The no-reading problem in consumer contract law

Stanford Law Review

Volumn 66, Issue 3, 2014, Pages 545-610

  Ayres, Ian ^a   Schwartz, Alan ^a,b  

^a YALE UNIVERSITY   (United States)

^b YALE SCHOOL OF MANAGEMENT   (United States)

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EID: 84897523182     PISSN: 00389765     EISSN: None     Source Type: Journal    
DOI: None     Document Type: Article

References (278)

1. Kleimann Commc'n Grp., Inc., Know Before You Owe: Evolution of the Integrated TILA-RESPA Disclosures 25 (2012), available at http://files.consumerfinance.gov/f/201207_cfpb_report_tila-respa-testing.pdf.
2. John P. Mello Jr., Apple Scraps Controversial Terms in iBook Author EULA Agreement, TechHive (Feb. 3, 2012, 5:29 PM), http://www.pcworld.com/article/ 249303/apple_scraps_controversial_terms_in_ibook_author_eula_agreement.html. Apple responded to the controversy surrounding its EULA with a modified version only requiring users to sell books created in the iBooks file format through Apple-a meager concession since this is the only format in which a book may be sold through Apple's iBooks Store.
3. Nate Anderson, Google on Chrome EULA Controversy: Our Bad, We'll Change It, Ars Technica (Sept. 3, 2008, 12:56 PM PDT), http://arstechnica.com/tech-policy/2008/ 09/google-on-chrome-eula-controversy-our-bad-well-change-it (internal quotation mark omitted).
4. Larry Magid, It Pays to Read License Agreements, PC Pitstop, http://www.pcpitstop.com/spycheck/eula.asp (last visited Feb. 22, 2014).
5. Larry Magid, It Pays to Read License Agreements, PC Pitstop, http://www.pcpitstop.com/spycheck/eula.asp (last visited Feb. 22, 2014).
6. Lucy Kellaway, Pointless Conditions Should Not Apply: The Sopoforic Legalese of Online Transactions, Fin. Times (Jan. 23, 2011, 8:24 PM), http://www.ft.com/cms/s/0/7158c690-2596-11e0-8258-00144feab49a.html# axzz1zPmBwtYm (internal quotation marks omitted). Over 7000 consumers made a purchase from the site that day, all checking a box saying they understood the conditions, and "no one noticed a thing."
7. See, e.g., Florencia Marotta-Wurgler, Will Increased Disclosure Help? Evaluating the Recommendations of the ALI's "Principles of the Law of Software Contracts, " 78 U. Chi. L. Rev. 165, 179-81 (2011).
8. Yannis Bakos et al., Does Anyone Read the Fine Print? Testing a Law and Economics Approach to Standard Form Contracts 1 (N.Y.U. Sch. of Law Ctr. for Law, Econ. & Org., Working Paper No. 09-40, 2009), available at http://ssrn.com/abstract=1443256.
9. Yannis Bakos et al., Does Anyone Read the Fine Print? Testing a Law and Economics Approach to Standard Form Contracts 1 (N.Y.U. Sch. of Law Ctr. for Law, Econ. & Org., Working Paper No. 09-40, 2009), available at http://ssrn.com/abstract=1443256.
10. See, e.g., Florencia Marotta-Wurgler, Will Increased Disclosure Help? Evaluating the Recommendations of the ALI's "Principles of the Law of Software Contracts, " 78 U. Chi. L. Rev. 165, 179-81 (2011).
11. For an exposition of the duty to read doctrine, see John D. Calamari, Duty to Read-A Changing Concept, 43 Fordham L. Rev. 341 (1974).
12. See, e.g., Upton v. Tribilcock, 91 U.S. 45, 50 (1875) ("It will not do for a man to enter into a contract, and, when called upon to respond to its obligations, to say that he did not read it when he signed it, or did not know what it contained.... A contractor must stand by the words of his contract.
13. John Hancock Mut. Life Ins. Co. v. Yates, 299 U.S. 178, 180 (1936) ("[W]hen the insured receives a policy, it is his duty to read it or have it read.... ").
14. Brown v. E.F. Hutton Grp., Inc., 991 F.2d 1020, 1033 (2d Cir. 1993) (holding that allegedly unsophisticated investors' failure to read securities disclosures was "reckless" and precluded them from bringing fraud claim).
15. Rossi v. Douglas, 100 A.2d 3, 7 (Md. 1953) ("[O]ne having the capacity to understand a written document who reads it, or, without reading it or having it read to him, signs it, is bound by his signature. "). This obligation applies even to illiterate buyers.
16. See, e.g., Johnnie's Homes, Inc. v. Holt, 790 So. 2d 956, 960 (Ala. 2001).
17. Secoulsky v. Oceanic Steam Nav. Co., 112 N.E. 151, 152 (Mass. 1916).
18. For additional scholarship on the duty to read, see Douglas G. Baird & Robert Weisberg, Rules, Standards, and the Battle of the Forms: A Reassessment of § 2-207, 68 Va. L. Rev. 1217 (1982).
19. Russell Korobkin, Bounded Rationality, Standard Form Contracts, and Unconscionability, 70 U. Chi. L. Rev. 1203 (2003).
20. Stewart Macaulay, Private Legislation and the Duty to Read-Business Run by IBM Machine, the Law of Contracts and Credit Cards, 19 Vand. L. Rev. 1051 (1966).
21. For examples of the duty to read applied in the modern consumer contract context, see McKenna v. Metropolitan Life Insurance Co., 126 F. App'x 571, 574 (3d Cir. 2005) (holding that it was "unreasonable" for an insured consumer not to read his insurance policy).
22. and Federal Trade Commission v. IFC Credit Corp., 543 F. Supp. 2d 925, 947 (N.D. Ill. 2008) (holding that consumers were responsible for reading telecommunications equipment leases).
23. Fivey v. Pa. R., 52 A. 472, 473 (N.J. 1902) (emphasis added).
24. Lewis v. Great W. Ry., (1860) 157 Eng. Rep. 1427 (L.R. Exch.) 1430 (Bramwell B.).
25. 5 H. & N. 867, 874.
26. See, e.g., Harris v. Green Tree Fin. Corp., 183 F.3d 173, 181 (3d Cir. 1999) (internal quotation mark omitted) ("Procedural unconscionability pertains to the process by which an agreement is reached and the form of an agreement, including the use therein of fine print and convoluted or unclear language. ")
27. "Clickwrap" generally refers to electronic agreements that automatically present contractual terms to a user and require the user to accept by affirmatively clicking an "I agree" icon. See generally Robert Lee Dickens, Finding Common Ground in the World of Electronic Contracts: The Consistency of Legal Reasoning in Clickwrap Cases, 11 Marq. Intell. Prop. L. Rev. 379 (2007) (providing a background on "clickwrap").
28. See, e.g., Specht v. Netscape Commc'ns Corp., 150 F. Supp. 2d 585, 596 (S.D.N.Y. 2001).
29. Grosvenor v. Qwest Commc'ns Int'l, Inc., No. 09-cv-2848-WDM-KMT, 2010 WL 3906253, at *2 (D. Colo. Sept. 30, 2010) ("As a rule, a clickwrap is valid where the terms of the agreement appear on the same screen with the button the user must click to accept the terms and proceed with the installation of the product.").
30. TradeComet. com LLC v. Google, Inc., 693 F. Supp. 2d 370, 377-78 (S.D.N.Y. 2010) (holding that a Google AdWords clickwrap agreement was reasonably communicated where the user had to "click through" the text of the agreement).
31. Principles of the Law: Software Contracts § 2.02(c)(1) (2010) (noting that a software contract is enforceable if, inter alia, "the standard form is reasonably accessible electronically prior to initiation of the transfer").
32. See, e.g., Ian Ayres, Regulating Opt-Out: An Economic Theory of Altering Rules, 121 Yale L.J. 2032, 2079-80 (2012) (analyzing the Higher Education Opportunity Act of 2008, which employs an altering rule to ensure students are more informed about their loans). Our proposal might be conceived as a kind of altering rule. To write enforceable terms that are in derogation of the expectations of a majority of buyers, mass-market sellers must abide by the enhanced disclosure obligations set out below.
