Submitted by the Council to the Members of The American Law Institute for Consideration at the Ninety-Sixth Annual Meeting on May 20, 21, and 22, 2019 Restatement of the Law Consumer Contracts Tentative Draft (April 18, 2019) SUBJECTS COVERED § 1. Definitions and Scope § 2. Adoption of Standard Contract Terms § 3. Modification of Standard Contract Terms § 4. Discretionary Obligations § 5. Unconscionability § 6. Deception § 7. Affirmations of Fact and Promises That Are Part of the Consumer Contract § 8. Standard Contract Terms and the Parol Evidence Rule § 9. Effects of Derogation from Mandatory Rules APPENDIX Black Letter of Tentative Draft The Executive Office The American Law Institute 4025 Chestnut Street Philadelphia, PA 19104-3099 Telephone: (215) 243-1600 • Fax: (215) 243-1636 E-mail: ali@ali.org • Website: http://www.ali.org ©2019 by The American Law Institute All Rights Reserved As of the date of publication, this Draft has not been considered by the members of The American Law Institute and does not represent the position of the Institute on any of the issues with which it deals. The action, if any, taken by the members with respect to this Draft may be ascertained by consulting the Annual Proceedings of the Institute, which are published following each Annual Meeting. © 2019 by The American Law Institute Tentative draft – not approved The American Law Institute DAVID F. LEVI, President ROBERTA COOPER RAMO, Chair of the Council DOUGLAS LAYCOCK, 1st Vice President LEE H. ROSENTHAL, 2nd Vice President WALLACE B. JEFFERSON, Treasurer PAUL L. FRIEDMAN, Secretary RICHARD L. REVESZ, Director STEPHANIE A. MIDDLETON, Deputy Director COUNCIL KIM J. ASKEW, K&L Gates, Dallas, TX JOSÉ I. ASTIGARRAGA, Reed Smith, Miami, FL DONALD B. AYER, Jones Day, Washington, DC SCOTT BALES, Arizona Supreme Court, Phoenix, AZ JOHN H. BEISNER, Skadden, Arps, Slate, Meagher & Flom, Washington, DC JOHN B. BELLINGER III, Arnold & Porter Kaye Scholer LLP, Washington, DC AMELIA H. BOSS, Drexel University Thomas R. Kline School of Law, Philadelphia, PA ELIZABETH J. CABRASER, Lieff Cabraser Heimann & Bernstein, San Francisco, CA EVAN R. CHESLER, Cravath, Swaine & Moore, New York, NY MARIANO-FLORENTINO CUÉLLAR, California Supreme Court, San Francisco, CA IVAN K. FONG, 3M Company, St. Paul, MN KENNETH C. FRAZIER, Merck & Co., Inc., Kenilworth, NJ PAUL L. FRIEDMAN, U.S. District Court, District of Columbia, Washington, DC STEVEN S. GENSLER, University of Oklahoma College of Law, Norman, OK ABBE R. GLUCK, Yale Law School, New Haven, CT YVONNE GONZALEZ ROGERS, U.S. District Court, Northern District of California, Oakland, CA ANTON G. HAJJAR, Chevy Chase, MD TERESA WILTON HARMON, Sidley Austin, Chicago, IL NATHAN L. HECHT, Texas Supreme Court, Austin, TX WILLIAM C. HUBBARD, Nelson Mullins Riley & Scarborough, Columbia, SC SAMUEL ISSACHAROFF, New York University School of Law, New York, NY KETANJI BROWN JACKSON, U.S. District Court for the District of Columbia, Washington, DC WALLACE B. JEFFERSON, Alexander Dubose & Jefferson LLP, Austin, TX GREGORY P. JOSEPH, Joseph Hage Aaronson LLC, New York, NY MICHELE C. KANE, The Walt Disney Company, Burbank, CA HAROLD HONGJU KOH, Yale Law School, New Haven, CT CAROLYN B. KUHL, Superior Court of California, County of Los Angeles, Los Angeles, CA CAROLYN B. LAMM, White & Case, Washington, DC DEREK P. LANGHAUSER, Office of the Governor, Augusta, ME DOUGLAS LAYCOCK, University of Virginia School of Law, Charlottesville, VA; University of Texas at Austin School of Law, Austin, TX CAROL F. LEE, Taconic Capital Advisors, New York, NY DAVID F. LEVI, Duke University School of Law, Durham, NC LANCE LIEBMAN*, Columbia Law School, New York, NY GOODWIN LIU, California Supreme Court, San Francisco, CA RAYMOND J. LOHIER, JR., U.S. Court of Appeals, Second Circuit, New York, NY GERARD E. LYNCH, U.S. Court of Appeals, Second Circuit, New York, NY MARGARET H. MARSHALL, Choate Hall & Stewart, Boston, MA LORI A. MARTIN, WilmerHale, New York, NY TROY A. MCKENZIE, New York University School of Law, New York, NY M. MARGARET MCKEOWN, U.S. Court of Appeals, Ninth Circuit, San Diego, CA JUDITH A. MILLER, Chevy Chase, MD PATRICIA ANN MILLETT, U.S. Court of Appeals, District of Columbia Circuit, Washington, DC JANET NAPOLITANO, University of California, Oakland, CA KATHRYN A. OBERLY, District of Columbia Court of Appeals (retired), Washington, DC KATHLEEN M. O’SULLIVAN, Perkins Coie, Seattle, WA *Director Emeritus ii © 2019 by The American Law Institute Tentative draft – not approved STEPHANIE E. PARKER, Jones Day, Atlanta, GA STUART RABNER, New Jersey Supreme Court, Trenton, NJ ROBERTA COOPER RAMO*, Modrall Sperling, Albuquerque, NM DAVID W. RIVKIN, Debevoise & Plimpton, New York, NY DANIEL B. RODRIGUEZ, Northwestern University Pritzker School of Law, Chicago, IL LEE H. ROSENTHAL, U.S. District Court, Southern District of Texas, Houston, TX GARY L. SASSO, Carlton Fields, Tampa, FL ANTHONY J. SCIRICA, U.S. Court of Appeals, Third Circuit, Philadelphia, PA MARSHA E. SIMMS, Weil, Gotshal & Manges (retired), New York, NY ROBERT H. SITKOFF, Harvard Law School, Cambridge, MA JANE STAPLETON, Christ’s College, University of Cambridge, Cambridge, England LAURA STEIN, The Clorox Company, Oakland, CA LARRY S. STEWART, Stewart Tilghman Fox Bianchi & Cain, Miami, FL ELIZABETH S. STONG, U.S. Bankruptcy Court, Eastern District of New York, Brooklyn, NY CATHERINE T. STRUVE, University of Pennsylvania Law School, Philadelphia, PA JEFFREY S. SUTTON, U.S. Court of Appeals, Sixth Circuit, Columbus, OH SARAH S. VANCE, U.S. District Court, Eastern District of Louisiana, New Orleans, LA SETH P. WAXMAN, WilmerHale, Washington, DC STEVEN O. WEISE, Proskauer Rose, Los Angeles, CA DIANE P. WOOD, U.S. Court of Appeals, Seventh Circuit, Chicago, IL COUNCIL EMERITI KENNETH S. ABRAHAM, University of Virginia School of Law, Charlottesville, VA SHIRLEY S. ABRAHAMSON, Wisconsin Supreme Court, Madison, WI PHILIP S. ANDERSON, Williams & Anderson, Little Rock, AR SUSAN FRELICH APPLETON, Washington University School of Law, St. Louis, MO SHEILA L. BIRNBAUM, Dechert LLP, New York, NY ALLEN D. BLACK, Fine, Kaplan and Black, Philadelphia, PA MICHAEL BOUDIN, U.S. Court of Appeals, First Circuit, Boston, MA WILLIAM M. BURKE, Shearman & Sterling (retired), Costa Mesa, CA GERHARD CASPER, Stanford University, Stanford, CA EDWARD H. COOPER, University of Michigan Law School, Ann Arbor, MI N. LEE COOPER, Maynard, Cooper & Gale, Birmingham, AL GEORGE H. T. DUDLEY, Dudley Newman Feuerzeig, St. Thomas, U.S. VI CHRISTINE M. DURHAM, Utah Supreme Court (retired), Salt Lake City, UT CONRAD K. HARPER, Simpson Thacher & Bartlett (retired), New York, NY D. BROCK HORNBY, U.S. District Court, District of Maine, Portland, ME MARY KAY KANE, University of California, Hastings College of the Law, San Francisco, CA CAROLYN DINEEN KING, U.S. Court of Appeals, Fifth Circuit, Houston, TX PIERRE N. LEVAL, U.S. Court of Appeals, Second Circuit, New York, NY BETSY LEVIN, Washington, DC HANS A. LINDE, Portland, OR MARTIN LIPTON, Wachtell, Lipton, Rosen & Katz, New York, NY MYLES V. LYNK, Arizona State University, Sandra Day O’Connor College of Law, Phoenix, AZ JOHN J. MCKETTA III, Graves, Dougherty, Hearon & Moody, Austin, TX ROBERT H. MUNDHEIM, Shearman & Sterling, New York, NY HARVEY S. PERLMAN, University of Nebraska College of Law, Lincoln, NE ELLEN ASH PETERS, Connecticut Supreme Court (retired), Hartford, CT MARY M. SCHROEDER, U.S. Court of Appeals, Ninth Circuit, Phoenix, AZ ROBERT A. STEIN, University of Minnesota Law School, Minneapolis, MN MICHAEL TRAYNOR**, Cobalt LLP, Berkeley, CA BILL WAGNER, Wagner McLaughlin, Tampa, FL WILLIAM H. WEBSTER, Milbank, Tweed, Hadley & McCloy, Washington, DC HERBERT P. WILKINS, Concord, MA *President Emeritus **President Emeritus and Chair of the Council Emeritus iii © 2019 by The American Law Institute Tentative draft – not approved Restatement of the Law Consumer Contracts Tentative Draft Comments and Suggestions Invited We welcome written comments on this draft. They may be submitted via the website project page or sent via email to RLCCcomments@ali.org. Comments will be forwarded directly to the Reporters, the Director, and the Deputy Director. You may also send comments via standard mail; contact information appears below. Unless expressed otherwise in the submission, individuals who submit comments authorize The American Law Institute to retain the submitted material in its files and archives, and to copy, distribute, publish, and otherwise make it available to others, with appropriate credit to the author. Comments will be accessible on the website’s project page as soon as they are posted by ALI staff. You must be signed in to submit or view comments. Reporters Professor Oren Bar-Gill Harvard Law School 1563 Massachusetts Avenue Cambridge, MA 02138-2996 Email: bargill@law.harvard.edu Director Professor Richard L. Revesz The Executive Office THE AMERICAN LAW INSTITUTE 4025 Chestnut Street Philadelphia, PA 19104-3099 Email: director@ALI.org Professor Omri Ben-Shahar University of Chicago Law School 1111 East 60th Street, Suite 1 Chicago, IL 60637-3281 Email: omri@uchicago.edu Deputy Director Ms. Stephanie A. Middleton The Executive Office THE AMERICAN LAW INSTITUTE 4025 Chestnut Street Philadelphia, PA 19104-3099 Email: smiddleton@ALI.org Professor Florencia Marotta-Wurgler New York University School of Law 40 Washington Square South #411B New York, NY 10012-1005 Email: wurglerf@exchange.law.nyu.edu Reporters’ Conflicts of Interest The project’s Reporters may have been involved in other engagements on issues within the scope of the project; all Reporters are asked to disclose any conflicts of interest, or their appearance, in accord with the Policy Statement and Procedures on Conflicts of Interest with Respect to Institute Projects. iv © 2019 by The American Law Institute Tentative draft – not approved Restatement of the Law Consumer Contracts REPORTERS OREN BAR-GILL, Harvard Law School, Cambridge, MA OMRI BEN-SHAHAR, University of Chicago Law School, Chicago, IL FLORENCIA MAROTTA-WURGLER, New York University School of Law, New York, NY [from 2014] ADVISERS JOHN H. BEISNER, Skadden, Arps, Slate, Meagher & Flom, Washington, DC ARTHUR R. BLOCK, Comcast Corporation, Philadelphia, PA AMELIA H. BOSS, Drexel University Thomas R. Kline School of Law, Philadelphia, PA ROLAND E. BRANDEL, Morrison & Foerster, San Francisco, CA JULIE S. BRILL, Microsoft Corporation, Redmond, WA BRIAN P. BROOKS, Fannie Mae, Washington, DC THOMAS J. BUITEWEG, Hudson Cook, Ann Arbor, MI STEVEN J. BURTON, University of Iowa College of Law, Iowa City, IA ELIZABETH J. CABRASER, Lieff Cabraser Heimann & Bernstein, San Francisco, CA RICHARD CRASWELL, Stanford Law School, Stanford, CA MELVIN A. EISENBERG, University of California, Berkeley School of Law, Berkeley, CA MEREDITH FUCHS, Capital One, McLean, VA LARRY T. GARVIN, Ohio State University, Moritz College of Law, Columbus, OH CLAYTON GILLETTE, New York University School of Law, New York, NY MICHAEL M. GREENFIELD, Washington University School of Law, St. Louis, MO GAIL K. HILLEBRAND, Consumer Financial Protection Bureau, Washington, DC ROBERT A. HILLMAN, Cornell Law School, Ithaca, NY SAMUEL ISSACHAROFF, New York University School of Law, New York, NY WALLACE B. JEFFERSON, Alexander Dubose & Jefferson, Austin, TX JAMES R. JENKINS, Midland, MI ALAN S. KAPLINSKY, Ballard Spahr, Philadelphia, PA RAYMOND M. KETHLEDGE, U.S. Court of Appeals, Sixth Circuit, Ann Arbor, MI CAROLYN B. KUHL, Superior Court of California, County of Los Angeles, Los Angeles, CA PATRICIA A. MCCOY, Boston College Law School, Newton Center, MA KELLY MCNAMARA-CORLEY, Discover Financial Services, Inc., Riverwoods, IL CARLOS G. ORTIZ, Goya Foods, Inc., Jersey City, NJ MARY D. PRIDGEN, University of Wyoming College of Law, Laramie, WY MARGARET JANE RADIN, University of Michigan Law School, Ann Arbor, MI E. LEE REICHERT III, Molson Coors Brewing Company, Denver, CO CHRISTINA C. REISS, U.S. District Court, District of Vermont, Burlington, VT ELIZABETH A. RENUART, National Consumer Law Center, Boston, MA JONATHAN ROSE, Arizona State University, Sandra Day O’Connor College of Law, Phoenix, AZ MARY M. SCHROEDER, U.S. Court of Appeals, Ninth Circuit, Phoenix, AZ HANS SCHULTE-NÖLKE, European Legal Studies Institute, Osnabruck, Germany WILLARD K. TOM, Morgan, Lewis & Bockius, Washington, DC STEVEN O. WEISE, Proskauer Rose, Los Angeles, CA JAMES J. WHITE, University of Michigan Law School, Ann Arbor, MI LAUREN E. WILLIS, Loyola Law School, Los Angeles, Los Angeles, CA JACOB S. ZIEGEL, University of Toronto, Faculty of Law, Toronto, ON, Canada v © 2019 by The American Law Institute Tentative draft – not approved 2019 by The American Law Institute Tentative draft not approved MEMBERS CONSULTATIVE GROUP Restatement of the Law, Consumer Contracts (as of April 18, 2019) KRISTEN DAVID ADAMS, Gulfport, FL PETER A. ALCES, Williamsburg, VA RICHARD M. ALDERMAN, Santa Fe, NM H. WILLIAM ALLEN, Little