrary, it suggests that no contractual duty will arise if an obligor attempts to make its performance entirely optional by reserving the right to make such modifications.
21. See id. §§ 1,2 cmt. e (defining a contract as a kind of "promise" and suggesting that a statement that makes performance entirely optional will not constitute a "promise"). The term "contract modification" is also often used to describe the imposition of new duties on one or both parties. The conventional view is that creation of a contractual, duty requires a promise from the obligee, which also implies assent.
22. See id. §§ 1, 4 (defining a contract as a binding promise and a promise as a manifestation of assent). Thus, a modification that imposes new duties upon a consumer will also require the consumer's assent. The statement in the text has to be qualified in one respect. In principle, a modification that merely imposes new duties on the seller will not require the assent of the consumer.
23. See id. § 89 & ch. 4, topic 2, introductory note (suggesting that mutual assent is not required to make a promise to modify a duty under an executory contract binding). We are not concerned with such modifications in this paper.
24. Purists will object, that in this scenario the contract is not being modified but rather is being altered or changed pursuant to a discretionary power reserved in the original contract.
25. See Watkins, supra note 4, at. 550-53 (distinguishing alterations from modifications).
26. In what follows we refer to both types of changes as "modifications. " We do this not only for the sake of convenience, but also to emphasize that in consumer settings changes of terms pursuant to discretionary powers often, serve as functional equivalents of unilateral modifications.
27. See Credit Card Accountability Responsibility and Disclosure Act of 2009, Pub. L. No. 111-24, 123 Stat. 1734 (codified in scattered sections of 15 U.S.C.);
28. Press Release, Office of the Press Secretary, The White House, Fact Sheet: Reforms to Protect American Credit. Card Holders: President Obama Signs Credit Card Accountability, Responsibility, and Disclosure Act (May 22, 2009), available at http://www.whitehouse.gov/the-press-office/Fact-Sheet-Reforms-to-. Protect-A.merican-Credit-CardHolders.
29. See Brian Grow et al., Credit Cards: Behind the Consumer Rage, Bus. WK., May 11, 2009, at. 48.
30. See infra Part III.
31. See Credit Card Accountability Responsibility and Disclosure Act.
32. See S. 414, 111th. Cong. § 172 (as reported by S. Comm. on Banking, Hous. & Urban. Affairs, Apr. 29, 2009), available at. http://frwebgate. access.gpo.gov/cgi-bin/getdoc.cgi?dbname-111-cong-bills&docid=f: s414rs.txt.pdf.
33. See Credit. Card Accountability Responsibility and Disclosure Act.
34. See infra Part IV.A.
35. See infra Part IV.B.
36. See infra notes 97-106 and accompanying text.
37. We first introduced the CAB idea in Oren Bar-Gill & Kevin Davis, Flexible, Responsible Credit-Card Reform, BUS. WK., May 5, 2009, http://www.businessweek.com/bwdaily/dnflash/content/ may2009/db2009055-207548. htm.
38. See supra note 6 and accompanying text.
39. See supra note 6 and accompanying text.
40. See supra note 6 and accompanying text.
41. See supra note 3 and accompanying text.
42. The distinction between a modification and a new contract can be hard to draw. For example, the relationship between a credit card issuer and a cardholder can be viewed as a series of short-term contracts, especially if the issuer, in its term sheet, reserves the right to terminate the relationship at any time for any reason. Under this interpretation, a term, change is not a modification of an existing contract, but rather an offer to enter into a new short-term contract on different terms.
43. See supra note 6 and accompanying text.
44. See RESTATEMENT (SECOND) OF CONTRACTS § 69 (1981) (describing the only cases in which silence and inaction operate as an acceptance). There are, however, exceptions to the affirmative assent, rule. In particular, if the seller has a right to terminate the contract and the consumer is aware that the seller is only continuing to perform under the expectation that the modified terms will apply, then continued use of the product or service by the consumer might constitute assent.
45. See id. § 69(1)(a). In. fact, under these circumstances, the seller's modification may be construed as an offer to renew the contract, only with different terms-an offer that consumers then accept by performing their obligations under the contract (for example, using a credit card to make purchases and paying the issuer at least a minimum amount each month).
46. Badie v. Bank of Am., 79 Cal. Rptr. 2d 273, 277 (Ct. App. 1998) (quoting the "Change of Terms" provision in customer agreements for Bank of America-issued Visa and MasterCard credit cards).
47. See infra note 108 and accompanying text.
48. See Watkins, supra note 4, at. 551.
49. The Restatement (Second) of Contracts endorses this theory. RESTATEMENT (SECOND) OF CONTRACTS § 69(1 )(c) & cmt. d ("Explicit statement by the offeree, usage of trade, or a course of dealing between the parties may give the offeror reason to understand that silence will constitute acceptance.").
50. See, e.g., Stinger v. Chase Bank, USA, NA., 265 F. App'x 224, 226-27 (5th Cir. 2008) (noting the argument that a cardholder's failure to object in writing constituted an intent to be bound to unilateral changes in an arbitration clause);
51. Mattingly v. Hughes Elees. Corp., 8.10 A.2d 498, 504 (Md. Ct. Spec. App. 2002) (discussing DIRECTV's claim that the plaintiff's continued use of its service constituted assent to a new arbitration clause);
52. Citibank (S.D.), NA. v. Wilson, 160 S.W.3d 810, 811-12 (Mo. Ct. App. 2005) ("Citibank argues that South Dakota law governs its contractual relationship with Wilson and contends that... it could unilaterally change the terms of their contract and Wilson would not have to expressly assent... for there to be a valid, binding agreement.").
53. DEL. CODE ANN. tit. 5, § 952 (2001).
54. See also, e.g., Edelist v. MBNA Am. Bank, 790 A.2d 1249, 1257-58 (Del. Super. Ct. 2001) (finding that "Delaware statutory law controlling [the user's] account permits [the issuer] to unilaterally amend agreements by notice and an opt-out provision").
55. UNIF. CONSUMER CREDIT CODE § 3.205 (1974). As of January 1, 2010, eleven states and Guam had adopted versions of either the 1968 or 1974 Uniform Consumer Credit Codes.