33. In North Dakota, for example, a mortgagee may only waive her homestead exemption rights if the mortgage contains a specific statement "printed in a conspicuous manner" and "immediately followed by the date and the signature of the person to indicate that the person is specifically and knowingly waiving the exemption. " N.D. Cent. Code § 47-18-05.1 (2013).
34. Hagwood v. Newton, 282 F.3d 285, 291 (4th Cir. 2002).
35. See generally Omri Ben-Shahar & Carl E. Schneider, The Failure of Mandated Disclosure, 159 U. Pa. L. Rev. 647, 649 (2011) (providing a survey of mandatory disclosures across different fields).
36. For a general discussion of consumers' failure to read contracts, see Robert A. Hillman & Jeffrey J. Rachlinski, Standard-Form Contracting in the Electronic Age, 77 N.Y.U. L. Rev. 429 (2002).
37. See, e.g., Zakaria Babutsidze, How Do Consumers Make Choices? A Survey of Evidence, 26 J. Econ. Survs. 752, 756 (2012) ("[C]onsumer reports and dealer visits [are] the most widely used source[s] of information. Next come experts' and friends' opinions. Advertising and mass media score considerably lower.... More recent studies find that interpersonal relations are so important that consumers exhibit more faith in information obtained through their friends than the reasonable level. " (citation omitted).
38. Google Inc., ZMOT Handbook: Ways to Win Shoppers at the Zero Moment of Truth 46 (2012), available at http://ssl.gstatic.com/think/docs/2012-zmot-handbook_research-studies.pdf ("68% of consumers report using YouTube to browse and research retail companies." (italics omitted).
39. Benedict G.C. Dellaert & Gerald Häubl, Searching in Choice Mode: Consumer Decision Processes in Product Search with Recommendations, 49 J. Marketing Res. 277, 277 (2012) ("[Outside the contracts context, a]n effective means of assisting consumer search is to provide them with recommendations.... Such assistance may be provided by human advisors (e.g., sales assistants, financial advisors, real estate agents), but it is increasingly available in the form of recommendations that are generated automatically by information systems. ").
40. Kenneth Hendricks et al., Observational Learning and Demand for Search Goods, Am. Econ. J.: Microeconomics, Feb. 2012, at 1, 1 ("A consumer's decision to learn about a product can be influenced by the choices of other consumers.... ").
41. Andrea Pozzi, Shopping Cost and Brand Exploration in Online Grocery, Am. Econ. J.: Microeconomics, Aug. 2012, at 96, 97 ("E-retailers provide recommendations based on customer[] profiling.... These features can affect product exploration.... [T]hese practices are becoming ubiquitous.... ").
42. There is a separate concern where consumers expect the inclusion of inefficiently unfavorable terms (for example, in the form of supracompetitive back-end fees) that can result when sellers cannot credibly commit to exclude these terms and instead compete by lowering the (front-end) price. Michael S. Barr et al., The Case for Behaviorally Informed Regulation, in New Perspectives on Regulation 25, 47 (David Moss & John Cisternino eds., 2009). If consumers expect the terms, they will be correctly priced. Thus, these authors claim that the problem is cognitive error. Our empirical results, reported in Part IV, suggest, however, the possibility of term optimism, which would yield incorrect pricing.
43. Part II defines term optimism more precisely. An optimistic term has two features: (i) the consumer is unaware of the term's content.
44. and (ii) the consumer assigns more positive utility or less negative utility to the term than he would have assigned had he known what the term actually does. The text above illustrates the mistakenly high-utility case: the consumer who is unaware of his insurance policy's exclusion clause incorrectly assumes that he is covered for more categories of harm than he is in fact, so he attributes more utility to the insurance contract than the contract actually generates for him.
45. As explained below in Part III, the regulatory scheme we propose would encourage sellers to bury expected terms and instruct courts to enforce those terms even though consumers may have lacked a ready means of reading the terms prior to purchase. Our approach, that is, would discourage consumers from reading terms whose substance the consumers expect in favor of reading terms whose presence in the contract would otherwise be regrettably surprising.
46. Recent studies suggest that the appropriate choice of format can materially influence consumer choice. John Kozup et al., Sound Disclosures: Assessing When a Disclosure Is Worthwhile, 31 J. Pub. Pol'y & Marketing 313, 315-16 (2012) ("[R]ecent research suggests that message format has profound effects on different attitudinal, belief, and knowledge variables.... [M]essage characteristics, such as the format of the label, can make a difference... [although] additional research on format specificity is necessary. ").
47. Recent studies suggest that the appropriate choice of format can materially influence consumer choice. John Kozup et al., Sound Disclosures: Assessing When a Disclosure Is Worthwhile, 31 J. Pub. Pol'y & Marketing 313, 315-16 (2012) ("[R]ecent research suggests that message format has profound effects on different attitudinal, belief, and knowledge variables.... [M]essage characteristics, such as the format of the label, can make a difference... [although] additional research on format specificity is necessary. ").
48. Vanessa G. Perry & Pamela M. Blumenthal, Understanding the Fine Print: The Need for Effective Testing of Mandatory Mortgage Loan Disclosures, 31 J. Pub. Pol'y & Marketing 305, 307 (2012) ("[Prior] findings imply that disclosure information, in a clear and simple format, may have a positive effect on decisions.... ").
49. Vanessa G. Perry & Pamela M. Blumenthal, Understanding the Fine Print: The Need for Effective Testing of Mandatory Mortgage Loan Disclosures, 31 J. Pub. Pol'y & Marketing 305, 307 (2012) ("[Prior] findings imply that disclosure information, in a clear and simple format, may have a positive effect on decisions.... ").
50. Vanessa G. Perry & Pamela M. Blumenthal, Understanding the Fine Print: The Need for Effective Testing of Mandatory Mortgage Loan Disclosures, 31 J. Pub. Pol'y & Marketing 305, 307 (2012) ("[Prior] findings imply that disclosure information, in a clear and simple format, may have a positive effect on decisions.... ").
51. See, e.g., Margaret Jane Radin, Boilerplate: The Fine Print, Vanishing Rights, and the Rule of Law (2013).
52. Randy E. Barnett, Consenting to Form Contracts, 71 Fordham L. Rev. 627 (2002).
53. Omri Ben-Shahar, Foreword, 104 Mich. L. Rev. 821 (2006).
54. Omri Ben-Shahar, The Myth of the "Opportunity to Read" in Contract Law, 5 Eur. Rev. Cont. L. 1 (2009).
55. For an exposition of the duty to read doctrine, see John D. Calamari, Duty to Read-A Changing Concept, 43 Fordham L. Rev. 341 (1974).
56. Melvin Aron Eisenberg, The Limits of Cognition and the Limits of Contract, 47 Stan. L. Rev. 211 (1995).
57. For a general discussion of consumers' failure to read contracts, see Robert A. Hillman & Jeffrey J. Rachlinski, Standard-Form Contracting in the Electronic Age, 77 N.Y.U. L. Rev. 429 (2002).
58. Nathan Isaacs, The Standardizing of Contracts, 27 Yale L.J. 34 (1917).
59. Friedrich Kessler, Contracts of Adhesion-Some Thoughts About Freedom of Contract, 43 Colum. L. Rev. 629 (1943).
60. Russell Korobkin, Bounded Rationality, Standard Form Contracts, and Unconscionability, 70 U. Chi. L. Rev. 1203 (2003).
61. Arthur Allen Leff, Unconscionability and the Code-The Emperor's New Clause, 115 U. Pa. L. Rev. 485 (1967).
62. Michael I. Meyerson, The Reunification of Contract Law: The Objective Theory of Consumer Form Contracts, 47 U. Miami L. Rev. 1263 (1993).
63. John E. Murray, Jr., The Parol Evidence Process and Standardized Agreements Under the Restatement (Second) of Contracts, 123 U. Pa. L. Rev. 1342 (1975).
64. John E. Murray, Jr., The Standardized Agreement Phenomena in the Restatement (Second) of Contracts, 67 Cornell L. Rev. 735 (1982).