Rock, AR THERESA AMATO, Washington, DC PHILIP S. ANDERSON, Little Rock, AR ROY RYDEN ANDERSON, Dallas, TX CHRISTOPHER EDWARD APPEL, Washington, DC LYNN A. BAKER, Austin, TX BARRY BARNETT, Houston, TX DABNEY DORSETT BASSEL, Fort Worth, TX SHAWN J. BAYERN, Tallahassee, FL NEAL S. BERINHOUT, Dallas, TX BRIAN BIX, Minneapolis, MN CARL S. BJERRE, Eugene, OR MATTHEW T. BODIE, Saint Louis, MO DAVID S. BOGEN, Baltimore, MD LOUIS F. BONACORSI, Saint Louis, MO WILLARD L. BOYD III, Des Moines, IA RONALD A. BRAND, Pittsburgh, PA THOMAS P. BROWN, San Francisco, CA MARK E. BUDNITZ, Atlanta, GA TIMOTHY W. BURNS, Madison, WI JOHN P. BURTON, Santa Fe, NM FABRIZIO CAFAGGI, Florence, Italy STEPHEN CALKINS, Detroit, MI VINCENT P. CARDI, Morgantown, WV PAUL DEWITT CARRINGTON, Mitchellville, MD WILLIAM RICHARD CASTO, Lubbock, TX ROBERT S. CHANG, Seattle, WA JORDAN B. CHERRICK, Saint Louis, MO CAROL L. CHOMSKY, Minneapolis, MN STEPHEN YEE CHOW, Boston, MA TRACY CHRISTOPHER, Houston, TX DAVID S. COALE, Dallas, TX NEIL B. COHEN, Brooklyn, NY MARTIN B. COWAN, New Rochelle, NY JOHN G. CRABTREE, Key Biscayne, FL CHRISTOPHER SCOTT D'ANGELO, Philadelphia, PA JOSEPH WILLIAM DELLAPENNA, Ardmore, PA EDWARD DIVER, Philadelphia, PA WILLIAM S. DODGE, Davis, CA CHRISTOPHER R. DRAHOZAL, Lawrence, KS WILLIAM A. DRENNAN, Carbondale, IL ARTHUR W. S. DUFF, Greenbrae, CA MATTHEW H. DUNCAN, Philadelphia, PA MARGUERITE M. ELIAS, Chicago, IL DAVID G. EPSTEIN, Richmond, VA HOWARD M. ERICHSON, New York, NY JOSEPH P. ESPOSITO, Washington, DC SAMUEL ESTREICHER, New York, NY WARD FARNSWORTH, Austin, TX JAY M. FEINMAN, Camden, NJ RICHARD L. FIELD, Cliffside Park, NJ JUDITH K. FITZGERALD, Pittsburgh, PA JOSEPH Z. FLEMING, Miami, FL MICHAEL D. FLOYD, Birmingham, AL DAVID JOEL FRISCH, Richmond, VA HENRY D. GABRIEL, Greensboro, NC ANGEL A. GARGANTA, San Francisco, CA DAVID R. GEIGER, Boston, MA JAMES PAUL GEORGE, Fort Worth, TX LLEWELLYN JOSEPH GIBBONS, Toledo, OH JOSEPH GOLDBERG, Albuquerque, NM JOHN M. GOLDEN, Austin, TX ERIC GOLDMAN, Santa Clara, CA JEREMY M. GOLDMAN, San Francisco, CA KATHERINE ANN GRAHAM, Saint Paul, MN JEFFREY J. GREENBAUM, Newark, NJ MICHAEL GREENWALD, Philadelphia, PA CHARLES E. GRIFFIN, Ridgeland, MS JOHN J. GROGAN, Philadelphia, PA MARJORIE E. GROSS, New York, NY DEEPAK GUPTA, Washington, DC ANTON G. HAJJAR, Chevy Chase, MD PETER E. HALLE, Coconut Grove, FL TERESA WILTON HARMON, Chicago, IL STEVEN L. HARRIS, Wilmette, IL ROBERT M. HART, Bronxville, NY PAUL T. HAYDEN, Los Angeles, CA WILLIAM C. HEUER, New York, NY RICHARD DEC. HINDS, Washington, DC DAVID A. HOFFMAN, Philadelphia, PA CHRIS JAY HOOFNAGLE, Berkeley, CA C. STEPHEN HSU, Beijing, China STEPHEN K. HUBER, Glenwood Springs, CO EDWIN E. HUDDLESON, Washington, DC SARAH JANE HUGHES, Bloomington, IN RICHARD W. HULBERT, New York, NY vii © 2019 by The American Law Institute Tentative draft – not approved LASHONDA A. HUNT, Chicago, IL RICHARD H. HUNTER, St. Croix, Virgin Islands J. RUSSELL JACKSON, Saint Louis, MO MELISSA B. JACOBY, Chapel Hill, NC EDWARD J. JANGER, Brooklyn, NY SARAH HOWARD JENKINS, Little Rock, AR VINCENT R. JOHNSON, San Antonio, TX THOMAS W. JOO, Davis, CA EMILY KADENS, Chicago, IL MICHELE C. KANE, Burbank, CA CEM KANER, Guelph, Canada ALLAN KANNER, New Orleans, LA RICHARD B. KATSKEE, Washington, DC ROBERT L. KEHR, Los Angeles, CA HAROLD H. KIM, Washington, DC NANCY S. KIM, San Diego, CA DANIEL S. KLEINBERGER, Mendota Heights, MN MARGARET N. KNIFFIN, New York, NY ANDREW D. KOBLENZ, Tyson, VA PETER R. KOCHENBURGER, Hartford, CT MICHAEL J. KRAMER, Albion, IN CHRISTINA L. KUNZ, Saint Paul, MN EDWARD LABATON, New York, NY SYBIL H. LANDAU, New York, NY HOWARD LANGER, Philadelphia, PA JOHN P. LAVELLE JR., Philadelphia, PA ROBERT M. LAWLESS, Champaign, IL PETER E. LECKMAN, Philadelphia, PA BILL LANN LEE, Berkeley, CA CAROL F. LEE, New York, NY ADAM J. LEVITIN, Washington, DC ADAM J. LEVITT, Chicago, IL JOHN B. LEWIS, Cleveland, OH PETER LINZER, Houston, TX JONATHAN C. LIPSON, Philadelphia, PA KYLE D. LOGUE, Ann Arbor, MI WILLIAM CULLEN MACDONALD, Brooklyn, NY KERRY LYNN MACINTOSH, Santa Clara, CA MICHAEL J. MADISON, Pittsburgh, PA PETER B. MAGGS, Urbana, IL C. SCOTT MARAVILLA, Washington, DC BRUCE A. MARKELL, Chicago, IL COLIN P. MARKS, San Antonio, TX JENNIFER S. MARTIN, Miami Gardens, FL NATHALIE D. MARTIN, Albuquerque, NM JUDITH L. MAUTE, Norman, OK JAMES R. MAXEINER, Baltimore, MD CATHERINE P. MCEWEN, Tampa, FL DAVID MCGOWAN, San Diego, CA JAMES A. MCKENNA, Hallowell, ME JOHN J. MCKETTA III, Austin, TX MARK S. MELODIA, New York, NY DOUGLAS K. MOLL, Houston, TX JULIET M. MORINGIELLO, Harrisburg, PA RICHARD L. NEUMEIER, Boston, MA RAFAEL I. PARDO, Atlanta, GA JACQUELINE A. PARKER, Stamford, CT R. ASHBY PATE, Birmingham, AL ROBERT S. PECK, Washington, DC ROBERT H. PEMBERTON, Austin, TX JEFFREY M. POLLOCK, Princeton, NJ CHERYL B. PRESTON, Provo, UT IAIN D. C. RAMSAY, Canterbury, England BERNARD D. REAMS JR., San Antonio, TX CURTIS R. REITZ, Philadelphia, PA WILLIAM L. REYNOLDS, Baltimore, MD CAPRICE L. ROBERTS, Gainesville, FL JAMES L. ROBERTSON, Jackson, MS KENNETH ROSS, Midway, UT ELIZABETH A. ROWE, Gainesville, FL KEITH A. ROWLEY, Las Vegas, NV LINDA J. RUSCH, Seattle, WA MICHAEL L. RUSTAD, South Burlington, VT JACK M. SABATINO, Trenton, NJ CHRISTOPHER LYNN SAGERS, Cleveland, OH KAREN J. SARJEANT, Silver Spring, MD MILTON R. SCHROEDER, Paradise Valley, AZ DANIEL SCHWARCZ, Minneapolis, MN PAUL M. SCHWARTZ, Berkeley, CA VICTOR E. SCHWARTZ, Washington, DC JOHN A. SEBERT, Wilmette, IL MARC M. SELTZER, Los Angeles, CA STEPHEN L. SEPINUCK, Spokane, WA BRIAN D. SHANNON, Lubbock, TX ALLEN E. SHOENBERGER, Chicago, IL MICHAEL N. SIMKOVIC, Santa Monica, CA OMARI SCOTT SIMMONS, Winston Salem, NC GEORGE PRESCOTT SLOVER, Washington, DC B. RUSH SMITH III, Columbia, SC DOUGLAS G. SMITH, Chicago, IL DAVID V. SNYDER, Washington, DC DANIEL J. SOLOVE, Washington, DC HENRY J. SOMMER, Philadelphia, PA LUIS EDUARDO SPROVIERI, Buenos Aires, Argentina JOAN E. STEINMAN, Chicago, IL JEFFREY W. STEMPEL, Las Vegas, NV LARRY S. STEWART, Miami, FL LAURA D. STITH, Jefferson City, MO ELIZABETH S. STONG, Brooklyn, NY GUY MILLER STRUVE, New York, NY CHARLES A. SULLIVAN, Newark, NJ viii © 2019 by The American Law Institute Tentative draft – not approved EVAN M. TAGER, Washington, DC LOUISE ELLEN TEITZ, Bristol, RI JEFFREY E. THOMAS, Kansas City, MO JAY TIDMARSH, Notre Dame, IN JOSEPH P. TOMAIN, Cincinnati, OH CARLA C. VAN DONGEN, Bloomington, IL SJEF VAN ERP, Maastricht, Netherlands BEA VERSCHRAEGEN, Vienna, Austria DOMINICK VETRI, Eugene, OR DAVID C. VLADECK, Washington, DC BILL WAGNER, Tampa, FL SEAN P. WAJERT, Philadelphia, PA DENNIS J. WALL, Winter Springs, FL SPENCER W. WALLER, Chicago, IL NICHOLAS J. WALLWORK, Salt Lake City, UT STEPHEN J. WARE, Lawrence, KS CHRISTIANE C. WENDEHORST, Vienna, Austria ALAN M. WHITE, Long Island City, NY GERARD E. WIMBERLY JR., New Orleans, LA JANE K. WINN, Seattle, WA WILLIAM J. WOODWARD, Oakland, CA WILLIAM A. WORTHINGTON, Houston, TX CANDACE ZIERDT, Gulfport, FL ix © 2019 by The American Law Institute Tentative draft – not approved The bylaws of The American Law Institute provide that “Publication of any work as representing the Institute’s position requires approval by both the membership and the Council.” Each portion of an Institute project is submitted initially for review to the project’s Advisers and Members Consultative Group as a Preliminary Draft. As revised, it is then submitted to the Council as a Council Draft. After review by the Council, it is submitted as a Tentative Draft or Discussion Draft for consideration by the membership at an Annual Meeting. Once it is approved by both the Council and membership, a Tentative Draft represents the most current statement of the Institute’s position on the subject and may be cited in opinions or briefs in accordance with Bluebook rule 12.9.4, e.g., Restatement (Second) of Torts § 847A (Am. Law Inst., Tentative Draft No. 17, 1974), until the official text is published. The vote of approval allows for possible further revision of the drafts to reflect the discussion at the Annual Meeting and to make editorial improvements. The drafting cycle continues in this manner until each segment of the project has been approved by both the Council and the membership. When extensive changes are required, the Reporter may be asked to prepare a Proposed Final Draft of the entire work, or appropriate portions thereof, for review by the Council and membership. Review of this draft is not de novo, and ordinarily is limited to consideration of whether changes previously decided upon have been accurately and adequately carried out. The typical ALI Section is divided into three parts: black letter, Comment, and Reporter’s Notes. In some instances there may also be a separate Statutory Note. Although each of these components is subject to review by the project’s Advisers and Members Consultative Group and by the Council and the membership, only the black letter and Comment are regarded as the work of the Institute. The Reporter’s and Statutory Notes remain the work of the Reporter. x © 2019 by The American Law Institute Tentative draft – not approved Restatements (excerpt of the Revised Style Manual approved by the ALI Council in January 2015) Restatements are primarily addressed to courts. They aim at clear formulations of common law and its statutory elements or variations and reflect the law as it presently stands or might appropriately be stated by a court. a. Nature of a Restatement. Webster’s Third New International Dictionary defines the verb “restate” as “to state again or in a new form” [emphasis added]. This definition neatly captures the central tension between the two impulses at the heart of the Restatement process from the beginning, the impulse to recapitulate the law as it presently exists and the impulse to reformulate it, thereby rendering it clearer and more coherent while subtly transforming it in the process. The law of the Restatements is generally common law, the law developed and articulated by judges in the course of deciding specific cases. For the most part Restatements thus assume a body of shared doctrine enabling courts to render their judgments in a consistent and reasonably predictable manner. In the view of the Institute’s founders, however, the underlying principles of the common law had become obscured by the ever-growing mass of decisions in the many different jurisdictions, state and federal, within the United States. The 1923 report suggested that, in contrast, the Restatements were to be at once “analytical, critical and constructive.” In seeing each subject clearly and as a whole, they would discern the underlying principles that gave it coherence and thus restore the unity of the common law as properly apprehended. Unlike the episodic occasions for judicial formulations presented by particular cases, however, Restatements scan an entire legal field and render it intelligible by a precise use of legal terms to which a body reasonably representative of the legal profession, The American Law Institute, has ultimately agreed. Restatements—“analytical, critical and constructive”— accordingly resemble codifications more than mere compilations of the pronouncements of judges. The Institute’s founders envisioned a Restatement’s black-letter statement of legal rules as being “made with the care and precision of a well-drawn statute.” They cautioned, however, that “a statutory form might be understood to imply a lack of flexibility in the application of the principle, a result which is not intended.” Although Restatements are expected to aspire toward the precision of statutory language, they are also intended to reflect the flexibility and capacity for development and growth of the common law. They are therefore phrased not in the mandatory terms of a statute but in the descriptive terms of a judge announcing the law to be applied in a given case. A Restatement thus assumes the perspective of a common-law court, attentive to and respectful of precedent, but not bound by precedent that is inappropriate or inconsistent with the law as a whole. Faced with such precedent, an Institute Reporter is not compelled to adhere to what Herbert Wechsler called “a preponderating balance of authority” but is instead expected to propose the better rule and provide the rationale for choosing it. A significant contribution of the Restatements has also been anticipation of the direction in which the law is tending and expression of that development in a manner consistent with previously established principles. The Restatement process contains four principal elements. The first is to ascertain the nature of the majority rule. If most courts faced with an issue have resolved it in a particular way, that is obviously important to the inquiry. The second step is to ascertain trends in the law. If 30 jurisdictions have gone one way, but the 20 jurisdictions to look at the issue most recently went © 2019 by The American Law Institute xi Tentative