High-Tech Warranty Project--Comment, P994413

Comment by Robert A. Hillman and Jeffrey J. Rachlinski

Professors of Law, Cornell Law School

1. This memo responds to an invitation by April M. Major of the FTC to comment on "warranty protection for software and other computer information products and services marketed to consumers." The invitation added that commentators were "free to submit your thoughts on other relevant issues pertaining to the topic." The authors of this memo are currently preparing an article tentatively entitled, "The Psychology of Standard-Form Contracting in the Electronic age." This memo, an abridgement of the current draft, compares the dynamics of paper and electronic consumer standard-form contracting and sets forth our tentative conclusion that internet contracting does not ameliorate the basic concerns of existing legal doctrine designed to protect the consumer from inadvertently manifesting assent to oppressive contract terms. In fact, internet contracting raises a new set of regulatory issues.

2. The paradigm paper consumer standard-form transaction involves a face-to-face meeting between an agent of the form provider and the consumer. The agent presents a printed form to the consumer with a few basic terms to be filled in by the parties and the remaining terms already drafted and printed by the form provider. The form provider repeatedly employs the form and has invested time and money in ensuring that if satisfies the provider's legal interests. The form is long and full of legalese. The consumer is in a hurry. The agent's warm smile contrasts with the intimidating barrage of printed words. The consumer either trusts the agent more than the form, or at least does not want to signal the opposite. Furthermore, the consumer wants to believe that the terms in the standard form (which commonly come into play only if some adverse event occurs) will not affect him. To illustrate these dynamics, analysts often use the example of the busy car renter at an airport anxious to be on her way and presented by an agent of the rental company with a long, incomprehensible standard form substantially similar to forms offered by other companies.⁽¹⁾

3. The consumer correctly perceives several realities. First, the form provider's agent is not disposed to bargain over the boilerplate or lacks the authority to do so; the form provider presents the form on a take-it-or-leave-it basis. Second, the consumer would not understand much of the language of the boilerplate even if she took the time to read it. Third, the form provider's competitors usually employ comparable terms. Fourth, the remote risks allocated by the boilerplate likely will not come to pass. Fifth, the agent (and any other bystander, perhaps waiting behind the consumer in line) will regard an effort to attempt read the form as ludicrous and even inconsiderate. Sixth, the form provider seeks to establish and maintain a good reputation with the purchasing public and generally will stand behind its product. Seventh, the consumer expects the law to enforce the boilerplate with the exception of offensive terms.⁽²⁾

4. The consumer (correctly) understands that the costs of reading, interpreting, and comparing standard terms outweigh any benefits of doing so and therefore chooses not to read the form carefully or even at all. Obviously, this process does not ensure consumers a set of reasonable terms. Some form providers view this situation as an opportunity to exploit consumers by including one-sided contract terms in the standard form.

5. This potential for exploitation has led courts and legislatures to develop rules designed to protect the consumer. First, courts police the terms of standard-form contracts carefully for unconscionable terms imposed by the form provider. Second, courts refuse to enforce a standard term when the form provider has reason to believe that the consumer would not have consented to the contract if the consumer knew the term was part of the contract. Some courts also extend this analysis to refrain from enforcing standard terms that a reasonable consumer would not have expected. Third, many state consumer-protection statutes and the Federal Magnuson-Moss Warranty Act require form providers to disclose and explain particularly problematic terms.

6. Judicial and legislative policing of standard-form contracts is not without costs. Form providers know more about the nature of their businesses than courts and legislatures and hence are in a better position to develop sensible standardized terms to govern their interactions with consumers. Judicial intervention also diminishes consumer choice and may increase form providers' costs and prices.

7. Does the emergence of an electronic version of standard-form contracts require the law to develop a new approach? The paradigm for electronic standard form consumer contracting is still evolving, but it is already clear that the example of the car-rental counter is inapt in the electronic world. An informal survey suggests various forms of contracting over the Internet already exist.⁽³⁾ On some websites, the consumer does not see the contract until it arrives in the package after delivery of the goods or software. Other Websites present form contracts electronically, for example, as part of the process of installing software. During installation, the site presents a small screen on a larger one consisting of the form contract terms, with two buttons: "I agree" and "I disagree." The consumer can click on either without scrolling through the agreement. Clicking "I disagree" ends the installation process. Still other websites present a "terms of use" page containing elaborate terms, and stating that the user agrees to the terms by using the site. An explicit statement in these terms requires the consumer to leave the site if she disagrees with the terms. The consumer need not access the page while making a purchase or otherwise using the site.

8. The paradigmatic standard-form contract consumer on the Internet is clearly not the haggard consumer at the car rental counter. Rather it is the well-educated college student browsing the Internet late at night, alone in his or her room, looking for interesting goods or services to be purchased quickly and used immediately.

9. Several differences between the Internet and paper contracting paradigms suggest the need for less regulation of Internet consumer contracts.

9a. First, the Internet consumer avoids the pressure of live sales talk and puffing. An Internet consumer does not face the prospect of insulting a trusted salesperson or delaying others by taking the time to read the terms of the standard-form contract.

9b. Second, the Internet consumer may "surf" during leisure hours and may not face the time crunch of the paper consumer.

9c. Third, the Internet facilitates access to information, thereby making it easier to comparison shop among competing terms.

9d. Fourth, as a new media, the Internet inspires caution in consumers who know that they are often dealing with a new company or, at least, a new mode of contracting.

9e. Fifth, to the extent that Internet access requires sophistication and education, its users might be more likely to understand terms or to conduct effective strategic searches.