65. Todd D. Rakoff, Contracts of Adhesion: An Essay in Reconstruction, 96 Harv. L. Rev. 1174 (1983).
66. W. David Slawson, Standard Form Contracts and Democratic Control of Lawmaking Power, 84 Harv. L. Rev. 529 (1971) [hereinafter Slawson, Standard Form Contracts].
67. W. David Slawson, The New Meaning of Contract: The Transformation of Contracts Law by Standard Forms, 46 U. Pitt. L. Rev. 21 (1984).
68. James J. White, Form Contracts Under Revised Article 2, 75 Wash. U. L.Q. 315 (1997).
69. Karl N. Llewellyn, The Common Law Tradition: Deciding Appeals 370 (1960).
70. Karl N. Llewellyn, The Common Law Tradition: Deciding Appeals 370 (1960).
71. Todd D. Rakoff, Contracts of Adhesion: An Essay in Reconstruction, 96 Harv. L. Rev. 1174 (1983).
72. Todd D. Rakoff, Contracts of Adhesion: An Essay in Reconstruction, 96 Harv. L. Rev. 1174 (1983).
73. See, e.g., Steven v. Fid. & Cas. Co. of N.Y., 377 P.2d 284, 295-98 (Cal. 1962) (providing a canonical example of California's unconscionability doctrine).
74. Arthur Allen Leff, Unconscionability and the Code-The Emperor's New Clause, 115 U. Pa. L. Rev. 485 (1967).
75. W. David Slawson, The New Meaning of Contract: The Transformation of Contracts Law by Standard Forms, 46 U. Pitt. L. Rev. 21 (1984).
76. Such clauses, also known as "dragnet clauses, " typically "state[] that the mortgage will secure not only the debt incurred in the instant mortgage transaction, but in addition all other debts or obligations that are presently owed or may in the future be owed to the mortgagee by the mortgagor. " Restatement (Third) of Prop.: Mortgs. § 2.4 cmt. (1997). While many states enforce these clauses, see, e.g., Lundgren v. Nat'l Bank of Alaska, 756 P.2d 270, 277-78 (Alaska 1987) (surveying the case law of state dragnet enforcement, though ruling against the dragnet clause in the specific case).
77. Citizens & S. DeKalb Bank v. Hicks, 206 S.E.2d 22, 24 (Ga. 1974).
78. Capocasa v. First Nat'l Bank of Stevens Point, 154 N.W.2d 271, 274 (Wis. 1967), courts in other states have expressed skepticism over such clauses and, in some circumstances, have refused to enforce them.
79. Nat'l Bank of E. Ark. v. Blankenship, 177 F. Supp. 667, 673-74 (E.D. Ark. 1959), aff'd, 283 F.2d 574 (8th Cir. 1960).
80. Wood v. Parker Square State Bank, 400 S.W.2d 898, 902 (Tex. 1966).
81. In passing the Home Ownership and Equity Protection Act of 1994 (HOEPA), Congress restricted the use of mortgage prepayment penalties under federal law. Home Ownership and Equity Protection Act of 1994, Pub. L. No. 103-325, § 129(c), 108 Stat. 2160, 2192-93 (codified as amended at 15 U.S.C. § 1639(c) (2012). According to one recent study, twenty-five states and the District of Columbia have adopted versions of HOEPA. Lei Ding et al., Ctr. for Cmty. Capital, State Anti-Predatory Lending Laws: Impact and Federal Preemption Phase I Descriptive Analysis 12 & n.5 (2009), available at http://ccc.unc.edu/contentitems/558 (listing states with mini-HOEPA statutes).
82. Standard Contracts Law, 5743-1982, 37 LSI 6 (1982-1983) (Isr.). The Israeli statute grants a special tribunal, the Standard Contracts Tribunal, the power to review potentially unfair contract terms ex ante, outside the litigation context and often at the request of a seller seeking certification of his contract. Id. at 6. The statute further lists presumptively unfair contract terms, including waiver of all liability, unilateral ability to change or set price terms, and restrictions on a customer's legal remedies (e.g., mandatory arbitration). Id. at 6-7. For further discussion of Israeli contract law.
83. Sinai Deutch, Controlling Standard Contracts-The Israeli Version, 30 McGill L.J. 458 (1985).
84. and Jonathan Yovel & Yoseph M. Edrey, Israel, in 3 International Contract Manual 60-1 (Albert H. Kritzer et al. eds., 2008). Thailand has enacted similar legislation outlining certain presumptively unfair, unenforceable terms.
85. See Unfair Contract Terms Act, B.E. 2540 (1997), ThaiLaws. com, http://thailaws.com/law/t_laws/tlaw0319.pdf (last visited Feb. 22, 2014).
86. For example, Interactive Brokers has an innovative contract with its retail investor customers under which customers who buy on margin contractually waive the right to receive a telephonic margin call. Interactive Brokers LLC, Interactive Brokers LLC Agreements and Disclosure Documents 194, available at http://www.interactivebrokers.com/download/IB_LLC_Agreements_and_Disclosure_Packag e.pdf ("IB Will Not Issue Margin Calls: IB does not have to notify Customer of any failure to meet Margin Requirements prior to IB exercising its rights under this Agreement. Customer acknowledges that IB generally will not issue margin calls.
87. Generally will not credit Customer's account to meet intraday or overnight margin deficiencies.
88. For example, Interactive Brokers has an innovative contract with its retail investor customers under which customers who buy on margin contractually waive the right to receive a telephonic margin call. Interactive Brokers LLC, Interactive Brokers LLC Agreements and Disclosure Documents 194, available at http://www.interactivebrokers.com/download/IB_LLC_Agreements_and_Disclosure_Packag e.pdf ("IB Will Not Issue Margin Calls: IB does not have to notify Customer of any failure to meet Margin Requirements prior to IB exercising its rights under this Agreement. Customer acknowledges that IB generally will not issue margin calls.
89. Notwithstanding these concerns, one of the authors believes that both ex ante and ex post substantive protections, if properly crafted, can usefully complement the reforms suggested in this Article.
90. Restatement (Second) of Contracts § 153(b) (1981).
91. Restatement (Second) of Contracts § 153(b) (1981).
92. Restatement (Second) of Contracts § 153(b) (1981).
93. Restatement (Second) of Contracts § 153(b) (1981).
94. Wayne R. Barnes, Toward a Fairer Model of Consumer Assent to Standard Form Contracts: In Defense of Restatement Subsection 211(3), 82 Wash. L. Rev. 227, 249 (2007) ("In this subsection, the 'other party' is almost invariably the business that drafted the standard form, and the party which appears to manifest assent is the consumer entering into the transaction with the business. ").
95. Restatement (Second) of Contracts § 211 cmt. b.
96. Restatement (Second) of Contracts § 211 cmt. b.
97. E.g., Jeffrey E. Thomas, An Interdisciplinary Critique of the Reasonable Expectations Doctrine, 5 Conn. Ins. L.J. 295, 303 (1998).
98. James J. White, Form Contracts Under Revised Article 2, 75 Wash. U. L.Q. 315 (1997).
99. Wayne R. Barnes, Toward a Fairer Model of Consumer Assent to Standard Form Contracts: In Defense of Restatement Subsection 211(3), 82 Wash. L. Rev. 227, 249 (2007) ("In this subsection, the 'other party' is almost invariably the business that drafted the standard form, and the party which appears to manifest assent is the consumer entering into the transaction with the business. ").
100. Restatement (Second) of Contracts § 211 cmt. f (emphasis added).
101. James J. White, Form Contracts Under Revised Article 2, 75 Wash. U. L.Q. 315 (1997).
102. Unidroit Principles of Int'l Commercial Contracts art. 2.1.20 (Int'l Inst. for the Unification of Private Law 2010).
103. James J. White, Form Contracts Under Revised Article 2, 75 Wash. U. L.Q. 315 (1997).
104. Principles of the Law: Software Contracts ch. 2, topic 2, summary overview (2010) (footnote omitted).
105. Principles of the Law: Software Contracts ch. 2, topic 2, summary overview (2010) (footnote omitted).
106. The goals of promoting autonomy and efficiency may at times diverge. While we emphasize the efficiency-enhancing effects of our proposal, autonomy advocates might embrace our proposal because it is less likely to bind consumers to unfavorable terms that they did not expect.