draft – not approved the other way, or refined their prior adherence to the majority rule, that is obviously important as well. Perhaps the majority rule is now widely regarded as outmoded or undesirable. If Restatements were not to pay attention to trends, the ALI would be a roadblock to change, rather than a “law reform” organization. A third step is to determine what specific rule fits best with the broader body of law and therefore leads to more coherence in the law. And the fourth step is to ascertain the relative desirability of competing rules. Here social-science evidence and empirical analysis can be helpful. A Restatement consists of an appropriate mix of these four elements, with the relative weighing of these considerations being art and not science. The Institute, however, needs to be clear about what it is doing. For example, if a Restatement declines to follow the majority rule, it should say so explicitly and explain why. An excellent common-law judge is engaged in exactly the same sort of inquiry. In the words of Professor Wechsler, which are quoted on the wall of the conference room in the ALI headquarters in Philadelphia: We should feel obliged in our deliberations to give weight to all of the considerations that the courts, under a proper view of the judicial function, deem it right to weigh in theirs. But in the quest to determine the best rule, what a Restatement can do that a busy common-law judge, however distinguished, cannot is engage the best minds in the profession over an extended period of time, with access to extensive research, testing rules against disparate fact patterns in many jurisdictions. Like a Restatement, the common law is not static. But for both a Restatement and the common law the change is accretional. Wild swings are inconsistent with the work of both a common-law judge and a Restatement. And while views of which competing rules lead to more desirable outcomes should play a role in both inquiries, the choices generally are constrained by the need to find support in sources of law. An unelected body like The American Law Institute has limited competence and no special authority to make major innovations in matters of public policy. Its authority derives rather from its competence in drafting precise and internally consistent articulations of law. The goals envisioned for the Restatement process by the Institute’s founders remain pertinent today: It will operate to produce agreement on the fundamental principles of the common law, give precision to use of legal terms, and make the law more uniform throughout the country. Such a restatement will also effect changes in the law, which it is proper for an organization of lawyers to promote and which make the law better adapted to the needs of life. [emphasis added] © 2019 by The American Law Institute xii Tentative draft – not approved PROJECT STATUS AT A GLANCE No portion of this project has previously been submitted for membership approval. History of Material in This Draft This project was initiated in 2012. Earlier versions of the material contained in this Draft can be found in Preliminary Draft Nos. 1, 2, and 3 (2014, 2015, 2017), Discussion Draft (2017), and Council Draft Nos. 1, 2, 3, 4, and 5 (2015, 2016, 2016, 2017, 2018). xiii © 2019 by The American Law Institute Tentative draft – not approved 2019 by The American Law Institute Tentative draft not approved Foreword This project had a unique genesis. In 2011, the Institute announced the first winners of its new Young Scholars Medal (subsequently renamed the Early Career Scholars Medal). One of the two winners, Professor Oren Bar-Gill, then of New York University School of Law, now at Harvard Law School, had devoted a significant portion of his academic career to the study of contracts in which there is significant imbalance of information between sellers and buyers and in which contract terms are not negotiated by the parties. Many of us encounter contracts of this sort daily when we buy certain products or services, either in traditional stores or online. Following Professor Bar-Gill’s presentation of his work at the 2011 Annual Meeting, the Institute launched a Restatement of the Law, Consumer Contracts, with Professor Omri Ben-Shahar of the University of Chicago Law School joining him as a Reporter. Professor Florencia Marotta-Wurgler of New York University School of Law became a Reporter a few years later. This Restatement seeks to clarify how the courts have applied the principles embodied in the Restatement of the Law Second, Contracts, and the Uniform Commercial Code to transactions that either were not contemplated at the time those projects were completed (and therefore not addressed), like the purchase of software licenses and all online transactions, or that became a more significant part of the economy since that time. In this regard, two concepts have proven to be particularly challenging—assent and unconscionability—and the Restatement has devoted significant attention to these matters. A Discussion Draft containing all of the Sections was presented at the Annual Meeting in 2017. The Council has now approved the whole project, which will be presented to the membership for final approval. The Reporters have done excellent work conceptualizing the project and responding to often inconsistent feedback and they deserve our collective gratitude, as do the Advisers and Members Consultative Group, who have grappled deeply with the knotty issues contained in this draft. RICHARD L. REVESZ Director The American Law Institute April 16, 2019 xv © 2019 by The American Law Institute Tentative draft – not approved 2019 by The American Law Institute Tentative draft not approved TABLE OF CONTENTS Section Page Project Status at a Glance ................................................................................................... xiii Foreword ................................................................................................................................ xv Reporters’ Memorandum ........................................................................................... xix Reporters’ Introduction ................................................................................................. 1 § 1. Definitions and Scope ........................................................................................... 8 § 2. Adoption of Standard Contract Terms ................................................................. 18 § 3. Modification of Standard Contract Terms ........................................................... 53 § 4. Discretionary Obligations .................................................................................... 67 § 5. Unconscionability ................................................................................................ 75 § 6. Deception ............................................................................................................. 99 § 7. Affirmations of Fact and Promises That Are Part of the Consumer Contract .... 107 § 8. Standard Contract Terms and the Parol Evidence Rule ..................................... 115 § 9. Effects of Derogation from Mandatory Rules ................................................... 121 Appendix. Black Letter of Tentative Draft .......................................................... 129 xvii © 2019 by The American Law Institute Tentative draft – not approved 2019 by The American Law Institute Tentative draft not approved To: From: Re: Date: ALI Members Oren Bar-Gill, Omri Ben-Shahar, and Florencia Marotta-Wurgler, Reporters Tentative Draft of Restatement of the Law, Consumer Contracts April 15, 2019 Dear Members, We are delighted to present to you the Tentative Draft of the Restatement of the Law, Consumer Contracts. This Restatement provides courts and lawyers with an exposition to the rules of the common law of contracts as applied to standard-form consumer contracts. These contracts control a large and growing share of the economy. This Restatement thus responds to a growing need of courts to determine the terms of those agreements and their limits. This document is a restatement: it closely follows the principles that guide a large majority of courts. This is a timely endeavor, as it identifies trends that have coalesced across a multitude of jurisdictions. Those principles and trends were distilled in accordance with the traditional ALI methodology—eliciting from leading cases the guiding rationales, clarifying their goals, and developing their conceptual implications. The pervasiveness of the rules restated was further confirmed by a secondary methodology of analyzing the entire body of consumer-contract law. In producing this Restatement, the Reporters benefited from a broad range of comments and suggestions from the Advisers, the MCG, other ALI members, and experts in the field of contract law. We are especially grateful for the extensive comments provided by a group of ALI Council members who specialize in the rules of the Uniform Commercial Code and in contract law more broadly. The advice and support we received is reflected in every Section and in every page of this document. This Restatement implements a framework originally developed by Karl Llewellyn long before the advent of digital contracting. Recognizing that consumers often do not read the fine print terms in a contract, this Restatement establishes the rules (which must be followed) for determining the terms of the agreement. It specifies the conditions for adoption of the standard contract terms, and it articulates the common-law doctrines that restrict the effect of intolerable terms. xix © 2019 by The American Law Institute Tentative draft – not approved 2019 by The American Law Institute Tentative draft not approved RESTATEMENT OF THE LAW CONSUMER CONTRACTS 1 Reporters’ Introduction: Consumer contracts present a fundamental challenge to the law 2 of contracts, arising from the asymmetry in information, sophistication, and stakes between the 3 parties to these contracts—the business and the consumers. On one side stands a well-informed 4 and counseled business party, entering numerous identical transactions, with the tools and 5 sophistication to understand and draft detailed legal terms and design practices that serve its 6 commercial goals. On the other side stand consumers who are informed only about some core 7 aspects of the transaction, but rarely about the list of standard terms. These consumers enter the 8 transaction solely for personal or household purposes, without any professional understanding of 9 its legal contours. It is both irrational and infeasible for most consumers to keep up with the 10 increasingly complex terms provided by businesses in the multitude of transactions, large and 11 small, entered into daily. 12 There are many benefits to standard-form contracting, even in such asymmetric 13 environments. The efficiencies of mass production and mass distribution of products and services 14 would be hindered if the terms of each transaction with each consumer had to be individually 15 negotiated. These efficiencies can benefit all market participants, and the law has accordingly 16 viewed standard-form contracting favorably, enforcing such contracts without mounting special 17 impediments. 18 But the benefits of standard-form contracting are not without risks. Because consumers 19 typically lack the information, sophistication, and incentive to monitor the terms appended to their 20 transactions, there is a concern that businesses will include terms that are unreasonably one-sided, 21 unfair, and inefficient. In the absence of scrutiny from their customers, businesses might overreach 22 and draft terms of agreement that undermine some of the value that consumers reasonably 23 expected. Such overreaching might persist even in competitive environments. 24 In dealing with this fundamental challenge of potential abuse in asymmetric contracting 25 environments, consumer-contract law deploys several policing techniques. The first set of 26 techniques fit within the doctrine of mutual assent—the rules that determine how a contract is 27 formed, which terms are adopted into the agreement, and what processes a business must follow 28 to alert consumers to the terms being introduced and to the consequences of their adoption. The 29 second set of techniques involve mandatory restrictions over the substance of the deal—rules that 1 © 2019 by The American Law Institute Tentative draft – not approved Reporters’ Introduction Consumer Contracts 1 limit the discretion of the business in drafting contract terms and set boundaries to the permissible 2 terms of contracts. 