56. See Legal Info. Inst., Cornell Univ. Law Sch., Consumer Credit: An Overview (2010), http://topics.law. cornell.edu/wex/consumer-cred.it/. It is north, noting, however, that state legislation pertaining to changes to credit card agreements is supplemented by Regulation Z under the Truth in Lending Act, which now requires issuers to give a minimum of forty-five days notice of many changes.
57. See Regulation Z, 12 C.F.R. § 226.9(c)(2) (2010).
58. Empirical evidence suggests that switching costs are substantial. See Joseph. Farrell & Paul Klemperer, Coordination and Lock-In: Competition with Switching Costs and Network Effects, in 3 HANDBOOK OF INDUSTRIAL ORGANIZATION 1967, 1980-81 (Mark Armstrong & Robert H. Porter eds., 2007), available at http://papers.ssrn.com/sol3/papers.cfm?abstract-id=917785.
59. In the credit card market, average switching costs were estimated to be S150. See Haiyan Shui & Lawrence M. Ausubel, Time Inconsistency in the Credit Card Market (May 3, 2004) (unpublished working paper at 1), available at http://ssrn.com/abstract=586622;
60. David B. Gross & Nicholas S. Souleles, Do Liquidity Constraints and Interest Rates Matter for Consumer Behavior? Evidence from Credit Card Data, 117 Q.J. ECON. 149, 171, 179 (2002) (finding only limited switching, which implies substantial switching costs).
61. In the bank loan market, one study estimated switching costs equal, to 4.12 percent of the customer's loan. See Moshe Kim, Doron Kliger & Bent Vale, Estimating Switching Costs: The Case of Banking, 12 J. FIN. INTERMEDIATION 25, 44 (2003) (analyzing data from the Norwegian bank, loan market).
62. In the cell phone market, switching costs approximately equal the price of an average phone. See Oz Shy, A Quick-and-Easy Method for Estimating Switching Costs, 20 INT'L J. INDUS. ORG. 71, 78-79 (2002) (analyzing data from the Israeli cell phone market).
63. For more discussion of switching costs in the cellular phone market, see Harald Gruber & Frank Verboven, The Evolution of Markets Under Entry and Standards Regulation-The Case of Global Mobile Telecommunications, 19 INT'L J. INDUS. ORG. 1189 (2001). Evidence of substantial switching costs has been found in the (land) phone services market.
64. See Christopher R. Knittel, Interstate Long Distance Rates: Search Costs, Switching Costs, and Market Power, 12 REV. INDUS. ORG. 519, 532-34 (1997);
65. V. Brian Viard, Do Switching Costs Make Markets More or Less Competitive?: The Case of 800-Number Portability (Stanford Univ. Graduate Sch. of Bus., Working Paper No. 1773R2, 2005), available at http://ssrn.com/ abstract=371921.
66. And evidence of substantial switching costs was found in the electricity market. See Michael Waterson, The Role of Consumers in Competition and Competition Policy, 21 INT'L J. INDUS. ORG. 129, 137-141 (2003);
67. Chris M. Wilson & Catherine Waddams Price, Do Consumers Switch to the Best Supplier? (CCP Working Paper No. 07-6, 2007), available at http://ssrn.com/abstract=982530 (identifying consumers in the U.K. electricity market who did not switch from one provider to another despite substantial available savings).
68. See infra Part II. B.
69. E.g., Stone v. Golden Wexler & Sarnese, P.C., 341 F. Supp. 2d 189, 196-98 (E.D.N.Y. 2004);
70. Badie v. Bank of Am., 79 Cal. Rptr. 2d 273, 280-85 (Ct. App. 1998).
71. See, e.g., Ingle v. Circuit City Stores, Inc., 328 F.3d 1165, 1179 (9th Cir. 2003) ("[W]e conclude that the provision affording Circuit City the unilateral power to terminate or modify the contract is substantively unconscionable.");
72. Discover Bank v. Shea, 827 A.2d 358, 363 (N.J. Super. Ct. Law Div. 2001) (holding that under New Jersey law, the Delaware law authorizing unilateral amendments violates public policy and so cannot be given effect).
73. See, e.g., Bank One, N.A. v. Coates, 125 F. Supp. 2d 819, 836 (S.D. Miss. 2001) (upholding a unilateral addition of a binding arbitration provision);
74. Hutcherson v. Sears Roebuck & Co., 793 N.E.2d 886, 900 (Ill. App. Ct. 2003) (same);
75. Joseph v. M.B.N.A. Am. Bank, N.A., 775 N.E.2d 550, 553-54 (Ohio Ct. App. 2002) (same).
76. See Alces & Greenfield, supra note 4, at 1101-06.
77. See CardWeb.com, Card Changes (June 24, 2009), https://www.cardweb.com/ cardflash/ 2009/06/24/.
78. See Credit Card Accountability Responsibility and Disclosure Act of 2009, Pub. L. No. 111-24, 123 Stat. 1734 (codified in scattered sections of 15 U.S.C.). As a result, credit card issuers raced to modify their contracts-increasing rates, adding fees, and cutting credit limits-before the CARD Act's forty-five-day notice requirement for term changes took effect.
79. See Ron Lieber, Maybe It's Time to Change Credit Cards, N.Y. TIMES, Aug. 22, 2009, at B1.
80. See 155 CONG. REC. S2149-50 (daily ed. Feb. 11, 2009) (statement of Sen. Dodd).
81. See Modernizing Consumer Protection in the Financial Regulatory System: Strengthening Credit Card Protections: Hearing Before the S. Comm. on Banking, Housing, and Urban Affairs, 111th Cong. 199 (2009) [hereinafter Modernizing Consumer Protection Hearing] (statement of Travis B. Plunkett, Legis. Director).
82. See Consumer Debt: Are Credit Cards Bankrupting Americans?: Hearing Before the Subcomm. on Commercial and Admin. Law of the H. Comm. on the Judiciary, 111th Cong. 42 (2009) (statement of Edmund Mierzwinski, Consumer Program Director, U.S. Public Interest Research Group) [hereinafter Consumer Debt Hearing].