107. Todd D. Rakoff, Contracts of Adhesion: An Essay in Reconstruction, 96 Harv. L. Rev. 1174 (1983).
108. But a term does not become invisible merely because it was presented by the drafting party on a take-it-or-leave-it basis. If we follow the dynamics of the practice we have investigated, we must also include within the set of visible terms those for which a large proportion of adherents (although not necessarily all) may be expected to have shopped.
109. Todd D. Rakoff, Contracts of Adhesion: An Essay in Reconstruction, 96 Harv. L. Rev. 1174 (1983).
110. Myopia is asserted to cause state-of-the-world mistakes in connection with credit card contracts in Oren Bar-Gill & Ryan Bubb, Credit Card Pricing: The Card Act and Beyond, 97 Cornell L. Rev. 967, 976 (2012).
111. Present bias is said to cause consumer mistakes in connection with credit card contracts in Paul Heidhues & Botond Ko{double acute}szegi, Exploiting Naïvete About Self-Control in the Credit Market, 100 Am. Econ. Rev. 2279 (2010). Heidhues & Ko{double acute}szegi and Bar-Gill & Bubb implicitly assume that consumers know what their contracts say.
112. State-of-the-world inefficiency may present itself broadly. For example, a consumer fails to understand a transaction's consequences if she underestimates her cell phone use, the likelihood of her defaulting on a loan, or the probability that a product is defective. Oren Bar-Gill, Seduction by Contract: Law, Economics, and Psychology in Consumer Markets 7 (2012) (noting that one of the main "tenets" of "behavioraleconomics theory" assumes that "[c]onsumers' purchasing and use decisions are affected by systematic misperceptions").
113. One might, however, imagine extending our proposal to require enhanced warning to correct state-of-the-world optimism. Thus, for example, au pair providers might inquire into whether clients have systematically optimistic views about the probability of having to "rematch" (i.e., send away an initial au pair from your family and seek a replacement). CV Harquail, How to Rematch: Share Your Best Practices, AuPairMom (Apr. 16, 2013), http://aupairmom.com/how-to-rematch-share-your-best-practices/2013/04/16/celiaharquail. Indeed, one might imagine using seller substantiation and disclosure to respond to other forms of optimism-including attribute optimism (e.g., consumers mistakenly believe their iPhone screen will not scratch) and competition optimism (e.g., consumers mistakenly believe their cell phone contract is less expensive than those offered by competitors).
114. Frédéric Koessler & Régis Renault, When Does a Firm Disclose Product Information?, 43 RAND J. Econ. 630, 631-32 (2012).
115. Regarding this notation, a partly informed consumer knows ti terms where i ε [1, T-1]. In the example above, i = 2.
116. A consumer's total cost of search comprises the cost of comparing the contracts of competing firms and the cost of learning about the associated contracts. When search costs, so defined, are zero, competition compels firms to offer efficient contracts. Search costs are often positive, however, and can disadvantage consumers. As an example, one recent study found that borrowers sacrifice at least $1000 by not shopping around enough for mortgage brokers. Susan E. Woodward & Robert E. Hall, Diagnosing Consumer Confusion and Sub-Optimal Shopping Effort: Theory and Mortgage-Market Evidence, 102 Am. Econ. Rev. 3249, 3249 (2012).
117. We constrain the seller to offer the same contract to everyone because we are interested in how heterogeneous buyer expectations affect contract content. This assumption rules out price discrimination. We note that consumers in the model differ in two dimensions: as said above, they hold different beliefs about contract content, and some care more about contract quality than others do.
118. As an example of what these inequalities represent, consumers get more utility from a broader warranty than from a narrower warranty, but a broader warranty is more costly for the seller to offer.
119. We assume for convenience that consumers value the product equally but have different preferences over the associated contract.
120. We omit subscripts for convenience.
121. This proposition parallels an analogous result of A. Michael Spence, Monopoly, Quality, and Regulation, 6 Bell J. Econ. 417 (1975), which demonstrates that monopolists maximize profits by attending to quality preferences of the marginal, and not the average, purchaser.
122. Alan Schwartz, How Much Irrationality Does the Market Permit?, 37 J. Legal Stud. 131, 149 (2008).
123. The consumer derives positive utility from the terms she knows because, we assume, people do not knowingly purchase negative utility contracts.
124. When the seller has market power, excess (net optimistic) demand may at times counteract the deadweight loss of supracompetitive pricing.
125. As an example, the seller inserts an inconvenient forum selection clause.
126. As said above, the argument in the text is a game-theoretic way to derive the result in the benchmark case that contract quality is inefficiently low because inframarginal/average consumers value contract quality more than marginal consumers.
127. The model's results continue to hold when contracts are disaggregated given a severability assumption. The assumption holds that the consumer's demand for a particular term is independent of her demand for other terms. To illustrate, let a contract have two terms: a price and a warranty, which we denote w. Accordingly, k = w and the analysis proceeds as above: the contract is degraded if the warranty is narrowed. Severability apparently is a plausible assumption in many contexts. Regarding the warranty example, the consumer's demand for a warranty should not be affected by how she finances the purchase or whether she would be penalized for prepaying the loan. As an example of how general the severability assumption is, let term y in the Facebook EULA permit Facebook to collect information from a consumer's posts but permit the consumer to delete those posts. Facebook then adds term z, which permits it to share widely the information in any undeleted post. Though there now are two terms, severability would not be violated: the addition of term z makes term y less desirable, so term z is just the method for degrading term y. In the language above, the consumer's demand for term y is partly a function of her belief that she has control over term y. Therefore, her demand falls-the contract is relevantly degraded-when her control is reduced.
128. Michael Luca & Jonathan Smith, Salience in Quality Disclosure: Evidence from the U.S. News College Rankings, 22 J. Econ. & Mgmt. Strategy 58, 58 (2013).
129. As said above, consumers seldom actually read contracts. Consumers can ask friends or consult Internet rankings to see if a product or service they like comes with favored or disfavored terms. Firms, we assume, can affect these extracontractual channels to create salience. For convenience, the text sometimes refers to the first or the second page of a contract or the like. These references may be taken as metaphor. The key assumption is that salience is partly within a seller's control.
130. The analysis here follows Yuval Salant, Procedural Analysis of Choice Rules with Applications to Bounded Rationality, 101 Am. Econ. Rev. 724, 737 (2011).
131. We note that stopping short can be rational when it is costly to search. Part III. A introduces costly search into the consumer's learning problem when discussing the efficacy of our warning box proposal.
132. For convenience, we ignore indifference and assume transitivity.
133. We use the word "important" in two senses. A term is "important" if consumers care about the term and sellers know they care. The warranty and the price usually are important in this sense. A term also is "important" if the term is not salient to consumers, but likely would affect their behavior if the term were made salient. Our proposal focuses on terms that are important in this second sense.
134. This logic applies regardless of the size of the consumer's search set. We ignore the case in which the consumer observes two terms she likes and one that has negative utility, but buys because the good outweighs the bad. This consumer is informed and better off on net by buying.
135. Disclosure probably should ignore the consumers who prefer terms tc and td because disclosure would make these terms salient and thus possibly decrease the salience of the terms that a substantial number of consumers prefer. This could worsen the information environment overall. For an analysis of this heterogeneity concern, see Richard Craswell, Static Versus Dynamic Disclosures, and How Not to Judge Their Success or Failure, 88 Wash. L. Rev. 333, 345-54 (2013). As the text above suggests, increasing competition is a better response.
136. Abraham Wickelgren has an analysis that is similar to ours. Abraham L. Wickelgren, Standardization as a Solution to the Reading Costs of Form Contracts, 167 J. Institutional & Theoretical Econ. 30 (2011). He argues that if firms offer the efficient contract, consumers need not read it to deter deviations.
137. Abraham Wickelgren has an analysis that is similar to ours. Abraham L. Wickelgren, Standardization as a Solution to the Reading Costs of Form Contracts, 167 J. Institutional & Theoretical Econ. 30 (2011). He argues that if firms offer the efficient contract, consumers need not read it to deter deviations.