3 Questions relating to these policing techniques have emerged at the forefront of consumer- 4 contract case law in recent decades. In the area of contract formation, technological advances have 5 made it easier for business parties to draft and disseminate lengthy documents with (often self- 6 serving) contractual terms at the initiation phases of consumer transactions and to modify those 7 terms periodically. Whereas shopping at a grocery store in the brick and mortar world entails very 8 few standard contract terms (and many legally supplied gap-fillers), shopping at the online outlet 9 of that store now entails a lengthy list of standard terms. The proliferation of lengthy standard- 10 term contracts, mostly in digital form, makes it practically impossible for consumers to scrutinize 11 the terms and evaluate them prior to manifesting assent. A signature at the bottom of the form, or 12 a click “I Accept” is, at best, a declaration “I know I am agreeing to something, but I don’t know 13 to what. I trust that if something really bad is buried in the fine print, the law will protect me from 14 its bite.” In such environments, whether the lengthy terms are presented to the consumer before or 15 after the decision to enter the transaction has little bearing on the consumer’s awareness or 16 understanding of the terms, as the process of review-and-scrutiny has become largely impractical. 17 Likewise, questions relating to the second set of policing techniques—the limits of 18 permissible contracting—have emerged at the other forefront of consumer-contract law. As 19 standard-form contracts increasingly replace longstanding default rules with provisions drafted by 20 business entities, courts have been called upon to police their reach. Whether the terms are 21 excessively one-sided and unfair, or merely diverge from the consumer’s reasonable expectations 22 as shaped by the business’s marketing practices, common-law courts and consumer-protection 23 statutes establish a framework for marking the boundaries. Traditional doctrines like 24 unconscionability and misrepresentation have been applied to police suspect practices and terms 25 relating to the subject matter of the transaction, to the remedies that consumers or the business may 26 seek when the transaction fails, to choices of law and forum, to the business’s discretion to specify 27 and adjust contractual obligations, and to many other areas of contracting. 28 Common-law courts have sought to address the concern for potential abuse in asymmetric 29 contracting environments through both techniques—the assent doctrine and mandatory limits over 30 permissible contracting. Courts have established some minimum requirements relating to the 31 manner in which the agreements are presented to consumers and to the conspicuousness of the 2 © 2019 by The American Law Institute Tentative draft – not approved Tentative Draft Reporters’ Introduction 1 alerts that consumers receive. At the same time, courts have developed standards that prohibit 2 various intolerable or deceptive terms even if those terms pass through the filter of mutual assent. 3 Because the imbalance between businesses and consumers is so great, the application of 4 contract law’s general rules of mutual assent alone are not likely to level the playing field. In a 5 world of lengthy standard forms, which consumers are unlikely to read, more restrictive assent 6 rules that demand more disclosures, more notifications and alerts, and more structured templates 7 for manifesting assent are unlikely to produce substantial benefit for consumers. Similarly, outside 8 the common law, the Uniform Commercial Code’s rule that disclaimers of implied warranties 9 become effective and are adopted as part of the contract only if made in a conspicuous manner 10 induced lengthy disclaimer paragraphs in ALL CAPS typeface, but again without curing the 11 imbalance between the business and the consumer. As the length and incidence of standard-form 12 contracts have grown, it has become all the less plausible to expect consumers to read and take 13 informed account of the contracts’ provisions. In these environments, strengthening the disclosure 14 requirements emanating from contract law’s general rules of mutual assent would not prompt 15 consumers to read the terms, to carefully weigh them, and to ultimately make more prudent 16 contracting decisions. Since advance disclosure of standard terms generally does not render the 17 assent process any more meaningful, the “opportunity to read” technique, which courts have 18 embraced, is quite ineffective in consumer contracts. Some observers have even argued that 19 mandating more disclosures might “backfire” by creating a false presumption of meaningful 20 assent, thus undercutting the second policing technique—the ex post scrutiny of contract terms. 21 Despite the limited effectiveness of the assent doctrine and of advance disclosure rules in 22 producing environments of informed consent, courts have—without exception—endorsed and 23 enforced standard form contracts, as long as some necessary requirements are met. This 24 Restatement states the requirements developed by common-law courts for the adoption of standard 25 contract terms into consumer contracts. The requirements focus on the timing, format of 26 presentation, context, and substance of the notifications consumers receive regarding the existence 27 of terms applying to the transaction. The goal of these court-developed requirements is to afford 28 consumers a meaningful opportunity to review the terms and to avoid the transaction. While some 29 variation exists among courts and jurisdictions concerning the necessary substance and scope of 30 the notifications accompanying the presentation of standard contract terms, this Restatement 31 presents a comprehensive set of requirements unifying this common-law jurisprudence. 3 © 2019 by The American Law Institute Tentative draft – not approved Reporters’ Introduction Consumer Contracts 1 Satisfaction of such requirements does not impose significant burdens on businesses or consumers 2 interested in quick, streamlined completion of transactions. Adherence by businesses to these 3 procedures would provide certainty surrounding the process of adoption of standard contract terms. 4 In addition to the rules governing the adoption of standard contract terms, this Restatement 5 unifies and presents the primary common-law mandatory restrictions over the substance of those 6 terms. One category of restrictions, which common-law courts have developed primarily under the 7 unconscionability doctrine, protects consumers against egregiously unfair terms. Another category 8 of restrictions protects consumers from standard contract terms that negate or undermine 9 consumers’ reasonably expected benefits from the bargain. At the center of this second safeguard 10 stand rules that give effect to representations, affirmations, and promises made to consumers, even 11 when meticulous language in the standard contract terms purports to undo such effect. 12 In recent decades, an important question regarding the scope of the unconscionability 13 safeguard is the effect of limits (stipulated in standard contract terms) on the ability of consumers 14 to pursue a complaint or to seek reasonable redress, particularly by channeling all disputes to 15 arbitration or barring class actions. Many courts have held that imposing express or de facto class- 16 action bars on consumers is unconscionable, because such limitations render the enforcement of 17 consumer contractual rights impractical. Recently, however, the enforceability of these terms has 18 turned also on the provisions of various federal statutes. One such statute is the Federal Arbitration 19 Act (FAA), which has been held by the U.S. Supreme Court to preempt, in some cases, the 20 application of the common-law doctrine of unconscionability to arbitration clauses. 21 The interpretation of the FAA and of other federal rules that regulate the procedures for 22 consumers’ access to justice is outside the scope of the common law of consumer contracts. This 23 Restatement states the principles that, in the absence of constraints of federal law, guide the 24 application of the doctrine of unconscionability under state law. It takes no position on the proper 25 application of the Federal Arbitration Act or other statutes governing enforceability of or limits on 26 arbitration provisions, and the way such statutes affect the application of the unconscionability 27 standard. 28 The ex post scrutiny of permissible contracting, as well as the scrutiny of standard contract 29 terms that conflict with other promises and representations made to consumers, are not intended 30 to be (nor can they feasibly operate as) a replacement for private ordering. Parties are allowed to 31 design their transactions, and standard contract terms—despite being invisible to most 4 © 2019 by The American Law Institute Tentative draft – not approved Tentative Draft Reporters’ Introduction 1 consumers—are an indispensable part of the transaction. Parties may agree to bargain-basement 2 terms, if they so wish, and for the right price. The ex post scrutiny by courts is only intended to 3 uproot terms so unfair that they would be unlikely to survive in an environment of meaningful free 4 choice, or that stealthily peel off the value that consumers bargained for. 5 Consumer-contract law as developed by courts reflects Karl Llewellyn’s familiar model: a 6 fairly streamlined adoption of standard contract terms (the “supplementary boilerplate,” in 7 Llewellyn’s words), along with rigorous scrutiny to protect the spirit of the bargained-for deal 8 (“the dickered terms”). Llewellyn captured this with the concept of “blanket assent” to “any not 9 unreasonable or indecent terms.” He recognized then—an insight that has become all the more 10 relevant in the digital era—that the manifestation of assent to a consumer contract results in the 11 adoption of standard contract terms but does not imply meaningful informed consent to these 12 terms. Llewellyn recognized that common-law courts scrutinize and uproot unfair terms and 13 enforce the standard contract terms only if they “do not alter or eviscerate the reasonable meaning 14 of the dickered terms.” Karl N. Llewellyn, The Common Law Tradition: Deciding Appeals 370 15 (New York: Little, Brown, 1960). 16 This Restatement offers a roadmap to the implementation of Llewellyn’s approach, which 17 continues to accurately characterize the approach taken by courts. This Restatement reflects the 18 common-law “blanket assent” principle, whereby courts allow businesses to draft and affix 19 standard contract terms to the transaction, as long as they provide consumers with adequate notices 20 and opportunity to review the terms, as well as a meaningful opportunity to avoid the transaction. 21 At the same time, this Restatement identifies the doctrines and rules arising from common-law 22 jurisprudence, which restrict the effect of standard contract terms by prohibiting businesses from 23 imposing intolerable terms or undermining the core bargain presented to consumers either as part 24 of the dickered terms or in precontractual communications. 25 In drafting the rules that apply contract law to consumer contracts, this Restatement relies 26 on two main sources. The first and primary source informing this Restatement are the common- 27 law principles that have been guiding courts in adjudicating consumer-contract disputes. Those 28 principles were originally found in the Restatement of the Law Second, Contracts (and often reflect 29 the statutory provisions of the Uniform Commercial Code), but have evolved in particular and 30 important directions that are specific to consumer contracts. When appropriate and consistent with 31 the common law of contracts and the UCC, the rules of this Restatement also reflect the principles 5 © 2019 by The American Law Institute Tentative draft – not approved Reporters’ Introduction Consumer Contracts 1 of fairness and antideception guiding consumer-protection statutes and regulations. The principles 2 that guide this latter body of law are manifested in several Sections of this Restatement that protect 3 consumers by enforcing the bargain as presented to them, even when some elements are missing 4 from, or qualified in, the standard contract terms. The two bodies of law that address consumer 5 contracts—the general common law of contracts and statutory and regulatory consumer-protection 6 law—appear together in many litigated cases. The present document promotes a greater conceptual 7 unity across these two bodies of law. 8 The challenges posed by consumer contracts have heightened over the past generation, as 9 courts have adapted traditional contract-law rules to consumer contracts. To track this 10 development, this Restatement follows the traditional ALI methodology and bolsters it with an 11 additional layer of transparency. Primarily, this Restatement follows leading court decisions, 12 eliciting from them the guiding rationales. It clarifies the policy goals underlying the rules applied 13 by courts, and develops their conceptual implications to accord them greater clarity and coherence. 