83. See The Credit Cardholders ' Bill of Rights Act of 2009 and The Consumer Overdraft Protection Fair Practices Act of 2009: Hearing on H.R. 627 and H.R. 1456 Before the Subcomm. on Financial Institutions and Consumer Credit of the H. Comm. on Financial Servs., 111th Cong. 205-07 (2009) (statement of Montrice Godard Yakimov, Managing Director for Compliance & Consumer Protection, Office of Thrift Supervision) [hereinafter CARD Act and Overdraft Protection Hearing];
84. Modernizing Consumer Protection Hearing, supra note 40, at 61-62 (statement of Adam J. Levitin, Associate Professor of Law, Georgetown University Law Center);
85. id. at 102-05 (statement of James C. Sturdevant, Principal, Sturdevant Law Finn);
86. id. at 196-97 (statement of Travis B. Plunkett);
87. 155 CONG. REC. S2149 (daily ed. Feb. 11, 2009) (statement of Sen. Dodd).
88. See, e.g., CARD Act and Overdraft Protection Hearing, supra note 42, at 93-95 (statement of Kenneth J. Clayton);
89. Modernizing Consumer Protection Hearing, supra note 40, at 83-85 (statement of Kenneth J. Clayton, Senior Vice President and General Counsel, Card Policy Council, American Bankers Association);
90. id. at. 110-13 (statement of Linda Echard, President and CEO, ICBA Bancard);
91. id. at 130-31 (statement of Oliver I. Ireland);
92. JONATHAN M. ORSZAG & SUSAN H. MANNING, AN ECONOMIC ASSESSMENT OF REGULATING CREDIT CARD FEES AND INTEREST RATES 9-15 (2007), available at http://www.aba.com/aba/documents/press/regulating-creditcard-fees-interest- rates 92507.pdf.
93. See Modernizing Consumer Protection Hearing, supra note 40, at. 60 (statement of Adam J. Levitin).
94. See, e.g., ORSZAG & MANNING, supra note 43, at 11-12.
95. See Modernizing Consumer Protection Hearing, supra note 40, at 61 (statement of Adam J. Levitin).
96. See, e.g., Homa v. Am. Express Co., 558 F.3d 225 (3d Cir. 2009);
97. Hoffman v. Citibank (S.D.), NA., 546 F.3d 1078 (9th Cir. 2008) (per curiam);
98. Eaves-Leanos v. Assurant, Inc., No. 3:07-CV18-S, 2008 U.S. Dist. LEXIS 3265.1 (W.D. Ky. Apr. 18, 2008);
99. Dumanis v. Citibank (S.D.), N.A., No. 07-CV-6070 (CJS), 2007 U.S. Dist. LEXIS 81586 (W.D.N.Y. Oct. 31, 2007);
100. Stone v. Golden Wexler & Samese, P.C., 341 F. Supp. 2d 189 (E.D.N.Y. 2004);
101. Perry v. FleetBoston Fin. Corp., No. 04-507, 2004 U.S. Dist. LEXIS 12616 (E.D. Pa. July 6, 2004);
102. Beneficial Nat'l Bank, U.S.A. v. Payton, 214 F. Supp. 2d 679 (S.D. Miss. 2001);
103. Bank One, NA. v. Coates, 125 F. Supp. 2d 819 (S.D. Miss. 2001);
104. Marsh v. First USA Bank, N.A.., 103 F. Supp. 2d 909 (N.D. Tex. 2000);
105. Discover Bank v. Superior Court, 113 P.3d 1100 (Cal. 2005);
106. Szetela v. Discover Bank, 118 Cal. Rptr. 2d 862 (Ct. App. 2002);
107. Hutcherson v. Sears Roebuck & Co., 793 N.E.2d 886 (111. App. Ct. 2003);
108. Discover Bank v. Shea, 827 A.2d 358 (N.J. Super. Ct. Law Div. 2001);
109. Johnson v. Chase Manhattan Bank USA, N.A., 784 N.Y.S.2d 921 (Sup. Ct. 2004);
110. Joseph v. M.B.N.A. Am. Bank, NA., 775 N.E.2d 550 (Ohio Ct. App. 2002);
111. Horton, supra note 4 (discussing the frequency with which contract drafters in various markets unilaterally amend procedural terms).
112. See, e.g., Beneficial Nat'l Bank U.S.A., 214 F. Supp. 2d at 690-91 (rejecting a cardholder's bias argument);
113. Bank One, N.A., 125 F. Supp. 2d at. 835-36 (same);
114. Marsh, 103 F. Supp. 2d at 924-26 (same);
115. Complaint, Swanson v. Nat'l Arbitration Forum, Inc., No. 27-CV-09-18550 (Minn. Dist. Ct. July 14, 2009), 2009 WL 2029918;
116. Consent Judgment, Swanson v. Nat'l Arbitration Forum, Inc., No. 27-CV-09-18550 (Minn. Dist. Ct. July 28, 2009).
117. This problem has been recognized by several courts. See, e.g., Hoffman, 546 F.3d at 1083 (holding that class arbitration waivers may effectively operate as exculpatory clauses);
118. Discover Bank, 113 P.3d at 1109 (same);
119. Szetela, 118 Cal. Rptr. 2d at 868 ("[A class arbitration waiver] serves as a disincentive for Discover to avoid the type of conduct that might lead to class action litigation in the first place.... Discover has essentially granted itself a license to push the boundaries of good business practices to their furthest limits....");
120. Shea, 827 A.2d at. 367 ("By depriving cardmembers of any forum in which they could reasonably vindicate their rights, Discover seeks to leave itself in a position where it could completely avoid accountability.").
121. And, recently, one major issuer has decided to backtrack and remove the mandatory arbitration provision from its contracts. See Jonathan Stempel, Update 3-Bank of America Ends Arbitration of Card Disputes, REUTERS, Aug. 13, 2009, http://www.reuters.com/article/marketsNews/idINN1326119520090813?rpc=44.
122. Litman v. Cellco P'ship, No. 07-CV-4886(FLW), 2008 U.S. Dist. LEXIS 87570, at. *3 (D.N.J. Sept. 29, 2008). Another cell phone service provider, Powertel, unilaterally modified its contract using a hill stuffer, adding a class arbitration waiver.