10. On the other hand, electronic contract does not address other concerns associated with standard-form contracting.

10a. First, the Internet does not affect the concern that consumers enter into standard-form contracts without reading them because they underrate the likelihood that the terms in the contract will affect them. For example, a consumer who does not believe that there is any chance that she will have to sue the manufacturer over an injury the product causes will not care if the standard form requires that she submit all disputes to binding arbitration in front of an industry-appointed arbitrator.

10b. Second, even with more time, Internet consumers probably cannot learn much about terms offered by competitors because Internet contracts are as long, complicated, and incomprehensible as paper contracts. Exacerbating the problem, reading off a screen is more difficult than reading a paper form and few consumers can be expected to take the time to print an electronic contract. Moreover, with such a wealth of information available, Internet consumers may become discouraged about finding the pertinent information or suffer from information overload.

10c. To date, Internet form providers appear to have resisted attempting to increase their customer base by offering more advantageous boilerplate terms. As Internet competition increases exponentially, perhaps competition will increase the market for terms, but this has yet to occur.

11. Electronic contracting also creates novel opportunities to exploit consumers.

11a. First, because Internet contracts can be integrated into webpages, graphics designers and webmasters can work with lawyers in the presentation of Internet contracts. Consumers can commit to the Internet form contract directly upon seeing the advertising on the web page, without the benefit of a cooling-off period. Exacerbating this problem, electronic form contracting presents new opportunities for form providers to camouflage or otherwise obfuscate terms.

11b. Second, the Internet seems to breed impatience rather than caution. Consumers over the Internet expect speed and instant gratification and become impatient with even the shortest delay. This translates into overeager contractors who may be more subject to "impulse" purchasing and even less likely to investigate the contract or to comparison shop.

11c. Third, although the novel nature of the Internet might inspire caution in some consumers, those consumers who have acclimatized to the medium probably click through standard-form contracts as quickly as possible.

11d. Fourth, even though people who use the Internet tend to be well-educated, children and teens are also prime Internet consumers.

11e. Fifth, Internet contractors have even less of an opportunity to bargain than consumers in the paper world. The paper world at least offers the chance that the consumer can ask the agent a few questions, or maybe even fetch a manager with some authority to alter terms. The Internet completely closes the prospect for bargaining.

11f. Sixth, the opportunity of form providers to access websites that contain their competitors' terms may lead to greater collusion or facilitate an evolution to one-sided, but not unconscionable terms.

12. In summary, lawmakers considering new rules for electronic standard-form consumer contracting must remember that paper and Internet form contracting share important features. Consumers have little or no opportunity to bargain for terms or to find better terms with a competitor. The boilerplate is difficult or impossible to comprehend. The boilerplate covers remote risks that consumers often fail to appreciate or consider. Although the Internet facilitates the flow of information and allows for a degree of comparison-shopping that is unheard of in the non-electronic world, it does not change the basic psychology of the optimistic consumer that needs to be warned of the real risks addressed by the standard-form contract. The Internet also presents new opportunities to exploit consumers. As a result, consumers in the virtual world still rightly expect that the law will protect them from offensive contractual terms.

13. The parallels between paper and Internet form contracting suggest the need for maintaining comparable legal protections for consumers contracting over the Internet. Nevertheless, lawmakers should remember that standard forms provide significant economies to the form provider and savings to consumers and the law should not foreclose the even greater potential benefits for both sides of electronic commerce. Therefore, as with paper form contracting, the law should enforce terms chosen by Internet consumers (if any) and reasonable standard terms.

14. At the same time, because the Internet provides new opportunities for form providers to hide terms and new methods of persuasion, and may facilitate impulse purchasing, existing legal rules probably should be enhanced. For example, following the Uniform Computer Information Transaction Act (UCITA), consumers should be ensured an opportunity to review terms in a record that is "made available in a manner that ought to call [the terms] to the attention of a reasonable person and in a form that readily permits review."⁽⁴⁾ The law should also invigorate doctrines such as unconscionability to assure the effective policing of boilerplate. For example, courts should have the power to strike unreasonable terms in an internet contract without a concomitant finding of procedural unconscionability. In addition, Magnuson-Moss warranty protections should be afforded consumers. Moreover, comparable protections relating to the clarity of boilerplate should extend beyond warranty terms, including requiring plain English for important terms such as forum selection clauses.

15. In addition, the Internet creates the opportunity for law to adopt novel approaches to policing standard-from contracts. Because of the absence of a live agent, the presentation of the Internet contract can be completely standardized. This could allow policy makers to prescribe a means of presenting contract terms that consumers typically ignore in a way that would alert consumers. Form providers adopting these presentation methods could be assured that the terms would be per se enforceable (assuming their conscionability). In the paper world, such rules are problematic, as form providers can defeat the law's efforts through the conduct of the form provider's agent. The virtual world, however, lacks the social pressure and other tactics that the form provider's agent might use to get consumers to disregard or underrate the importance of these terms.

1. For an elaboration of these themes, see, e.g., E. A. Farnsworth, Contracts, § 4.26 (3d ed. 1999) Melvin A. Eisenberg , The Limits of Cognition and the Limits of Contract, 47 Stan. L. Rev. 211 (1995); Melvin A. Eisenberg, Text Anxiety, 59 S. Cal. L. Rev. 305 (1986); Michael I. Meyerson, The Reunification of Contract Law: The Objective Theory of Consumer Form Contracts, 47 U. Miami L. Rev. 1263 (1996); Todd D. Rakoff, Contracts of Adhesion: An Essay in Reconstruction, 96 Harv. L. Rev. 1173 (1983); Jane K. Winn, What Does a Click Mean? Balancing Efficiency and Fairness Concerns in Internet Contracting (2000), manuscript on file with Robert A. Hillman.

2. On all of these points, see sources cited supra note 1.

3. For more details see Winn, supra note 1.

4. UCITA section 112, Comment.