14 In addition, and in order to confirm that the rules identified through this primary method indeed 15 reflect the “law in action,” the Reporters read the entire body of contract-law decisions relating to 16 consumer contracts and the rules of this Restatement—higher-court as well as lower-court 17 decisions, both state-court and federal-court cases, published and unpublished, and holdings as 18 well as dicta, made available in online legal-research directories and from secondary sources. By 19 looking at all the information flowing from case law and carefully organizing it according to 20 outcomes, rationales, and influence, this methodology made it possible to examine with greater 21 subtlety the emerging rules, their impact, and their prominence. It decreases the possibility that 22 important or well-reasoned cases may have been missed, and allows a closer consideration of the 23 evolution of the doctrine to better understand how courts address key issues. We thus present a 24 Restatement that reflects the rules as elicited from the most influential and persuasive court 25 decisions, along with the assurance that these rules are indeed widely accepted by the courts in the 26 many jurisdictions within the United States. It is important to emphasize that the examination of 27 the entire body of case law does not replace nor modify the traditional legal analysis—the craft of 28 discovering the DNA of the law through experienced and informed reading of persuasive sources. 29 Rather, the full landscape view bolsters the traditional approach with an added measure of 30 comprehensiveness and transparency. The traditional method of legal reasoning is reflected in the 31 black letter and explicated in the Comments to the Sections of this Restatement. The 6 © 2019 by The American Law Institute Tentative draft – not approved Tentative Draft Reporters’ Introduction 1 comprehensive analysis of the entire case law is explained and reported in Reporters’ Notes 2 accompanying the relevant Sections. 3 As explained above, this Restatement draws on common-law principles that have 4 antecedents in the Restatement of the Law Second, Contracts. The application of those principles 5 in the area of consumer contracts produced the rules that are restated here. In restating these rules 6 in the consumer context, the present document seeks to provide courts with more tailored guidance 7 in adjudicating consumer-contract disputes than the Restatement Second of Contracts offers, 8 reflecting developments in consumer-contract law since the completion of the Restatement Second 9 of Contracts. Importantly, this Restatement does not purport to cover all possible aspects of a 10 consumer-contracts case. The Restatement Second of Contracts continues to provide valuable 11 guidance on general contract-law questions in the consumer context that are not covered in this 12 Restatement. 13 This Restatement is organized as follows. Section 1 defines key terms. The first substantive 14 rule is the Adoption of Standard Contract Terms provision in § 2. The rule reflects an approach, 15 widely embraced by a large majority of courts, that enables businesses to design the terms of the 16 transaction, as long as they provide reasonable notice and meaningful opportunity to review the 17 terms and to avoid the transaction. This rule is complemented by a related provision in § 3, 18 extending similar principles to modifications of standard contract terms. 19 The remaining Sections comprise a set of rules that rely on ex post scrutiny by courts to 20 limit the risk of abuse. Section 4 addresses the problem of open-ended terms, which grant the 21 business unrestricted discretion to specify and adjust its obligations. Section 5 is the 22 unconscionability rule, providing the framework for invalidating terms that unreasonably favor the 23 business party and unfairly surprise the consumer. Section 6 deals with the problem of deception, 24 whereby the standard contract terms conflict with explicit affirmations or promises made to the 25 consumer. Section 7 includes the rules regarding precontractual affirmations and promises. Section 26 8 creates presumptions of integration for standard contract terms (under the Parol Evidence Rule) 27 and explains how such presumptions are rebutted by prior affirmations of fact or promises. And 28 § 9 completes this list of anti-abuse provisions by stipulating the effects of striking terms out of 29 contracts. 7 © 2019 by The American Law Institute Tentative draft – not approved Reporters’ Introduction Consumer Contracts *** 1 This Restatement includes the following provisions: 2 § 1. Definitions and Scope 3 § 2. Adoption of Standard Contract Terms 4 § 3. Modification of Standard Contract Terms 5 § 4. Discretionary Obligations 6 § 5. Unconscionability 7 § 6. Deception 8 § 7. Affirmations of Fact and Promises That Are Part of the Consumer Contract 9 § 8. Standard Contract Terms and the Parol Evidence Rule 10 § 9. Effects of Derogation from Mandatory Rules 11 § 1. Definitions and Scope 12 13 14 15 16 (a) Definitions: (1) “Consumer” – An individual acting primarily for personal, family, or household purposes. (2) “Business” – An individual or entity other than a consumer that regularly participates in or solicits, directly or indirectly, transactions with consumers. 17 (3) “Contract” – A promise or set of promises for the breach of which the law 18 gives a remedy, or the performance of which the law in some way recognizes as a duty. 19 (4) “Consumer contract” – A contract between a business and a consumer 20 other than an employment contract. 21 (5) “Standard contract term” – A term, relating to a consumer contract, that 22 has been drafted prior to the transaction for use in multiple transactions between the 23 business and consumer parties. 24 (6) “Affirmation of fact or promise” – Any statement about the transaction, 25 including but not limited to statements about quantity, quality, characteristics, utility, 26 price, discount, comparative cost, service, and remedy, intended to reach consumers, 27 including in negotiations, advertising, brochures, or labels, or in any record 8 © 2019 by The American Law Institute Tentative draft – not approved Tentative Draft §1 1 accompanying the transaction, but excluding statements that would be reasonably 2 understood by consumers as “puffing” or statements of belief not founded on fact. 3 (7) “Good faith” – Honesty in fact and the observance of reasonable 4 commercial standards of fair dealing. 5 (b) Scope: This Restatement applies to consumer contracts, except to the extent that 6 a matter is governed by statute or regulation. It restates contract-law principles under state 7 law and takes no position on the proper relationship between statutory or regulatory 8 requirements and these principles. 9 Comment: 10 1. “Consumer” defined. The definition of “consumer” follows UCC § 1-201(b)(11). 11 2. “Business” defined. An individual or any type of entity can be a “business” under this 12 Section. Compare UCC § 1-201(b)(27) (defining “Person”). A “business” is an individual or entity 13 that regularly participates in or solicits, directly or indirectly, transactions with consumers. The 14 definition of “business” is consistent with the definition of “merchant” in UCC § 2-104(1), subject 15 to two qualifications: (i) a “business” may deal in transactions other than those involving goods 16 (for example, it may deal in services, real estate, and information products); (ii) a “business” is 17 covered by this Restatement only to the extent that it deals with consumers, not with other 18 merchants. 19 20 3. “Contract” defined. The definition of “contract” follows Restatement of the Law Second, Contracts § 1. 21 4. “Standard contract terms” defined. The definition of “standard contract term” focuses 22 on the pre-drafting factor, which captures a key feature of consumer contracts: their multi- 23 transaction application. Pre-drafting also implies that there is no negotiation between the business 24 and the consumer over the language of those terms. In some cases, negotiation of the standard 25 contract terms is present, as when the consumer may choose which version of the standard terms 26 applies, or choose to avoid a particular set of terms. In other cases, tailoring of the standard contract 27 terms is present, as when the terms are tailored per consumer based on personal information known 28 to the business. Such negotiated or tailored terms are considered “standard contract terms” despite 29 the absence of uniform content, because of the multi-transaction application. 9 © 2019 by The American Law Institute Tentative draft – not approved §1 1 Consumer Contracts Illustrations: 2 1. A credit-card issuer includes a pre-drafted arbitration clause in the terms that it 3 offers to all of its consumer customers. The arbitration clause is a standard contract term, 4 as defined in subsection (a)(5), even if the consumer can prevent it from becoming part of 5 the contract by a notice to the business. 6 2. An insurer offers different, non-negotiated premiums to different policyholders 7 based on a formula that rates each policyholder’s risk. The premium is not negotiable. The 8 term setting the premium is a standard contract term, as defined in subsection (a)(5). 9 5. Core deal terms versus boilerplate. Standard contract terms may include both terms that 10 consumers readily identify as characterizing the transaction, or “core deal terms,” as well as terms 11 that are usually appended to the transaction in fine print, or “boilerplate.” The criteria for adoption 12 and legal enforceability may vary according to the classification of the standard contract term or 13 the circumstances in which the term is provided to the consumer, and thus some rules of this 14 Restatement may apply differently to core deal terms versus boilerplate (for example, rules relating 15 to adoption of terms under §§ 2 and 3, unconscionability under § 5, deception under § 6, 16 disclaimers under § 7(c), and integration under § 8). 17 Illustration: 18 3. A product is sold online for a fixed price. The listing of the product contains a 19 description of the product, the price, the delivery charge, and a “30-day money-back” 20 statement, as well as a link to the seller’s website, where additional terms of sale are posted. 21 All are standard contract terms as defined in subsection (a)(5), even though only some of 22 them (the price, the description of the goods, the delivery charge, and the “30-day money- 23 back” statement) are core deal terms. 24 6. “Affirmation of fact or promise” defined. The definition of “affirmation of fact or 25 promise” includes express statements, as well as reasonable interpretations of express statements, 26 and implications that reasonably flow from express statements or acts. Affirmations and promises 27 can be found, for example, on a business’s website, on packaging materials, and in advertisements. 28 The definition does not include statements that should be reasonably understood as “puffing” or 29 statements of belief not founded on fact. (Compare Restatement of the Law Second, Contracts 10 © 2019 by The American Law Institute Tentative draft – not approved Tentative Draft §1 1 §§ 168-169; UCC § 2-313(2).) As explained in §§ 6 to 8, an affirmation or promise can result in 2 nonenforcement of inconsistent standard contract terms (§ 6), can create an obligation that 3 becomes part of the consumer contract (§ 7), and can rebut the presumption of partial or complete 4 integration of the standard contract terms (§ 8). 5 7. “Good faith” defined. The definition of “good faith” follows the Uniform Commercial 6 Code § 1-201(b)(20), which has evolved since the original version of the Uniform Commercial 7 Code. Although various formulations and explications of the duty of good faith have been adopted 8 in different sources of law, they all share the same ultimate goal. The duty of good faith is intended 9 to capture and weed out various forms of opportunistic behavior—including unfair advantage- 10 taking, hold up, and dishonesty—that reduce the value of contracting and require costly 11 precautions. Good-faith performance or enforcement of a contract emphasizes faithfulness to an 12 agreed common purpose and consistency with the justified expectations of the other party. The 13 element of “observance of reasonable commercial standards of fair dealing” is particularly 14 necessary when businesses operate through agents and deal with numerous consumers. In these 15 settings, unfair advantage-taking may occur even without dishonesty in fact. Compare Restatement 16 of the Law Second, Contracts § 205, Comment a. This definition does not intend to change the 17 meaning of the implied covenant of good faith and fair dealing. 