123. Powertel, Inc. v. Bexley, 743 So. 2d 570, 572, 576 (Fla. Dist. Ct. App. 1999). This modification was deemed unconscionable.
124. Id. at 577.
125. See Verizon Wireless, Customer Agreement (May 13, 2010), http://www.verizon wireless.com/b2c/globalText?text.Name=CUSTOMER- AGREEMENT&jspName-footer/customerAgr eement.jsp.
126. Christopher Price, AT&T Generally Unaware of New Contract Changes, Refuses to Waive Termination Fees, PHONENEWS.COM, May 3, 2009, http://www.phonenews.com/att-generally-unawareof-new-conttact-changes-refuses- to-waive-termination-fees-7753/. AT&T made the modifications mentioned above unilaterally and customers who attempted to respond by terminating their service contracts, which typically run for two years, were charged an early termination fee. AT&T's stance on early termination fees was controversial because in 2008, under the auspices of the CTIA, the international, association for the wireless telecommunications industry, all carriers agreed that consumers would be allowed to terminate their contracts, without paying an early termination fee, following any material change to the terms of service.
127. See id.;
128. CTIA, Consumer Code, http://www.ctia.org/content/index.cfm/AID/10352/ (last visited June 12, 2010). In defending its insistence on charging early termination fees following these changes, AT&T adopted a very narrow definition of a material change. AT&T argued that according to its "internal policy" there are only two types of changes that allow termination without incurring an early termination fee: (1) a price increase, and (2) a material decrease in the geographic area in which the airtime rate applies.
129. See Christopher Price, AT&T Clarifies Position on ETF & Material Changes, Argues Only Two Situations Allow Terminating Contract, PHONEN.EWS.COM, May 8, 2009, http://www.phonenews.com/att-clarifiesposition-on-etf-material- changes-argues-only-two-situations-allow-terminating-contract-7802/. AT&T is not alone. In June 2009, a consumer complained that Verizon refused termination (without paying an early termination fee) after it increased its administrative charges from $0.85 to $0.92.
130. See Posting of Christine to Consumer Complaints About Verizon Wireless, http://www.consumeraffairs.com/cellphones/verizon-wireless.htinl (June 11, 2009).
131. Change-of-terms clauses have been used to add or change arbitration clauses in other markets as well. For example, DIRECTV, a satellite television provider, included a change-of-terms clause in its subscription agreement and used it to add an arbitration clause. DIRECTV, Inc. v. Mattingly, 829 A.2d 626, 629 (Md. 2003). This particular modification was struck down for lack of sufficient notice.
132. Id. at 639.
133. See Ronen Halevy, T-Mobile Raising Per-Message SMS Rates to 20 Cents, BERRYREVIEW.COM, July 1, 2008, http://www.berryreview.com/2008/07/01/t-mobile- raising-permessage-sms-rates-to-20-cents/.
134. This example is taken from Randal C. Picker, The Mediated Book 4-6 (Univ. of Chi. Law & Econ., Olin Working Paper No. 463, 2009), available at http://ssrn.com/abstract-1399613.
135. Amazon.com, Amazon. Kindle: License Agreement and Terms of Use (Feb. 9, 2009), http://www.amazon.com/gp/help/customer/display.htinl/ref=hp-rel-topic?i. e=UTF8&nodeId=20014453 0.
136. Greg Sandoval, Amazon Retreats on Kindle's Text-to-Speech Issue, CNET NEWS, Feb. 27, 2009, http://news.cnet.com/amazon-retreats-on-kindles-text-to- speech-issue/. It is true though that Amazon's modification came in response to complaints by the Authors Guild that this new feature would put pressure on the audio books market and, moreover, would violate the copyright holders' rights.
137. See The Authors Guild, E-Book Rights Alert: Amazon's Kindle 2 Adds "Text to Speech. Function" (Feb. 12, 2009), http://www.authorsguild. org/advocacy/articles/e-book-rig.hts-alert-amazonskindle-2.html. But these complaints seem unfounded.
138. See, e.g., Posting of Michael Kwun to Deeplinks Blog, http://www.eff.org/deeplinks/ (Feb. 11, 2009).
139. See, e.g., Perry v. FleetBoston Fin. Corp., No. 04-507, 2004 U.S. Dist. LEXIS 12616, at *13-14 (E.D. Pa. July 6, 2004) (accepting the issuer's argument that "change in terms procedures are necessary 'due to the ever-changing economic conditions, the fast-moving and highly competitive credit card marketplace, and the fact that open-end or revolving credit card agreements are generally indefinite in duration,'" but limiting the issuer's ability to make unilateral changes to such terms as "previously contemplated by the original agreement, so long as cardholders do not accept the unilateral change by continuing to use their cards");
140. Stone v. Golden Wexler & Sarnese, P.C., 341 F. Supp. 2d 189, 198 (E.D.N.Y. 2004) ("To be sure, flexibility is important to the credit industry, since credit card companies are parties to long-term contracts with countless customers.").
141. See generally Collins, supra note 4 (characterizing change-of-terms clauses as responses to uncertainty about future events that might require adaptation of the contract).
142. In other words, modification is a remedy for contractual incompleteness. If, at the time of contracting, parties had perfect information about all future contingencies and could costlessly negotiate and write a complete state-contingent contract, then modification would be superfluous. Of course, contracting costs are often high, and complete contracts are rare. Thus, the ability to modify the contract is often welfare enhancing.
143. See STEVEN SHAVELL, FOUNDATIONS OF ECONOMIC ANALYSIS OF LAW 319 (2004).
144. See Stone, 341 F. Supp. 2d at 198 (accepting, at least in principle, the issuer's argument that flexibility is necessary and that requiring explicit consent to every change would burden the industry significantly).
145. See infra notes 62-64 and accompanying text.
146. For example, evidence suggests that many consumers have a poor understanding of their credit card contracts. See Oren Bar-Gill & Elizabeth Warren, Making Credit Safer, 157 U. PA. L. REV. 1, 27-29 (2008).