138. We argue that sellers should warn about unfavorable terms that fifty percent or more of consumers do not anticipate. Sellers also should warn about terms that fewer than fifty percent of consumers mistake if the mistake imposes large losses on the consumers who make it. Terms that induce such mistakes likely reduce welfare as much as less grave terms that half or more of consumers mistake.
139. All-Indus. Research Advisory Council, Public Attitude Monitor 1989: A Survey of Public Attitudes on Auto Insurance Rates, Seat Belts, Attorney Advertising, Homeowner's Insurance, and Insurance Claim Fraud 15 (1989).
140. E.g., Jeffrey E. Thomas, An Interdisciplinary Critique of the Reasonable Expectations Doctrine, 5 Conn. Ins. L.J. 295, 303 (1998).
141. Brian Bucks & Karen Pence, Do Borrowers Know Their Mortgage Terms?, 64 J. Urb. Econ. 218 (2008) (comparing mortgage borrowers' perceptions of loan terms as reflected in the 2001 Survey of Consumer Finances with lenders' reports of mortgage terms in the 2001 Residential Finance Survey).
142. Christine Jolls, Beyond Paternalism: The New Behavioral Law and Economics 5-3 to 5-4 (2012) (unpublished manuscript) (on file with authors).
143. Hous. Action Ill., Findings from the HB 4050 Predatory Lending Database Pilot Program 3-4 (2007), available at http://www.housingactionil.org/downloads/HB4050Findings.pdf (noting that many low-income adjustable-rate borrowers are unaware that their rate may adjust at all).
144. James M. Lacko & Janis K. Pappalardo, Fed. Trade Comm'n, Improving Consumer Mortgage Disclosures: An Empirical Assessment of Current and Prototype Disclosure Forms 121-23 (2007), available at http://www.ftc.gov/os/2007/06/P025505 MortgageDisclosureReport.pdf.
145. James M. Lacko & Janis K. Pappalardo, The Failure and Promise of Mandated Consumer Mortgage Disclosures: Evidence from Qualitative Interviews and a Controlled Experiment with Mortgage Borrowers, 100 Am. Econ. Rev. (Papers & Proc.) 516, 518-19 (2010).
146. Jonathan Macey et al., Helping Law Catch Up to Markets: Applying Broker-Dealer Law to Subprime Mortgages, 34 J. Corp. L. 789, 816 (2009) (discussing the New York Stock Exchange's "Know Thy Customer Rule").
147. See, e.g., Ian Ayres, Super Crunchers: Why Thinking-by-Numbers Is the New Way to Be Smart 47 (2007) (noting how Capital One has been at the forefront of using customer data to solicit business).
148. Oren Bar-Gill & Oliver Board, Product-Use Information and the Limits of Voluntary Disclosure, 14 Am. L. & Econ. Rev. 235, 236-37 (2012).
149. Restatement (Second) of Contracts §§ 153, 211 (1981) (articulating, respectively, the doctrine of unilateral mistake and the standardized agreement rule, which holds that if another party has reason to believe that the party manifesting assent would not do so if he knew that the writing contained a particular term, then the term is not part of the agreement).
150. The concept of term substantiation might in some contexts be extended to the idea of substantiating that consumers do not hold optimistic views about the content of legal default rules. For example, Pauline Kim has argued that employees hold systematically optimistic beliefs about the default terms of at-will employment contracts. Pauline T. Kim, Bargaining with Imperfect Information: A Study of Worker Perceptions of Legal Protection in an At-Will World, 83 Cornell L. Rev. 105, 147 (1997).
151. The concept of term substantiation might in some contexts be extended to the idea of substantiating that consumers do not hold optimistic views about the content of legal default rules. For example, Pauline Kim has argued that employees hold systematically optimistic beliefs about the default terms of at-will employment contracts. Pauline T. Kim, Bargaining with Imperfect Information: A Study of Worker Perceptions of Legal Protection in an At-Will World, 83 Cornell L. Rev. 105, 147 (1997).
152. Henry N. Butler & Joshua D. Wright, Are State Consumer Protection Acts Really Little-FTC Acts?, 63 Fla. L. Rev. 163 (2011).
153. Martin R. West & Paul E. Peterson, The Adequacy Lawsuit: A Critical Appraisal, in School Money Trials: The Legal Pursuit of Educational Adequacy, at 1, 7.
154. Unif. Computer Info. Transactions Act § 102(a)(44)-(45) (2002).
155. See generally Jean Braucher, The Failed Promise of the UCITA Mass-Market Concept and Its Lessons for Policing of Standard-Form Contracts, 7 J. Small & Emerging Bus. L. 393 (2003) (arguing that UCITA's definition of "mass-market" is too narrow).
156. 13 C.F.R. § 121.101 (2013).
157. U.S. Small Bus. Admin., SBA Size Standards Methodology 7 (2009), available at http://www.sba.gov/sites/default/files/ size_standards_methodology.pdf.
158. U.S. Small Bus. Admin., Table of Small Business Size Standards Matched to North American Industry Classification System Codes (2013), available at http://www.sba.gov/sites/default/files/files/size_table_07222013.pdf.
159. See, e.g., 13 C.F.R. § 123.403. There are, of course, many other ways in which businesses are distinguished based on size: the census employs a model (also using NAICS data) based on number of employees
160. Statistics of U.S. Businesses (SUSB) Main, U.S. Census Bureau, http://www.census.gov/econ/susb (last visited Feb. 22, 2014).
161. the Hart-Scott-Rodino Act requires merger registration only for transactions above a certain dollar-value threshold (currently $75.9 million), see Revised Jurisdictional Thresholds for Section 7A of the Clayton Act, 79 Fed. Reg. 3814 (Jan. 23, 2014).
162. A mass-market contractor who failed to conduct an adequate substantiation study would be subject to an enforcement action by either a state or federal consumer protection agency, and regulators might create a presumption that willfully unsubstantiated terms are voidable at the consumers' option unless the mass-market contractor can bring forth sufficient evidence to establish that the term in question met or exceeded the median consumer's expectation.
163. The analysis that follows extends the analysis in Part II. D by making explicit the search cost aspect of the consumer's optimization problem. For an early showing that information overload does not occur when disclosure increases the net gain from searching, see David M. Grether et al., The Irrelevance of Information Overload: An Analysis of Search and Disclosure, 59 S. Cal. L. Rev. 277 (1986).
164. Studies, including ours, show that consumers are aware of many terms in common contracts and have pessimistic expectations about a subset of the rest. Joshua Mitts, An Experimental Evaluation of Term Substantiation 1 (Oct. 13, 2013) (unpublished manuscript) (on file with authors).
165. See, e.g., Zakaria Babutsidze, How Do Consumers Make Choices? A Survey of Evidence, 26 J. Econ. Survs. 752, 756 (2012) ("[C]onsumer reports and dealer visits [are] the most widely used source[s] of information. Next come experts' and friends' opinions. Advertising and mass media score considerably lower.... More recent studies find that interpersonal relations are so important that consumers exhibit more faith in information obtained through their friends than the reasonable level. " (citation omitted).
166. There are serious difficulties in eliciting information about term importance. Consumers who hold inaccurate views about term content may not be able to say how important a term is until they know how their beliefs are wrong. Accordingly, it might be appropriate to iteratively elicit information on term importance from mistaken consumers only after they are informed about the actual content of the contract.
167. As indicated below, validation has a dynamic aspect: warnings should change with changes in consumer knowledge and contract content.
168. Regulators should be concerned about the possibility that warnings overshoot and cause optimistic consumers to be overly pessimistic about the terms of the contract. Similar concerns have arisen with regard to "corrective advertising. " Richard Craswell, Regulating Deceptive Advertising: The Role of Cost-Benefit Analysis, 64 S. Cal. L. Rev. 549, 567 (1991) (discussing cost-benefit concerns of corrective advertising).
169. Victoria C. Plaut & Robert P. Bartlett, III, Blind Consent? A Social Psychological Investigation of Non-Readership of Click-Through Agreements, 36 Law & Hum. Behav. 293, 300 (2012).