18 8. Scope. The scope of this Restatement derives from the definition of “consumer contract” 19 (subsection (a)(4)). This Restatement contains contract-law rules that have distinct application to 20 contracts in which asymmetries in information, sophistication, and bargaining power are present, 21 of which consumer contracts are a prominent species. This Restatement does not purport to cover 22 all possible aspects of such contracts. The Restatement of the Law Second, Contracts, continues 23 to apply to general contract-law questions that are not covered here, particularly when the question 24 does not involve a standard contract term and is not otherwise covered by this Restatement. 25 9. Contracts over data and privacy. A “consumer contract” is defined by the type of parties 26 that enter it, not by the subject matter that it governs. Consumer contracts could govern a variety 27 of topics, including the business’s data and privacy policies. Indeed, consumer transactions often 28 involve attempts by the business to form agreements governing the business’s treatment of 29 consumers’ personal information, including the business’s collection, use, sharing, protection, or 30 other handling of personal information. Such matters have become an important economic 31 component of many consumer transactions. While some privacy notices are required by law and 11 © 2019 by The American Law Institute Tentative draft – not approved §1 Consumer Contracts 1 some reflect obligations that are not contractual in their nature, and while the legal treatment of 2 such aspects of the agreement may be subject to additional area-specific rules (see, e.g., Principles 3 of the Law, Data Privacy, Introductory Note), the business’s rights and obligations could also be 4 governed by contract law and by the rules of this Restatement. Accordingly, this Restatement is 5 not intended to determine which data or privacy policies or terms constitute or become part of 6 contracts, but merely to provide principles of contract law for those that do. Specifically, if the 7 data and privacy terms are presented to consumers in a manner that satisfies the definitions of 8 “contract” and “consumer contract,” courts should apply the rules of this Restatement (as well as 9 other contract-law rules, but subject to specific rules of data-privacy law) to determine the 10 formation, scope, and consequences of an agreement over data. 11 Illustration: 12 4. A consumer uses a business’s website to order a product. Before the purchase is 13 complete, the website refers the consumer to two sets of standard contract terms that the 14 website says will apply to the transaction. The first set of terms is titled “Terms of Service” 15 and covers several issues including warranties, remedies, choice of law and forum, and 16 intellectual-property rights. The second set of terms is titled “Privacy Policy” and states 17 the agreements of the parties with respect to the scope of personal data collection, use, 18 sharing, and security. The provisions of § 2 of this Restatement that determine whether the 19 “Terms of Service” are adopted into the agreement also determine whether the Privacy 20 Policy is adopted into the agreement. 21 10. Relation to the Uniform Commercial Code and other statutory law. This Restatement 22 restates the rules of the common law of consumer contracts. A significant number of consumer 23 contracts are governed by statutes. Importantly, sales or leases of goods are governed extensively 24 (but not completely) by Articles 2 and 2A of the Uniform Commercial Code (UCC), and other 25 consumer contracts are within the scope of other UCC articles. Of course, the common-law rules 26 set out in this Restatement cannot override statutory provisions of the UCC, and this point is made 27 explicit in subsection (b), and explained here. But the UCC does not create complete legal systems 28 for contracts within its scope, and the common-law rules restated here apply to issues not addressed 29 by the particular provisions of the statute. Indeed, the UCC provides that common-law principles 30 supplement the UCC unless displaced by particular provisions of the UCC. (See UCC § 1-103(b) 12 © 2019 by The American Law Institute Tentative draft – not approved Tentative Draft §1 1 and Comment 2 to that Section). In some cases, the UCC is silent as to an issue. In other cases, 2 even when there is a UCC rule generally applicable to a particular issue, the UCC rule does not 3 answer all the questions that may arise in connection with that issue. Thus, many of the common- 4 law rules set out in this Restatement, in addition to applying to non-UCC transactions, will have 5 application to contracts within the scope of the UCC when no particular provisions of the UCC 6 address or displace them. In addition, many of the common-law rules set out in this Restatement 7 are drawn directly from UCC provisions and from case law interpreting them that reflects a widely 8 shared view as to the meaning and application of the UCC. 9 Certain other subsets of consumer contracts, e.g., credit transactions, insurance contracts, 10 real-estate contracts, or contracts involving investments in securities, are governed by specific 11 federal or state statutes. Consumer contracts for the sale of goods are also governed by the 12 Magnuson–Moss Warranty Act. Many consumer contracts are covered by additional statutes and 13 regulations, including the Federal Trade Commission Act and state Unfair and Deceptive Acts and 14 Practices statutes. This Restatement provides common-law rules that supplement and implement 15 the provisions of these enactments, but in case of conflict or displacement by statute, the statutory 16 rules apply. The statutory rules take precedence also when the statute supplants the common law. 17 The existence of a statute, however, does not, in and of itself, supplant or displace the common-law 18 rules restated herein. 19 In addition, this Restatement takes no position on the proper application of the Federal 20 Arbitration Act or other statutory or regulatory requirements that may affect the enforceability of 21 or limits on arbitration provisions, and the way such requirements may affect application of the 22 stated contract principles. It includes some Illustrations and, in the Reporters’ Notes, some case 23 citations, that reference arbitration clauses in consumer contracts. Those references are intended to 24 clarify the principles that guide the application of the doctrine of unconscionability or other contract 25 principles. They are not intended to address the question how these principles align vis-à-vis the 26 law of arbitration. 27 Parties to a consumer contract are also subject to additional common-law rules. See, for 28 example, the Restatement of the Law Third, Torts: Liability for Economic Harm, and the 29 Restatement of the Law, Liability Insurance. In case of conflict, sector-specific common-law rules 30 may take precedence over the general common-law rules of consumer contracts that are restated 31 herein. 13 © 2019 by The American Law Institute Tentative draft – not approved §1 Consumer Contracts REPORTERS’ NOTES 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 The purpose of this Restatement is to identify a class of contracts that has presented separate challenges and concerns and has received special treatment. The definition of “consumer contracts” identifies this class of contracts. The selection principle is consistent with the definition of “consumer contracts” in the common law, under the Uniform Commercial Code, and under state consumer-protection statutes. “Consumers” are defined as parties who enter the transaction primarily for personal, family, or household purposes. They are acting for purposes outside their profession or trade. The distinction between personal and professional is based on a notion of expertise. (Compare UCC § 2-104 (AM. LAW INST. & UNIF. LAW COMM’N) (defining “Merchant”).) Professional transactors accumulate experience and expertise, which help them recognize the various aspects of the transaction, including the nonnegotiated standard contract terms. Consumers, in contrast, do not have the same experience and expertise to draw on. The same is true for parties in markets that share similar qualities of asymmetry, such as the relationships between firms and less-experienced independent contractors that have become characteristic in online platforms and the sharing economy. The principles of this Restatement could apply to such transactions, to the extent that they are not governed by more specific bodies of law. The definition of “standard contract terms” identifies two elements: pre-drafting and application to multiple consumer transactions. This definition includes terms that appear nonstandard because they are personalized across consumers, as long as the formula (“the algorithm”) for the personalization is predetermined and applied generally across multiple consumer transactions. While such personalization has existed in some sectors for a while (e.g., in pricing insurance policies), it is emerging as a common feature in the design of consumer transactions in a data-driven economy. A question that has risen to the fore in recent times is whether privacy policies posted by businesses, which govern the businesses’ data collection, use, and protection practices, are contracts. While a business’s general statements of policy (in any area, including privacy) should not be viewed as contracts, a notice that purports to create consent-based rights and obligations should generally be viewed as the subject matter of a consumer contract, in the same way that notices regarding the scope of warranty, remedies, or dispute resolution do. Comment 9 provides a clear answer: Privacy policies that attempt to create consent-based rights and obligations are treated as attempts to form consumer contracts, and the Restatement’s rules apply to them. Such data-privacy provisions may be included in the standard contract terms, or they may be posted on websites, appended to mobile applications, or provided to consumers at retail locations where consumers complete their transactions. See In re JetBlue Airways Corp. Privacy Litigation, 379 F. Supp. 2d 299, 325-326 (E.D.N.Y. 2005) (indicating that JetBlue’s privacy policy constituted a term in the contract of carriage, but ultimately determining that the plaintiffs failed to meet their pleading requirement with respect to damages, so the breach-of-contract claim should be 14 © 2019 by The American Law Institute Tentative draft – not approved Tentative Draft 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 §1 dismissed); In re Am. Airlines, Inc., Privacy Litigation, 370 F. Supp. 2d 552, 556 (N.D. Tex. 2005) (stating as a matter of fact that the privacy policy on American Airlines’ website was part of the contract of carriage); In re Sony Gaming Networks & Customer Data Security Breach Litigation, 996 F. Supp. 2d 942, 954 (S.D. Cal. 2014) (granting a motion to dismiss against plaintiffs that entered into a Terms of Service User Agreement with Sony and agreed to Sony’s Privacy Policy). Some of the terms in those notices merely inform consumers of rights and obligations that businesses have with respect to the consumers’ personal information, including rights and obligations that do not depend on or require mutual assent. However, other terms in privacy notices grant the business rights that, in the absence of contractual agreement, it would not otherwise have in the consumers’ personal information, or make explicit promises regarding the handling of consumer personal information beyond those required by law (e.g., the business may promise that it will employ heightened data-security protections and allow only qualified employees to have access to the information). It is in those situations that the classification of privacy policies as contracts has significant legal consequences. Indeed, agreements over the business’s use of consumers’ information are increasingly at the core of many consumer products and services. Consumers “pay” for services by allowing businesses to collect and use their personal information that may not be collected and used without such permission, and it is therefore appropriate to regard the personal-information provisions as part of the contract. This is the approach taken in the case law. It is the position taken by the court in the one published state appellate case on this topic, Gwinnett Community Bank v. Arlington Capital, LLC, 757 S.E.2d 239 (Ga. Ct. App. 2014). In that case, the court found that privacy notices may give rise to contractual obligations. The same approach also emerges from a comprehensive survey of lower-court decisions, as detailed below. Identifying data and privacy policies as contracts. The potential inclusion of privacy notices in the definition of “consumer contracts” reflects a basic and longstanding principle of contract law—that the rules do not vary with the subject matter of the purported agreement. A qualitative and quantitative analysis of recent cases confirms that this principle is generally applied. A database of all published state decisions and federal decisions applying state law, as well