147. In a series of articles, one of us has argued that underestimation of future costs explains contract design and market outcomes in several markets.
148. See Bar-Gill & Warren, supra note 62, at 46-64 (consumer credit markets);
149. Oren Bar-Gill & Rebecca Stone, Mobile Misperceptions, 23 HARV. J.L. & TECH. 49, 80-96 (2009) (cellular service market);
150. Oren Bar-Gill, Seduction by Plastic, 98 NW. U. L. REV. 1373, 1395-1411 (2004) (credit card market);
151. Oren Bar-Gill, supra note 3, at 754-90 (consumer product and service markets);
152. Oren Bar-Gill, The Law, Economics and Psychology of Subprime Mortgage Contracts, 94 CORNELL L. REV. 1073, 111 8-39 (2009) (subprime mortgage market).
153. See Kevin E. Davis, The Demand for Immutable Contracts: Another Look at the Law and Economics of Contract Modifications, 8.1 N.Y.U. L. REV. 487, 494-98 (2006) (observing that the ability to modify contracts creates incentives for parties to misrepresent.-or at least fail to disclose-their willingness to perform their contractual obligations).
154. Cf. Edward L. Glaeser, Psychology and the Market, 94 AM. ECON. REV. (PAPERS & PROC.) 408, 409-11 (2004) ("Markets do not eliminate (and often exacerbate) irrationality.... The advertising industry is the most important economic example of these systematic attempts to mislead, where suppliers attempt to convince buyers that their products will yield remarkable benefits.... It is certainly not true that competition ensures that false beliefs will be dissipated. Indeed, in many cases, competition will. work to increase the supply of these falsehoods....").
155. See infra note 108 and accompanying text.
156. Imperfect information alone is not enough; imperfect information can result in both underand overestimation of the unilateral modification risk. And overestimation will generate a demand for restrictions on sellers' power to modify consumer contracts unilaterally. Imperfect rationality implies that underestimation will dominate overestimation.
157. This is more than, a mere theoretical possibility. As discussed above, cellular service contracts subject modifications to a "no material adverse effect" standard.
158. See Verizon Wireless, Customer Agreement, supra note 51 ("We may change prices or any other term of your Service or this agreement, at any time, but we'll provide notice first, including written notice if you have Postpay Service. If you use your Service after the change takes effect, that means you're accepting the change. If you're a Postpay customer and a change to your Plan or this agreement has a material adverse effect on you, you can cancel the line of Service that has been affected within 60 days of receiving the notice with no early termination fee.").
159. In principle, sellers could specify more specific rules for policing modifications. For example, credit card issuers can specify that they will only increase rates by up to X percent and only if the cardholder's credit score drops by more than Y points. Such a specific rule would be easy for courts to apply, and litigation costs should be correspondingly low. The problem with specific rules is that they presume an ability to predict the specific modifications that could arise. But the raison d'être of modifications is to enable midstream adjustments, in response to changed circumstances, in situations in which it is inefficient to write more complete ex ante contracts that specify obligations for all contingencies.
160. See supra Part. II.B.
161. Similar problems would arise if, instead of reviewing modifications by the court after the fact, sellers were to seek declaratory judgments before implementing each modification. Moreover, this version of the court-based commitment mechanism adds another cost element-the cost of delay in implementing desirable modifications.
162. It is possible, however, that different courts would use different standards for policing modifications and sellers would use forum selection clauses to present consumers with a choice among the different standards.
163. See supra note 60 and accompanying text.
164. See Modernizing Consumer Protection Hearing, supra note 40, at 47-48 (statement of Adam J. Levitin) (arguing that term changes "obfuscate the true cost of using credit").
165. See Bar-Gill & Warren, supra note 62, at 13;
166. Horton, supra note 4, at 609. Cf. Davis, supra note 64, at 497 (arguing that permitting modifications with, mutual assent "tends to increase the cost to customers of identifying [sellers] whose costs of performance are truly low").
167. See Horton, supra note 4, at 609;
168. supra note 31 and accompanying text.
169. Bar-Gill & Warren, supra note 62, at 16.
170. See id.
171. See David Gilo & Ariel Porat, The Hidden Roles of Boilerplate and Standard-Form Contracts: Strategic Imposition of Transaction Costs, Segmentation of Consumers, and Anticompetitive Effects, 104 MICH. L. REV. 983, 1004-08 (2006) (discussing the anticompetitive effects of contracts that prevent comparison shopping).
172. Reduction in competition caused by the use of readily modifiable contracts need not involve individual consumers' signing welfare-reducing contracts. Rational, informed consumers will avoid welfare-reducing transactions. It may also be the case that competition-reducing contracts strike an optimal balance between flexibility and transparency for the customers who enter into them. Consequently, there may be no grounds for complaining that the contracts fail to maximize the welfare of those who sign them. The problem here is that sellers and their customers have no incentive to take into account the fact that by signing readily modifiable contracts, they may prejudice other participants in the market. For example, suppose that a credit card issuer faces exceptionally strong reputational sanctions if it makes modifications that are inefficient ex post. That issuer and customers who are aware of its reputation may find it optimal to sign a contract that contains a change-of-terms clause with no express constraints on unilateral modifications. Customers who read the change-of-terms clause and are unaware of the issuer's reputation, however, may rationally avoid contracting with the issuer. Moreover, other issuers will have no incentive to offer innovative terms in order to compete for customers. This lack of incentive is because customers who stop reading when they find the change-ofterms clause, or who realize that any terms they do read are subject to modification at any time, will have no way to determine which issuer is offering superior terms.
173. In the economic literature, see, for example, PATRICK BOLTON & MATHIAS DEWATRIPONT, CONTRACT THEORY 32-33, 36 (2005), the leading textbook on contract theory, which deals extensively with renegotiation-the economists' term for modification. In the law and economics literature,
174. see, for example, SHAVELL, supra note 59, at 314-20;
175. Oren Bar-Gill & Oinri Ben-Shahar, The Law of Duress and the Economics of Credible Threats, 33 J. LEGAL STUD. 391 (2004);
176. Davis, supra note 64;
177. Christine Jolls, Contracts as Bilateral Commitments: A New Perspective on Contract Modification, 26 J. LEGAL STUD. 203 (1997).