170. Studies, including ours, show that consumers are aware of many terms in common contracts and have pessimistic expectations about a subset of the rest. Joshua Mitts, An Experimental Evaluation of Term Substantiation 1 (Oct. 13, 2013) (unpublished manuscript) (on file with authors).
171. Studies, including ours, show that consumers are aware of many terms in common contracts and have pessimistic expectations about a subset of the rest. Joshua Mitts, An Experimental Evaluation of Term Substantiation 1 (Oct. 13, 2013) (unpublished manuscript) (on file with authors).
172. The seller can treat this kind of term as "expected, " making it enforceable even if buried. The warning waiver concept is implied by our focus on the disclosure of terms that may have affected consumer choice if correctly perceived. Consumers who eschew notice of particular terms would not have changed their purchase behavior were those terms brought to their attention.
173. Robert A. Hillman & Jeffrey J. Rachlinski, Standard-Form Contracting in the Electronic Age, 77 N.Y.U. L. Rev. 429 (2002).
174. For a general discussion of consumers' failure to read contracts, see Robert A. Hillman & Jeffrey J. Rachlinski, Standard-Form Contracting in the Electronic Age, 77 N.Y.U. L. Rev. 429 (2002).
175. Stephen J. Ware, Comment, A Critique of the Reasonable Expectations Doctrine, 56 U. Chi. L. Rev. 1461, 1482 (1989) (arguing that, in certain circumstances, consumers may expect that sellers "will not risk a bad reputation in the market by sticking to the fine print").
176. G.A. Cohen, On the Currency of Egalitarian Justice, 99 Ethics 906, 922-23, 930-31 (1989).
177. Zev Eigen has found that contractors may be more likely to pay attention to disclosed terms when there is less background noise. Zev J. Eigen, Experimental Evidence of the Relationship Between Reading the Fine Print and Performance of Form-Contract Terms, 168 J. Institutional & Theoretical Econ. 124, 124, 134-37 (2012) ("Results suggest that individuals spend almost three times more time reviewing form contracts when less information is provided outside the contract.... ").
178. Alan Schwartz & Louis L. Wilde, Imperfect Information in Markets for Contract Terms: The Examples of Warranties and Security Interests, 69 Va. L. Rev. 1387, 1415 (1983).
179. David Horton, The Shadow Terms: Contract Procedure and Unilateral Amendments, 57 UCLA L. Rev. 605, 623-36 (2010) (charting the historical rise of unilateral modifications).
180. Florencia Marotta-Wurgler & Robert Taylor, Set in Stone? Change and Innovation in Consumer Standard-Form Contracts, 88 N.Y.U. L. Rev. 240, 252-53 (2013).
181. Restatement (Second) of Contracts § 69 (1981) (delineating circumstances in which silence may constitute acceptance).
182. Pub. L. No. 111-24, sec. 101, §§ 127, 148, 171-172, 123 Stat. 1734, 1735-38.
183. See, e.g., Badie v. Bank of Am., 79 Cal. Rptr. 2d 273, 289 (Ct. App. 1998).
184. Our approach is conceptually analogous to a proposal of Oren Bar-Gill and Kevin Davis that unilateral modifications only be enforced if approved by "Change Approval Boards. " Oren Bar-Gill & Kevin Davis, Empty Promises, 84 S. Cal. L. Rev. 1, 37-39 (2010). Our approach enlists the sellers' efforts to more directly elicit the preferences of consumers. Our approach may thus be less susceptible to a kind of autonomy-defeating paternalism, whereby consumer protection advocates block substantive terms or require separate assent to warnings that a majority of consumers dislike.
185. False and misleading advertising is governed by section 5 of the Federal Trade Commission Act, 15 U.S.C. § 45 (2012).
186. Kraft, Inc. v. Fed. Trade Comm'n, 970 F.2d 311, 314 (7th Cir. 1992).
187. In re Thompson Med. Co., 104 F.T.C. 648, 839 (1984), aff'd, 791 F.2d 189 (D.C. Cir. 1986).
188. Kraft, 970 F.2d at 318.
189. In re Thompson Med. Co., 104 F.T.C. at 789.
190. In re Thompson Med. Co., 104 F.T.C. at 789.
191. 97 F. Supp. 2d 502, 529-30 (S.D.N.Y. 2000).
192. In re Thompson Med. Co, 104 F.T.C. at 839. Courts evaluate the level of substantiation required on a case-by-case basis, looking to a number of factors including "(1) the type of claim.
193. (2) the product.
194. (3) the consequences of a false claim.
195. (4) the benefits of a truthful claim.
196. (5) the cost of developing substantiation for the claim.
197. Fed. Trade Comm'n v. QT, Inc., 448 F. Supp. 2d 908, 959 (N.D. Ill. 2006).
198. In re Thompson Med. Co, 104 F.T.C. at 839
199. Federal Trade Commission v. Sabal, 32 F. Supp. 2d 1004, 1008 (N.D. Ill. 1998)
200. Federal Trade Commission v. Garvey, the Ninth Circuit found that the star of a weight loss infomercial had adequately proved his genuine belief in the claims related to the efficacy of the program that was the subject of the infomercial by demonstrating that he and his wife had lost eight and twenty-seven pounds using the program, respectively, and that he had reviewed two booklets with substantiation materials for the program. 383 F.3d 891, 901-02 (9th Cir. 2004).
201. 15 U.S.C. § 1125(a)(1). See generally Gregory Klass, Meaning, Purpose, and Cause in the Law of Deception, 100 Geo. L.J. 449, 482-88 (2012) (providing background information on false advertising actions under the Lanham Act).
202. See generally Gregory Klass, Meaning, Purpose, and Cause in the Law of Deception, 100 Geo. L.J. 449, 482-88 (2012) (providing background information on false advertising actions under the Lanham Act).
203. See generally Gregory Klass, Meaning, Purpose, and Cause in the Law of Deception, 100 Geo. L.J. 449, 482-88 (2012) (providing background information on false advertising actions under the Lanham Act).
204. Ames Publ'g Co. v. Walker-Davis Publ'ns, Inc., 372 F. Supp. 1, 13-14 (E.D. Pa. 1974) ("While unarticulated in the Act itself, an underlying purpose of Section 43(a) appears to be protection of the consuming public from false representations and descriptions in connection with the advertising of goods and services. ").
205. 20th Century Wear, Inc. v. Sanmark-Stardust Inc., 747 F.2d 81, 91 (2d Cir. 1984) ("[S]ection 43(a) has been broadly construed to provide protection against deceptive marking, packaging, and advertising of goods and services in commerce. "). An advertisement generally violates section 43(a) when it includes: (1) a false or misleading description of fact or representation of fact by the defendant in a commercial advertisement about its own or another's product.
206. (2) the statement actually deceives or has the tendency to deceive a substantial segment of its audience.
207. (3) the deception is material, in that it is likely to influence the purchasing decision.
208. (4) the defendant placed the false or misleading statement in interstate commerce.
209. and (5) the plaintiff has been or is likely to be injured as a result of the false or misleading statement, either by direct diversion of sales from itself to defendant or by a lessening of goodwill associated with its products. Clorox Co. P.R. v. Proctor & Gamble Commercial Co., 228 F.3d 24, 33 n.6 (1st Cir. 2000).
210. E.g., Clorox, 228 F.3d at 36 ("An advertisement's propensity to deceive the viewing public is most often proven by consumer survey data. ").
211. See generally Gregory Klass, Meaning, Purpose, and Cause in the Law of Deception, 100 Geo. L.J. 449, 482-88 (2012) (providing background information on false advertising actions under the Lanham Act).
212. 661 F. Supp. 2d 940, 943, 952-56, 958 (N.D. Ill. 2009).
213. Stiffel Co. v. Westwood Lighting Grp., 658 F. Supp. 1103, 1114 (D.N.J. 1987) (noting that the potential that between 22% and 57% of consumers will be misled is "not insubstantial" (internal quotation marks omitted).
214. McNeilab, Inc. v. Am. Home Prods. Corp., 501 F. Supp. 517, 527 (S.D.N.Y. 1980) (holding that 23% of consumers being misled was enough to demonstrate that a commercial "tend[ed] to confuse or mislead" (emphasis omitted) (internal quotation marks omitted).