as unpublished decisions reported in Westlaw® and LexisNexis®, was collected and analyzed. Each decision was categorized on dozens of dimensions, including court and litigant characteristics, as well as causes of action brought, facts, court reasoning—both in holdings and in dicta—and outcomes. Consumer actions for breach of contract against businesses for violations of privacy notices are relatively recent, and the case law is evolving. An early case, in which a consumer attempted to enforce a protective promise made in a privacy notice, held that the privacy notice on a website was not a contract. “[G]eneral statements of policy are not contractual” and “absent an allegation that Plaintiffs actually read the privacy policy, not merely the general allegation that Plaintiffs ‘relied on’ the policy, Plaintiffs have failed to allege an essential element of a contract claim: that the alleged ‘offer’ was accepted by Plaintiffs.” See In re Northwest Airlines Privacy Litigation, No. Civ. 04-126(PAM/JSM), 2004 WL 1278459, at *6 (D. Minn. June 6, 2004). That case, 15 © 2019 by The American Law Institute Tentative draft – not approved §1 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 Consumer Contracts however, was not consistent with a large body of case law that was ready to attribute contractual consequences to general statements of policy posted on websites and, accordingly, it did not influence subsequent jurisprudence. Instead, a great majority of courts follow two other cases decided a year later, which held that terms in privacy notices give rise to contractual obligations as long as all the necessary elements for contract formation are met. See, e.g., In re JetBlue Airways Corp. Privacy Litigation, 379 F. Supp. 2d 299 (E.D.N.Y. 2005) (indicating that JetBlue’s privacy policy constituted a term in the contract of carriage, but ultimately determining that the plaintiffs failed to meet their pleading requirement with respect to damages, so the breach of contract claim should be dismissed); In re Am. Airlines, Inc., Privacy Litigation, 370 F. Supp. 2d 552 (N.D. Tex. 2005) (stating as a matter of fact that the privacy policy on American Airlines’ website was part of the contract of carriage). The logic of the latter decisions is compelling. Indeed, the decision in Northwest Airlines is inconsistent with the majority rule of what constitutes contractual assent (see § 2), and therefore it does not squarely address the question whether terms and conditions relating to data and privacy—if presented in a manner consistent with the assent rules—are to be regarded as contracts. To confirm this Restatement’s position following the holding and rationale of the JetBlue and American Airlines decisions, an empirical methodology was implemented and all published and readily available unpublished cases involving claims for breach of contract for business violations of privacy policies were examined. The conclusion was that the JetBlue approach, which held that privacy notices can create contractual obligations, is indeed the dominant jurisprudence in this area. Starting with Northwest Airlines in 2004 and concluding in 2015 with Austin–Spearman v. AARP, 119 F. Supp. 3d 1 (D.D.C. 2015), there have been 45 cases in which consumers brought breach-of-contract claims for violations of privacy notices, in which courts analyzed the contractual enforceability of privacy notices applicable to consumers, or in which firms, as defendants, sought to enforce their own policies, arguing that they constitute contracts and that consumers’ assent to them operates as a defense against the alleged privacy violations. In 11 cases, courts failed to find a valid claim for breach of contract for reasons internal to contract claims, including failure of consideration or lack of mutuality, insufficient notice to constitute mutual assent, and failure to ascertain damages for breach of contract. Because the holding in those cases did not turn, wholly or in part, on the classification of privacy notices as contracts, or the courts did not explicitly address the contractual enforceability of privacy notices, this Restatement focuses on the remaining 34 cases. (Note, however, that even in those 11 cases, courts applied contract-law doctrines to evaluate whether the privacy notices created enforceable obligations). Within the remaining pool of 34 cases in which the courts addressed the classification of privacy notices as contracts directly, though, in some cases, only in dicta, in 30, courts concluded that privacy notices could give rise to contractual obligations. Only in four cases, which include the original Northwest Airlines decision, courts decided otherwise, concluding or implying that privacy notices are not attempts to form contracts. The three additional cases are Dyer v. Nw. Airlines Corps., 334 F. Supp. 2d 1196 (D.N.D. 2004), Starkey v. Staples, Inc., No. 3:13-0433, 16 © 2019 by The American Law Institute Tentative draft – not approved Tentative Draft 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 §1 2013 WL 5936898 (M.D. Tenn. Nov. 5, 2013), and Lucky v. Ky. Bank (In re Lucky), Nos. 0554625, 10-5085 (Bankr. E.D. Ky. Mar. 21, 2011). An analysis of citations indicates that cases embracing privacy notices as contracts are not only more numerous, but more influential. A standard measure of influence used in case-citation analysis focuses on citations by out-of-state and out-of-circuit courts. (For the application of this methodology, see, e.g., Gregory A. Caldeira, The Transmission of Legal Precedent: A Study of State Supreme Courts, THE AMERICAN POLITICAL SCIENCE REVIEW Vol. 79, No. 1 (Mar. 1985); William M. Landes, Lawrence Lessig & Michael Solimine, Judicial Influence: A Citation Analysis of Federal Courts of Appeals Judges, 27 J. LEGAL STUD. 271 (1998); DAVID E. KLEIN, MAKING LAW IN THE UNITED STATES COURTS OF APPEALS (Cambridge Univ. Press 2002); Eric Posner, Stephen J. Choi & G. Mitu Gulati, Judicial Evaluations and Information Forcing: Ranking State High Courts and Their Judges, 58 DUKE L.J. 1313 (2009).) Such courts are not bound by the cited out-of-state cases under stare decisis principles; such citations are thus more discretionary and the cited cases are likely to be particularly helpful when internal precedent is unclear or missing. The dominant precedent, as measured by both total number of out-of-state citations as well as citation rate (to account for the fact that some cases have simply been around longer), is Jet Blue, with a total of 39 out-of-state citations and an average of four citations per year, through September 2015. The cases with the second and third highest number of yearly citations, In Re Sony Gaming Networks (with an average of three citations per year) and Perkins v. LinkedIn, 53 F. Supp. 3d 1222 (N.D. Cal. 2014) (with an average of two citations per year), also recognize notices as contracts and follow the Jet Blue approach. In total, there are 13 cases that recognize privacy notices as contracts and have at least one out-of-state citation per year. Among the cases not recognizing privacy notices as contracts, the most influential case, Northwest Airlines (2004), has only 16 total out-of-state citations, for an average of just over one per year. While often informative, these measures, even when constructed narrowly, can be noisy when cases are cited for multiple reasons. An overview of the case law after 2015 offers further evidence of courts’ willingness to consider contractual enforcement of statements regarding information privacy. See, e.g., Kuhns v. Scottrade, Inc., 868 F.3d 711 (8th Cir. 2017) (recognizing a breach-of-contract claim for violation of information-privacy terms); In re Yahoo! Inc. Customer Data Sec. Breach Litig., 2017 WL 3727318 (N.D. Cal. Aug. 30, 2017) (finding that business may have breached terms related to protecting the personally identifiable information of consumers); Fero v. Excellus Health Plan, Inc., 236 F. Supp. 3d 735 (W.D.N.Y. 2017) (finding that privacy notices incorporated by reference in the contracts between the business and consumers could give rise to breach-of-contract claims). The conclusion that privacy notices can give rise to contractual obligations does not preclude the application of specific rules arising from privacy law. It suggests, however, that unless a clear overriding reason exists, the general rules and principles of this Restatement ought to apply. This coexistence between the Restatement and area-specific rules applies also in other contexts. The Restatement is a complementary source to statutory law operating in the area of consumer contracts (e.g., the Uniform Commercial Code, The Magnuson–Moss Warranty Act, the Federal 17 © 2019 by The American Law Institute Tentative draft – not approved §1 Consumer Contracts 1 2 3 4 5 6 7 8 9 10 Trade Commission Act, the Dodd–Frank Wall Street Reform and Consumer Protection Act, the Federal Arbitration Act, and state Unfair and Deceptive Acts and Practices statutes). Courts adjudicating contract disputes that invoke these statutes have relied on, and developed, principles of consumer-contract law that extend beyond the statutory framework. These principles inform the rules restated herein. Finally, this Restatement’s rules may be suitable for, and indeed reflect, rules being applied by courts in transactions other than consumer contracts. The primary criterion that requires specific attention to consumer contracts—the asymmetry of knowledge, sophistication, and drafting prowess—may similarly be present when one of the parties to the contract is not a consumer. For example, it may be present in dealings between a small business and a large corporation. 11 § 2. Adoption of Standard Contract Terms 12 13 14 15 16 (a) A standard contract term is adopted as part of a consumer contract if the consumer manifests assent to the transaction after receiving: (1) a reasonable notice of the standard contract term and of the intent to include the term as part of the consumer contract, and (2) a reasonable opportunity to review the standard contract term. 17 (b) When a standard contract term is available for review only after the consumer 18 manifests assent to the transaction, the standard contract term is adopted as part of the 19 consumer contract if: 20 (1) before manifesting assent to the transaction, the consumer receives a 21 reasonable notice regarding the existence of the standard contract term intended to 22 be provided later and to be part of the consumer contract, informing the consumer 23 about the opportunity to review and terminate the contract, and explaining that the 24 failure to terminate would result in the adoption of the standard contract term; 25 26 (2) after manifesting assent to the transaction, the consumer receives a reasonable opportunity to review the standard contract term; and 27 (3) after the standard contract term is made available for review, the consumer 28 has a reasonable opportunity to terminate the transaction without unreasonable cost, 29 loss of value, or personal burden, and does not exercise that power. 30 (c) If the consumer manifests assent to the transaction, a contract exists even if some 31 of the standard contract terms are not adopted. In such case, the terms of the contract are 18 © 2019 by The American Law Institute Tentative draft – not approved Tentative Draft §2 1 those adopted under subsections (a) and (b), and, if the consumer elects, the unadopted 2 standard terms, along with any terms supplied by law. 3 Comment: 4 1. General. This Section describes the procedures for adoption of standard contract terms 5 into consumer contracts. It operates in a reality in which consumers are fully aware of some “core” 6 aspects of the transaction but are unlikely to read and exercise meaningful informed consent to the 7 non-core standard contract terms. The adoption rules seek to preserve the convenience of 8 streamlined contracting while providing consumers reasonable opportunity to scrutinize the 9 standard contract terms and avoid unwanted transactions. Accordingly, this Section identifies 10 minimum requirements for contracting procedures that result in the adoption of standard contract 11 terms. Recognizing, however, that despite these procedures, consumers often enter into contracts 12 without appreciating the effect of the standard contract terms, other Sections of this Restatement 13 provide additional layers of protection against surprising and unfair outcomes. 