178. While the mutual assent requirement is often implicit in this literature, the economic term for modification, "renegotiation," suggests that both parties must agree to the modification. Moreover, this literature generally assumes that contracts will be renegotiated whenever a mutually beneficial modification exists, again suggesting that mutual assent is required.
179. See, e.g., BOLTON & DEWATRIPONT, supra note 79, at 541;
180. SHAVELL, supra note 59, at 316-17.
181. See, e.g., BOLTON & DEWATRIPONT, supra note 79, at 36, 450-56;
182. SHAVELL, supra note 59, at 317-18;
183. Bar-Gill & Ben-Shahar, supra note 79, at 412-17;
184. Davis, supra note 64, at 498-501.
185. Horton, also considers some of these standard responses. Horton argues that unilateral modifications should be banned.
186. See Horton, supra note 4, at 660-67.
187. Peter Alces and Jason Hopkins point out that in the context of many agreements between banks and their customers, many consumers do not even have access to copies of their agreements. The authors propose to combat pernicious terms in bank-customer agreements by having the Federal Reserve Board establish an online clearinghouse in which banks are required to reproduce the terms of their agreements. Although Alces and Hopkins devote a great deal of attention to the pernicious nature of change-of-terms clauses, they do not propose that any special steps be taken to bring those clauses to customers' attention.
188. See Alces & Hopkins, supra note 4, at 904-06.
189. Truth in Lending Act of 1968, 15 U.S.C. § 1632(a) (2006).
190. Regulation Z, 12 C.F.R. pt. 226, supp. I, § 226.5, para. 5(a)(1), cmt. 1 (2010).
191. See Curtis Bridgeman, Misrepresented Intent in the Context of Unequal Bargaining Power, 2006 MICH. ST. L. REV. 993, 1008-09 (2006).
192. See supra Part III.C.1.
193. For evidence that consumers spend little time reading terms of contracts, see Yannis Bakos, Florencia Marotta-Wurgler & David R. Trossen, Does Anyone Read the Fine Print? Testing a Law and Economics Approach to Standard Form Contracts (NYU Ctr. for Law, Econ. & Org., Working Paper No. 09-40, 2009), available at http://ssrn,coin/abstract=1443256 (finding that only one or two out of every one thousand retail shoppers chose to view the license agreements of sixty-six companies selling software online).
194. See supra Part III.C.
195. Badie v. Bank of Am., 79 Cal. Rptr. 2d 273 (Ct. App. 1998).
196. See id. at 284.
197. See id. at 284-85.
198. See id. at 286 (citing Cal, Civ. Code § 1654 (West 1998);
199. Oceanside 84, Ltd. v. Fidelity Fed. Bank, 66 Cal. Rptr. 2d 487,492 (Ct. App. 1997);
200. Powers v. Dickson, Carlson & Campillo, 63 Cal. Rptr. 2d 261, 266-67 (Ct. App. 1997)).
201. Id. at 289
202. (quoting Trizec Props., Inc. v. Superior Court, 280 Cal. Rptr. 885, 887 (Ct. App. 1991)).
203. See id. at 289-90.
204. Regulation Z, 12 C.F.R. § 226.5b (2010). The commentary to the regulation adds, "A creditor may not include a general provision in its agreement permitting changes to any or all of the terms of the plan. For example, creditors may not include 'boilerplate' language in the agreement stating that they reserve the right to change the fees imposed under the plan ...."
205. Id. pt. 226, supp. I, § 226.5b(e), para. 5b(f)(3)(i), cmt. 2.
206. See also Alces & Greenfield, supra note 4, at 1127.
207. See Horwitz, supra note 4, at 100-05 (discussing the doctrine of unconscionability as a legal defense to the unfairness of a change-of-terms provision).
208. See 1 E. ALLAN FARNSWORTH, FARNSWORTH ON CONTRACTS § 4.28, at 508-09 (1990) ("Most cases of unconscionability involve a combination of [substantive and procedural] unconscionability; and it is generally agreed that if more of one is present, then less of the other is required.").
209. See Badie, 79 Cal. Rptr. 2d at 287 ("[T]here is nothing about the original terms that would have alerted a customer to the possibility that [Bank of America] might one day in the future invoke the change of terms provision to add a clause that would allow it to impose [alternative dispute resolution] on the customer.").
210. See, e.g., Ingle v. Circuit. City Stores, Inc., 328 F.3d 1165, 1172-73, 1.179 (9th Cir. 2003) (finding a provision in an arbitration agreement with employees substantively unconscionable where it afforded the employer the unilateral power to terminate or modify the agreement).
211. Bridgeman & Sandrik, supra note 4, at 399.
212. Id.
213. See, e.g., COLO. REV. STAT. § 6-1-105(1)(n) (2002);
214. N.Y. GEN. Bus. LAW § 396 (McKinney 2009);
215. TEX. BUS. & COM. CODE ANN. § 17.50(a)(1) (Vernon 2009);
216. Rossman v. Fleet Bank (R.I.) Nat'l Ass'n, 280 F.3d 384, 396 (3d Cir. 2002) ("Bait advertising, although not necessarily literally false ... is nonetheless considered deceptive, insofar as it suggests the product advertised is actually offered and intended to be sold, when the real intention is simply to create a contact with the buyer that allows the seller to switch the consumer to a more profitable sale.");
217. FTC Guides Against Bait Advertising, 16 C.F.R. § 238.0-.4 (2010);
218. RESTATEMENT (SECOND) OF TORTS § 530(1) (1977).
219. See Bridgeman & Sandrik, supra note 4, at. 398-400. The existing doctrine of promissory fraud's requirement of intention not to perform and intent to deceive precludes liability in this situation.