215. Laurie Reynolds, Full State Funding of Education as a State Constitutional Imperative, 60 Hastings L.J. 749, 776-80 (2009).
216. While the general rule is that an advertiser must substantiate its claims before disseminating them, the FTC and the courts may, in their discretion, consider post-claim evidence of substantiation in determining whether advertisements are false or misleading. See In re Thompson Med. Co., 104 F.T.C. at 841 ("[U]sing post-claim evidence to evaluate the truth of a claim, or otherwise using such evidence in deciding whether there is a public interest in continuing an investigation or issuing a complaint, is appropriate policy. ").
217. Charles Shafer, Developing Rational Standards for an Advertising Substantiation Policy, 55 U. Cin. L. Rev. 1, 67 (1986) (discussing the history of the FTC's substantiation policy and explaining the four circumstances in which the FTC considers post-claim substantiation: "when (1) evaluating the truth of the claim.
218. (2) deciding whether there is public interest.
219. (3) deciding the appropriate scope of the order.
220. (4) assessing the reasonableness of the prior substantiation".
221. Johnson & Johnson-Merck Consumer Pharm. Co. v. Rhone-Poulenc Rorer Pharm., Inc., 19 F.3d 125, 129 (3d Cir. 1994).
222. Requiring statistically significant (p <.05) results helps resolve whether a competitor survey was sufficiently large to produce credible evidence of an unexpected term. A smaller substantiation survey would only trigger a warning duty if it uncovered a substantial enough disparity to achieve statistical significance. To assure that mass-market sellers surveyed an adequate number of consumers, sellers would also calculate and disclose a "power analysis" indicating that their chosen sample size is sufficient to identify a five percent disparity at least eighty percent of the time. We discuss in Part IV. A how the warning trigger should treat a respondent who reports not having beliefs or "any idea" about particular terms.
223. Term substantiation might also elicit information about contractual representation. For example, some users of stickK may not realize that they represent "that the total of all Commitment Stakes authorized by [a] Client is less than 10 percent of [a] Client's annual income. " Terms and Conditions of Commitment Contract, stickK ¶ 6.2, http://www.stickk.com/faq/tac (last visited Feb. 22, 2014).
224. Complaint at 15, Fed. Trade Comm'n v. In Deep Servs., Inc., No. 09-CV-01193 (C.D. Cal. June 23, 2009) (internal quotation marks omitted).
225. see Final Order for Permanent Injunction & Monetary Judgment as to Corporate Defendant In Deep Servs., Inc., Fed. Trade Comm'n v. In Deep Servs., Inc., No. 09-CV-01193 (C.D. Cal. Oct. 26, 2010).
226. Complaint at 3, Fed. Trade Comm'n v. Fin. Freedom Processing, Inc., No. 3:10-cv-2446 (N.D. Tex. Dec. 2, 2010), 2010 WL 5091184.
227. Opening Brief of Plaintiff-Appellant Fed. Trade Comm'n at 19, Fed. Trade Comm'n v. Fin. Freedom Processing, Inc., 538 Fed. App'x 488 (5th Cir. 2013) (No. 12-10520).
228. Reply Brief of Plaintiff-Appellant Fed. Trade Comm'n at 22 n.23.
229. Fin. Freedom Processing, Inc., 538 Fed. App'x 488 (No. 12-10520).
230. Fin. Freedom Processing, Inc., 538 Fed. App'x at 489.
231. Fed. Trade Comm'n v. Tashman, 318 F.3d 1273, 1283 (11th Cir. 2003) (Vinson, D.J., dissenting) ("[B]oth the advertisements and the disclosure documents must be construed together to evaluate the net impression of the representations to consumers. ").
232. Removatron Int'l Corp. v. Fed. Trade Comm'n, 884 F.2d 1489, 1497 (1st Cir. 1989) (addressing the "common-sense net impression of petitioners' advertising claims").
233. A second distinction between advertisement and term substantiation concerns causation. Advertisement substantiation tries to uncover the causal impact of particular advertisements on consumer impressions. Sellers are not liable for misperceptions that stem from independent sources. But we favor assessing the net impression of consumers' belief about contractual terms regardless of the source of those impressions. If the seller learns that a majority of its customers have false and overly optimistic impressions about certain terms of an agreement, the seller should warn customers about these unexpected terms (or face the prospect that the terms will not be enforced). This result is consistent with the impetus behind cigarette health warnings, which, as argued by Christine Jolls, can be justified as an attempt to "debias" consumers' overoptimistic perceptions of health risks (regardless of whether those misperceptions were caused by seller advertisements). Christine Jolls, Product Warnings, Debiasing, and Free Speech: The Case of Tobacco Regulation, 169 J. Institutional & Theoretical Econ. 53, 54, 56 (2013).
234. See generally Gregory Klass, Meaning, Purpose, and Cause in the Law of Deception, 100 Geo. L.J. 449, 482-88 (2012) (providing background information on false advertising actions under the Lanham Act).
235. Kleimann Commc'n Grp., Inc., Know Before You Owe: Evolution of the Integrated TILA-RESPA Disclosures 25 (2012), available at http://files.consumerfinance.gov/f/201207_cfpb_report_tila-respa-testing.pdf.
236. Statement of Rights and Responsibilities, Facebook, http://www.facebook.com/ legal/terms (last modified Nov. 15, 2013). Facebook's Statement of Rights and Responsibilities incorporates several of its other policies, which are detailed on separate webpages. Most importantly, many of Facebook's most essential privacy policies appear in its Data Use Policy.
237. See Data Use Policy, Facebook, https://www.facebook.com/about/privacy (last modified Nov. 15, 2013). Our survey instrument can be found in Ian Ayres et al., A Randomized Survey Assessing User Knowledge of Facebook Terms of Service 11-20 (Oct. 22, 2013) (unpublished manuscript) (on file with authors).
238. The surveys were collected by a second-year Yale Law School student, Patrick Hayden.
239. The Yale campus locations included the law school dining hall, the foyer of the Payne Whitney Gymnasium, and the Memorial Rotunda.
240. These surveys were administered at the entrance of the Super Stop & Shop, which is located in the Whalley Avenue Special Service District in New Haven. The demographics of this neighborhood are quite different from those of the Yale students who participated in our survey. The median household income in this neighborhood was $28,894 in 2008, see AMS Consulting & MJB Retail Consulting, Retail Assessment & Strategy: Whalley Avenue Special Service District 46 (drft. 2009), available at http://www.cityofnewhaven.com/uploads/WSSD%20Retail%20Assessment-Strategy% 20Reportv1.pdf, which is 24% below New Haven's 2008 median income, see id., and 44% below the 2008 national median income.
241. Jessica Semega, U.S. Census Bureau, Median Household Income for States: 2007 and 2008 American Community Surveys 4 (2009), available at http://www.census.gov/prod/2009pubs/acsbr08-2.pdf.
242. Given the empiricism reported in notes 6 and 7 above and the accompanying text, it is unlikely that 23% of our subjects actually had read the Facebook EULA.
243. See United States Facebook Statistics by Country, Socialbakers, http://www.socialbakers.com/facebook-statistics/united-states (last visited Feb. 22, 2014). Note that this disparity can be partly explained by the fact that six percent of Facebook's users are under the age of eighteen, and that we were only authorized to survey participants aged eighteen or older in this study.
244. See United States Facebook Statistics by Country, Socialbakers, http://www.socialbakers.com/facebook-statistics/united-states (last visited Feb. 22, 2014). Note that this disparity can be partly explained by the fact that six percent of Facebook's users are under the age of eighteen, and that we were only authorized to survey participants aged eighteen or older in this study.
245. Based on 2012 census data, the U.S. population is 63% white and not of Hispanic descent, 17% Hispanic, 13% black or African American, and 5% Asian. See State & County QuickFacts, U.S. Census Bureau (Dec. 17, 2013, 2:44 PM EST), http://quickfacts.census.gov/qfd/states/00000.html.
246. Cameron Marlow, How Diverse Is Facebook?, Facebook (Dec. 16, 2009, 6:54 PM), http://www.facebook.com/note.php? note_id=205925658858 (estimating that Facebook's U.S. user base was approximately ten percent black in 2009).