220. See, e.g., Saia Food Distribs. & Club, Inc. v. SecurityLink from Ameritech, Inc., 902 So. 2d 46, 56-57 (Ala. 2004)
221. (quoting Waddell & Reed, Inc. v. United Investors Life Ins. Co., 875 So. 2d 1143, 1160 (Ala. 2003));
222. Bulbman, Inc. v. .Nev. Bell, 825 P.2d 588, 592 (Nev. 1992) ("The mere failure to fulfill a promise or perform in the future .. . will not give rise to a fraud claim absent evidence that the promisor had no intention to perform at the time the promise was made.");
223. RESTATEMENT (SECOND) OF TORTS § 530 cmt. b ("To be actionable the statement of the maker's own intention must be fraudulent, which is to say that he must in fact not have the intention stated.").
224. See Bridgeman & Sandrik, supra note 4, at 398.
225. See id. at 400 ("[W]hen millions of consumers have relatively small injuries, the type of injury that will typically be caused by bullshit promises, the class action is the only efficient and effective way to compensate the individuals for their losses....").
226. See supra note 38 and accompanying text.
227. See U.C.C. § 2-209 cmt. 2 (2000);
228. RESTATEMENT (SECOND) OF CONTRACTS § 89 (1981).
229. See, for example, the UNIF. RESIDENTIAL LANDLORD & TENANT ACT § 3.102(a) (1972),
230. as reprinted in Horwitz, supra note 4, at 96 ("A landlord, from time to time, may adopt a rule or regulation, however described, concerning the tenant's use and occupancy of the premises. It is enforceable against the tenant only if (1) its purpose is to promote the convenience, safety, or welfare of the tenants in the premises, preserve the landlord's property from abusive use, or make a fair distribution of services and facilities held out for the tenants generally; (2) it is reasonably related to the purpose of which it is adopted; (3) it applies to all tenants in the premises in a fair manner; (4) it is sufficiently explicit in its prohibition, direction, or limitation of the tenant's conduct to fairly inform him of what he must or must not do to comply; (5) it is not for the purpose of evading the obligations of the landlord; and (6) the tenant has notice of it at the time he enters into the rental agreement, or when it is adopted.");
231. OFFICE OF FAIR TRADING, UNFAIR CONTRACT TERMS GUIDANCE 52-53 (2008), available at. http://www.oft.gov.Uk/shared-oft/reports/unfair-contract-terms/ oft311.pdf (describing limitations that make change-of-terms clauses more likely to be compatible with the Unfair Terms in Consumer Contracts Regulations, 1999, S.I. 1999/2083 (U.K.)).
232. Another example can be found in Regulation Z, which enumerates permissible unilateral changes to home equity loans. These include changes "that will unequivocally benefit the consumer throughout the remainder of the plan" or are "insignificant." Regulation Z, 12 C.F.R. § 226.5b(f)(3) (2010). A different approach would be to bar unilateral modifications that deviate from terms that are being offered to new consumers. Such behavior might be evidence of deceptive conduct.
233. See Rossman. v. Fleet Bank (R.I.) Nat'l Ass'n, 280 F.3d 384, 389 (3d Cir. 2002) (involving a credit card issuer that claimed that increased interest rates forced it to modify its no-annual-fee commitment while it allegedly continued to offer no-annual-fee cards to new customers). We are reluctant to endorse this proposal in which no element of deception is present as there may be legitimate reasons for a seller to bind new and existing customers to different terms.
234. See supra notes 67-70 and accompanying text.
235. For example, it would be unheard of for a court to reason as follows : "This consumer paid a lower price, so he or she must have accepted the risk of a broader range of unilateral modifications."
236. There is precedent for having an administrative agency involved in crafting constraints on sellers' ability to modify consumer contracts. In the United Kingdom, the Office of Fair Trading ("OFT") has issued detailed guidance on the kinds of change-of-terms clauses that it considers to be in contravention of the Unfair Terms in Consumer Contracts Regulations, 1999, S.I. 1999/2083 (U.K.) (which implements the European Community's Unfair Contract Terms Directive 93/13, 1993 O.J. (L 95)).
237. OFFICE OF FAIR TRADING, supra note 109, at 52-53. As all systems that rely on constraints formulated prior to the time of a specific modification, this one risks barring some beneficial modifications. Moreover, the guidance only sets out the views of the OFT on when it is likely to initiate judicial proceedings to enforce the regulations, but "the final decision on whether a term is unfair rests with the courts."
238. Id. at. 7. Consequently, except to the extent that the courts defer to the OFT, this scheme remains vulnerable to the concerns about lack of expertise, delay, and litigation costs that we associate with court-based systems.
239. In this respect, the CAB would function in a similar manner to the "representative trustee technique" described in Davis, supra note 64, at 518-37. We do not believe, however, it will, be necessary for CABs to adopt the complex organizational form associated with the representative trustee technique in order to fulfill their mandates. The CAB would not function in the same fashion as mechanisms for preapproval of initial contracts. In certain markets, the initial contracts would require approval from a government agency. In a similar vein, some have proposed a certification process, whereby a government or nongovernment body would certify initial contracts.
240. See Shmuel I. Becher, A "Fair Contracts " Approval Mechanism: Reconciling Consumer Contracts and Conventional Contract Law, 42 U. MICH. J.L. REFORM 747 (2009);
241. Clayton P. Gillette, Pre-approved Contracts for Internet Commerce, 42 HOUS. L. REV. 975 (2005). These proposals are materially different from our proposal since review of the initial contract according to standards established by law is likely to be more demanding than review of only proposed changes to the initial contract against standards established by the initial contract. Since our focus is on the problem of contract modification, we do not express an opinion on the desirability of approval or certification mechanisms that focus on the initial contract. We note, however, that our approach, focusing on the review of modifications, is perfectly consistent with a preliminary review of the initial contract. In fact, we would argue that any review or certification of the initial contract should ask if the seller has added a CAB to the initial contract and what modification policy the CAB has adopted.
242. See supra note 6 and accompanying text.
243. See supra Part III.C.2.
244. Under our proposal, consumers will make purchase decisions based on two reputational signals: the seller's general reputation and the reputation of the CAB that the seller includes in its contract. Arguably, the informational burden under our proposal is as great as under a system in which sellers develop more refined reputations-a general reputation and a modification-related reputation. Still, we believe that linking the two reputation signals to two separate bodies would facilitate a cleaner modification-related reputation, signal.
245. Recall that a contract with a CAB would cost more. Consumers will refuse to pay higher prices for a contract with a CAB that does not protect their interests.