247. See, e.g., Ian Ayres, Super Crunchers: Why Thinking-by-Numbers Is the New Way to Be Smart 47 (2007) (noting how Capital One has been at the forefront of using customer data to solicit business).
248. Statement of Rights and Responsibilities, Facebook, http://www.facebook.com/ legal/terms (last modified Nov. 15, 2013). Facebook's Statement of Rights and Responsibilities incorporates several of its other policies, which are detailed on separate webpages. Most importantly, many of Facebook's most essential privacy policies appear in its Data Use Policy.
249. See, e.g., Ian Ayres, Super Crunchers: Why Thinking-by-Numbers Is the New Way to Be Smart 47 (2007) (noting how Capital One has been at the forefront of using customer data to solicit business).
250. The correct answer is c. See What's Facebook's Philosophy on Personal Information and Ads?, Facebook, http://www.facebook.com/help/?faq=207216349317757# What's-Facebook's-philosophy-on-personal-information-and-ads? (last visited Feb. 22, 2014) ("Facebook Ads are sometimes paired with news about social actions (e.g., liking a Page) that your friends have taken. You only appear in Facebook Ads to your confirmed friends. If a photo is used, it is your profile photo and not from your photo albums.").
251. The correct answer is c. See What's Facebook's Philosophy on Personal Information and Ads?, Facebook, http://www.facebook.com/help/?faq=207216349317757# What's-Facebook's-philosophy-on-personal-information-and-ads? (last visited Feb. 22, 2014) ("Facebook Ads are sometimes paired with news about social actions (e.g., liking a Page) that your friends have taken. You only appear in Facebook Ads to your confirmed friends. If a photo is used, it is your profile photo and not from your photo albums.").
252. See, e.g., Ian Ayres, Super Crunchers: Why Thinking-by-Numbers Is the New Way to Be Smart 47 (2007) (noting how Capital One has been at the forefront of using customer data to solicit business).
253. The two dimensions (forward/backward and no idea/best guess) of randomization produced a total of four survey versions. If we expand our analysis to include "no idea" group respondents, and count "no idea" responses as problematic, the number of required warnings would increase from five to eleven terms.
254. Statement of Rights and Responsibilities, Facebook, http://www.facebook.com/ legal/terms (last modified Nov. 15, 2013). Facebook's Statement of Rights and Responsibilities incorporates several of its other policies, which are detailed on separate webpages. Most importantly, many of Facebook's most essential privacy policies appear in its Data Use Policy.
255. See, e.g., Ian Ayres, Super Crunchers: Why Thinking-by-Numbers Is the New Way to Be Smart 47 (2007) (noting how Capital One has been at the forefront of using customer data to solicit business).
256. Another 8.7% of respondents believed that the contract was less favorable than the actual contract by answering, "Facebook may use your photo and name for any advertisement. "
257. The four warnings are derived from the corresponding sections of Facebook's EULA. See Sharing and Finding You on Facebook, Facebook, http://www.facebook.com/ about/privacy/your-info-on-fb (last visited Feb. 22, 2014) ("When you select an audience for your friend list, you are only controlling who can see the entire list of your friends on your timeline. We call this a timeline visibility control. This is because your friend list is always available to the games, applications and websites you use, and your friendships may be visible elsewhere (such as on your friends' timelines or in searches). For example, if you select 'Only Me' as the audience for your friend list, but your friend sets her friend list to 'Public,' anyone will be able to see your connection on your friend's timeline.").
258. Statement of Rights and Responsibilities, Facebook, http://www.facebook.com/ legal/terms (last modified Nov. 15, 2013). Facebook's Statement of Rights and Responsibilities incorporates several of its other policies, which are detailed on separate webpages. Most importantly, many of Facebook's most essential privacy policies appear in its Data Use Policy.
259. Statement of Rights and Responsibilities, Facebook, http://www.facebook.com/ legal/terms (last modified Nov. 15, 2013). Facebook's Statement of Rights and Responsibilities incorporates several of its other policies, which are detailed on separate webpages. Most importantly, many of Facebook's most essential privacy policies appear in its Data Use Policy.
260. Statement of Rights and Responsibilities, Facebook, http://www.facebook.com/ legal/terms (last modified Nov. 15, 2013). Facebook's Statement of Rights and Responsibilities incorporates several of its other policies, which are detailed on separate webpages. Most importantly, many of Facebook's most essential privacy policies appear in its Data Use Policy.
261. For our ranking of importance we limited the sample to respondents who had pessimistic or uninformed responses.
262. We found no significant difference in the number of terms triggering warnings for salient subgroups (i.e., black or African Americans, Hispanics, and women).
263. "Warn" was also triggered if a participant selected an incorrect response that could not properly be classified as either optimistic or pessimistic (e.g., selecting New York rather than California in a question related to Facebook's choice-of-law provision).
264. "Backward" refers to the effect of reversing the question.
265. "No Idea" refers to the inclusion of the "I have no idea" answer option.
266. Statement of Rights and Responsibilities, Facebook, http://www.facebook.com/ legal/terms (last modified Nov. 15, 2013). Facebook's Statement of Rights and Responsibilities incorporates several of its other policies, which are detailed on separate webpages. Most importantly, many of Facebook's most essential privacy policies appear in its Data Use Policy.
267. "Importance" refers to the respondent's subjective rating of the importance of a given term on a scale from one to five.
268. Statement of Rights and Responsibilities, Facebook, http://www.facebook.com/ legal/terms (last modified Nov. 15, 2013). Facebook's Statement of Rights and Responsibilities incorporates several of its other policies, which are detailed on separate webpages. Most importantly, many of Facebook's most essential privacy policies appear in its Data Use Policy.
269. "Importance" refers to the respondent's subjective rating of the importance of a given term on a scale from one to five.
270. and "Law School Education" refers to whether the participant is currently or has ever been enrolled in law school. We selected obvious defaults for gender (male) and race (white), and we used the median reported household income of our respondents ($60,000 to $99,999) as the income default. These defaults are omitted from Table 1.
271. The level of specificity in the framing of consumer knowledge might importantly affect the results of term-substantiation studies such as this one. But as discussed in Part III. A above, our proposal's embrace of third-party contestability is likely to limit the importance of particular specificity frames as being outcome determinative.
272. Ariel Porat & Lior Jacob Strahilevitz, Personalizing Default Rules and Disclosure with Big Data, 112 Mich. L. Rev. (forthcoming 2014).
273. Ariel Porat & Lior Jacob Strahilevitz, Personalizing Default Rules and Disclosure with Big Data, 112 Mich. L. Rev. (forthcoming 2014).
274. Ian Ayres, Back to Basics: Regulating How Corporations Speak to the Market, 77 Va. L. Rev. 945, 945-46, 966 (1991).
275. Jonathan R. Macey & Geoffrey P. Miller, Good Finance, Bad Economics: An Analysis of the Fraud-on-the-Market Theory, 42 Stan. L. Rev. 1059, 1066 (1990) (arguing that, if they could, shareholders would allow, and even contract for, management misrepresentations because they would benefit from the resulting long-term increase in share price).
276. A competitive market, for example, is unlikely to place risk on the inefficient loss avoider. Therefore, consumers might infer that grossly inefficient terms that merely engross seller profits would not persist in a market with sufficient reputational checks on sellers.
277. Recent studies suggest that the appropriate choice of format can materially influence consumer choice. John Kozup et al., Sound Disclosures: Assessing When a Disclosure Is Worthwhile, 31 J. Pub. Pol'y & Marketing 313, 315-16 (2012) ("[R]ecent research suggests that message format has profound effects on different attitudinal, belief, and knowledge variables.... [M]essage characteristics, such as the format of the label, can make a difference... [although] additional research on format specificity is necessary. ").
278. Alex Plunkett, Disclosures: A New Avenue for Improvement, Consumer Fin. Protection Bureau Blog (Oct. 3, 2013), http://www.consumerfinance.gov/blog/disclosures-a-newavenue-for-improvement ("[The CFPB's] new trial disclosure policy... allows companies to apply for a waiver to test potential disclosure improvements on a trial basis.").