246. Recall that CABs would not scrutinize initial contracts. A CAB applying an ex ante standard would still be applying it at the ex post modification stage, asking, "Would both parties approve the modification had they considered it ex ante?" Of course a CAB, whether applying an ex ante or ex post standard, would indirectly affect the design of the initial contract as sellers would recognize their more limited ability to change the contract.
247. This feature of CABs mitigates certain concerns about proposals to have administrative agencies preapprove initial contracts. Clayton P. Gillette, for one, has raised doubts about whether administrative agencies are likely to adopt standards of review that will be consistent with maximizing consumers' ex ante welfare, particularly in the face of consumer heterogeneity.
248. See Gillette, supra note 113, at 1001-12. Allowing consumers to set the applicable standard addresses this concern. 120. Moreover, sellers can be expected to adjust certain terms in their initial contracts to the CABs they adopt. If the CAB system induces greater complexity and reduced standardization of consumer contracts, this would further increase the informational burden on consumers.
249. This claim is clearly valid for products and services, such as credit cards, in which the entire value of the product or service is defined by the contract. When the contract is ancillary to a physical, product that cannot easily be changed or modified, then this claim needs to be weakened.
250. See Gillette, supra note 1.13, at 1008-12 (arguing that consumer groups have proven to be effective opponents to sellers in regulatory settings, though their interests may be more aligned with the interests of group leaders than constituents).
251. Cf. RICHARD H. THALER & CASS R. SUNSTEIN, NUDGE: IMPROVING DECISIONS ABOUT HEALTH, WEALTH, AND HAPPINESS (2008) (identifying mild forms of government intervention and describing them as "nudges").
252. See H.R. 4173, 111th Cong. (2009) (proposing to establish a new Consumer Financial Protection Agency).
253. Our proposal is qualitatively different from existing mechanisms that include a much broader governmental role. For example, insurance companies often cannot increase their rates without first obtaining the approval of a state regulator. See, e.g., FLA. STAT. § 627.062 (2009);
254. N.J. STAT. ANN. § 17: 29A-14 (West 2009);
255. TEX. INS. CODE ANN. § 1153.051(c) (Vernon 2009). The regulator can be viewed as a CAB. But contrary to our proposal, which encourages the creation of private CABs alongside the government-sponsored CAB, the state insurance regulator is a monopolistic CAB. Moreover, whereas the insurance regulator derives its authority from specific legislation, our CABs would derive their authority from private contracts.
256. For discussion of these and other preapproval mechanisms for consumer contracts, see Becher, supra note 113; and Gillette, supra note 113.
257. See supra note 8 and accompanying text.
258. Cf. Consumer Financial Protection Agency Act of 2009, H.R. 3126, 111th Cong. § 136 (2009) (proposing to establish a new Consumer Financial Protection Agency that could force sellers to offer plain vanilla products to facilitate comparison shopping, among other things). A contract prohibiting unilateral modifications is an example of a plain vanilla product.
259. See id.
260. See supra note 4 and accompanying text.
261. See, e.g., Brodie v. Gen. Chem. Corp., 934 P.2d 1263, 1268 (Wyo. 1997) ("[W]e do not consider the employer's concern about negotiating employment contracts on an individual basis significant enough to outweigh our understanding that employees would risk losing a valuable contractual right without their consent.");
262. Doyle v. Holy Cross Hosp., 708 N.E.2d 1140 (Ill. 1999) (focusing on the consideration requirement, not on the assent requirement).
263. See, e.g., O'Brien v. New Eng. Tel. & Tel. Co., 664 N.E.2d 843, 848-49, 848 n.3 (Mass. 1996) (discussing the possibility that an employer had the right to amend its employee manual unilaterally);
264. Lincoln v. Wackenhut Corp., 867 P.2d 701, 705 (Wyo. 1994) (describing a disclaimer preserving an employer's right to alter the language of its employee handbook).
265. See, e.g., Asmus v. Pac. Bell, 999 P.2d 71, 78-79 (Cal. 2000) (permitting an employer unilaterally to modify a unilaterally implemented employment security policy despite the employer's statement that it would continue the policy so long as it did not undergo changes materially affecting its business plan achievement);
266. Bankey v. Storer Broad. Co. (In re Certified Question from the U.S. Court of Appeals for the Sixth Circuit), 443 N.W.2d 112, 120 (Mich. 1989) (holding that an employer may, without an express reservation of the right to do so, unilaterally change its written policy from discharge for cause to termination at will, provided reasonable notice is given);
267. Fleming v. Borden, Inc., 450 S.E.2d 589, 594-96 (S.C. 1994) (holding that terms of employment contracts can be altered unilaterally with reasonable notice).
268. RESTATEMENT (THIRD) OF EMPLOYMENT LAW § 2.05(c) & cmt. b (Tentative Draft No. 2, 2009) (explaining that employee rights created by express agreements cannot be modified unilaterally).
269. Id. § 2.05. Comment b to section 2.05 suggests that a multifactored test is used to identify vested or accrued rights. The relevant factors include "the text of the statement, other policies of the employer, the employer's course of conduct, and usages in the particular industry or occupation."
270. Id. § 2.05 cmt. b.
271. Id. § 2.05 cmt. e ("[Requiring express agreement by employees to changes in employer statements would be unworkable for companies with, large workforces and would undermine sought-for unifornity of treatment among similarly situated employees.").
272. Asmus, 999 P.2d at 73. Asmus is cited with approval by the Reporter for the American Law Institute because the Management Employment Security Policy was adopted unilaterally.
273. See RESTATEMENT (THIRD) OF EMPLOYMENT LAW § 2.05 reporters' notes cmt. a, at 97. A plausible argument, however, could be made that the text of the Management Employment Security Policy caused it to create a vested or accrued right immune from unilateral modification under section 2.05.
274. We acknowledge, however, that some of the problems we identify may be less severe in employment settings because (1) the scope for welfare-reducing modifications is limited by the special regulations that apply to employment contracts, and (2) on account of the high stakes in many employment disputes, litigation costs present less of an obstacle to policing of modifications by the courts.