14 2. Adoption of standard terms may be separate from manifestation of assent to the 15 transaction. A consumer contract is not formed unless the consumer manifests assent to the 16 transaction. A consumer may manifest assent to the transaction proposed by the business in any 17 manner and by any medium reasonable in the circumstances. Once the transaction is formed, this 18 Section determines which standard contract terms are adopted. While in many instances, the 19 manifestation of assent to the transaction and the adoption of standard contract terms happen at 20 the same time, in other instances they may be done separately. Because the review of the entire 21 body of standard contract terms is an uncommon practice for the great majority of consumers, and 22 because convenience in the method of delivery of the terms benefits consumers and businesses 23 alike, the adoption of standard contract terms can be made either together with or separate from 24 the act of manifesting assent to the transaction. Standard contract terms may be presented to the 25 consumer before the consumer manifests assent to the transaction, at the same time that the 26 consumer manifests assent to the transaction but before the product is delivered or the service is 27 rendered, or when the product is delivered or the service commences. Standard contract terms may 28 also be presented in some combination of the foregoing. Accordingly, a single consumer contract 29 may contain several “packets” of standard contract terms, each adopted in a different manner and 30 at a different time (see Comment 7). Manifesting assent to the transaction as a whole generally 31 involves adoption of at least some standard contract terms—the core deal terms (see § 1, Comment 19 © 2019 by The American Law Institute Tentative draft – not approved §2 Consumer Contracts 1 5; see also Comment 3 to this Section); other standard contract terms may then be adopted 2 separately from those that are adopted concurrently with the manifestation of assent. 3 Illustration: 4 1. A consumer rents a car at an airport counter and concludes the transaction by 5 signing a printed sheet titled “Rental Contract.” The price and description of the vehicle 6 are prominently displayed on the front of the sheet. The consumer’s signature manifests 7 assent to the transaction and constitutes the adoption of the core deal terms (which, in car- 8 rental contracts, typically include the price, the description of the vehicle, and the type of 9 insurance provided). Additional standard contract terms are presented on the back of the 10 sheet, and a statement referring to their inclusion is posted adjacent to the signature line in 11 a prominent fashion. Those terms are adopted concurrently with the manifestation of assent 12 to the transaction via the signature. If, in addition, other standard contract terms are 13 presented to the consumer after the time of signature—for example, in an email sent to the 14 consumer some time later—those terms may be adopted under subsection (b) separately 15 from the manifestation of assent to the transaction (see Comment 5), but only if the 16 requirements of subsection (b) are met. 17 3. Manifesting assent to the transaction. A consumer may manifest assent to the transaction 18 proposed by the business in any manner and by any medium reasonable in the circumstances. In 19 inviting the consumer to enter a transaction, the business may establish how the assent may be 20 manifested, as long as the manner and medium are reasonable in the circumstances and reasonably 21 communicated to the consumer as manifesting assent. (Compare Restatement of the Law Second, 22 Contracts §§ 30, 50.) Most often, assent to the transaction is manifested by signing an agreement, 23 paying, or clicking “Purchase Now” or “I Agree” after the consumer has been put on reasonable 24 notice that such actions would result in the formation of a legal obligation. Absent such effective 25 communication—for example, when the consumer may reasonably think that proceeding with the 26 activity does not create a set of legally binding obligations—the consumer does not manifest assent 27 to a consumer contract. When manifesting assent, the consumer is usually aware only of the core 28 deal terms. Such core deal terms often include price and payment methods, a shorthand description 29 of the product, key delivery arrangements, and a few successfully communicated legal limitations 30 (for example, the nonrefundable classification of some airline fares or the duration commitment in 20 © 2019 by The American Law Institute Tentative draft – not approved Tentative Draft §2 1 some service contracts). In assenting to the transaction, the consumer simultaneously adopts those 2 core deal terms—many of which are standard contract terms under the definition in § 1(a)(5), but 3 some may be nonstandard—as part of the contract. 4 4. Adoption of terms reasonably available for review prior to manifesting assent to the 5 transaction. When the consumer manifests assent to the transaction, a consumer contract is 6 formed. The consumer contract includes the core deal terms (those which, from the perspective of 7 the consumer, characterize the bargain), as well as other standard and nonstandard contract terms 8 reasonably available for review prior to manifesting assent. Some of these standard contract terms 9 may be explicitly acknowledged by the consumer in the course of manifesting assent to the 10 transaction (see Illustrations 2-4). Other standard contract terms may not be explicitly 11 acknowledged, but as long as the consumer receives reasonable notice of them, including 12 reasonable notice that they are intended to be part of the transaction and that manifesting assent 13 would constitute a legally binding adoption of those terms, and has a reasonable opportunity to 14 review them, they are adopted when the consumer manifests assent to the transaction (see 15 Illustrations 5-6). The standards for reasonable notice and opportunity to review that apply to terms 16 that are not explicitly acknowledged in the course of affirmatively manifesting assent may be more 17 exacting (see Comment 9). 18 Illustrations: 19 2. A consumer uses a business’s website to purchase a product. To complete the 20 transaction, the website asks the consumer to read the Terms and Conditions that are 21 provided in a scroll-down text box and to click “I Agree.” The website does not allow the 22 consumer to complete the purchase without clicking “I Agree.” The consumer manifests 23 assent to the transaction by clicking the button. The terms in the scroll-down box are 24 adopted as part of the contract under subsection (a). 25 3. Same facts as in Illustration 2, but the Terms and Conditions incorporate by 26 reference a separate list of Privacy Policy terms. The following statement appears in clear 27 type in the first paragraph of the Terms and Conditions: “Additional binding terms related 28 to our Privacy Policy are available here,” linking to another webpage with the Privacy 29 Policy terms. The consumer’s manifestation of assent to the transaction (by clicking “I 30 Agree”) encompasses the additional Privacy Policy terms, and those terms are adopted as 31 part of the contract under subsection (a). 21 © 2019 by The American Law Institute Tentative draft – not approved §2 Consumer Contracts 1 4. A consumer opens an account with a web retailer and clicks an “I Agree” button 2 immediately below the Terms of Service but does not make any purchase. The Terms of 3 Service appear in a text box in the middle of the page and state prominently that they apply 4 to all subsequent purchases made by the consumer using the account. Later, the consumer 5 makes a purchase on this website using the account, without assenting to any terms other 6 than the description of the goods, the price, and the delivery method. The Terms of Service 7 are part of the contract formed under subsection (a) at the time of the purchase because 8 they were available for review in a reasonable manner before the consumer manifested 9 assent to the transaction (see Comment 9). 10 5. A consumer uses a website to order a product. During the checkout process, the 11 consumer is presented with the core deal terms—the description of the product, the price, 12 and the shipping arrangement. The consumer manifests assent to the transaction by entering 13 payment information and clicking “Purchase Now.” Located immediately in the vicinity of 14 the “Purchase Now” button is an underlined link, in large font and contrasting color, titled 15 “Additional Terms of Sale Applying to Your Purchase.” If clicked, the link opens a new 16 webpage containing additional standard contract terms. When the consumer clicks 17 “Purchase Now,” the linked terms are adopted as part of the contract under subsection (a) 18 because reasonable notice of the terms and the intent to include them in the consumer 19 contract, as well as a reasonable opportunity to read them, have been given. 20 6. A consumer enters a dry-cleaner’s store. At the entrance, a large sign is posted 21 in such a way that any consumer entering the store will see it and be able to read its terms. 22 The sign states that the store is not responsible for damage to items occurring in the 23 ordinary course of the cleaning process. When the consumer manifests assent to the 24 transaction by completing the drop-off process and receiving an acknowledgment of the 25 order, the standard contract term posted on the sign is adopted as part of the contract under 26 subsection (a). 27 5. Adoption of terms after manifesting assent to the transaction. Subsection (b) identifies 28 an alternative process for the adoption of standard contract terms, under which terms may be made 29 available for review for the first time after the consumer manifests assent to the transaction. The 30 process of replacing the opportunity to read prior to assent with a reasonable post-assent review 31 period and termination right allows the parties to enter transactions with greater ease and without 22 © 2019 by The American Law Institute Tentative draft – not approved Tentative Draft §2 1 sacrificing any meaningful protection that advance reading of the contract bestows. Subsection (b) 2 validates this process, under which terms are adopted if the consumer receives: (1) reasonable 3 notice before manifesting assent to the transaction that additional standard contract terms will be 4 presented after manifesting assent to the transaction, including reasonable notice that such terms 5 are intended to be part of the transaction; (2) reasonable opportunity to review the terms upon their 6 arrival; and (3) the opportunity to terminate the entire transaction without unreasonable cost, risk, 7 or personal burden. The majority of courts do not require all the notices listed in subsection (b)(1), 8 focusing instead on the opportunity to review and terminate in subsections (b)(2) and (3). To avoid 9 surprising the consumer with unexpected terms, this Restatement endorses the more restrictive 10 approach, adopted by a minority of courts, requiring that before manifesting assent to the 11 transaction, the consumer must be reasonably notified about the opportunity to review the newly 12 available standard contract terms and to terminate the transaction, and that failure to terminate 13 would result in the adoption of the standard contract terms. 14 Illustration: 15 7. A consumer orders a product from a business by signing an agreement that 16 contains the core deal terms and making a payment. On the form, a clearly visible statement 17 immediately above the signature line informs the consumer that additional standard 18 contract terms will be arriving with the product and will become part of the contract if the 19 consumer does not return the product. Later, along with the delivered product, the 20 consumer receives the additional standard contract terms that include an express warranty 21 statement and limitations on remedies. The terms appear inside an envelope labeled “Terms 22 and Conditions” and are affixed to the product. They contain a clear, upfront statement that 23 the consumer has a right to return the product within 30 days if she does not agree with the 24 terms, and that reasonable return shipping costs will be paid by the business. The standard 25 terms are adopted as part of the contract under subsection (b). The same result applies if 26 the Terms and Conditions arrive separately from the product, e.g., with a welcome letter 27 delivered by mail, as long as such letter provides reasonable notice that it is related to the 28 purchase of the product and that it contains terms that govern that transaction, as well as a 29 reasonable notice of the opportunity to terminate the transaction. 23 © 2019 by The American Law Institute Tentative draft – not approved §2 Consumer Contracts 1 6. Adoption of terms by entry to, or use of, a proprietary environment of the business. 2 Standard contract terms governing the proprietary environment of the business—whether physical 3 or digital—may be adopted as part of a consumer contract upon entry to, or continued use of, that 4 environment, even if no purchase is concluded while in the environment. The deliberate act of 5 entering the business’s proprietary environment and remaining in it long enough to gain access to 6 the content and benefits it confers constitutes a manifestation of assent by the consumer to a 7 transaction. The transaction consists of the right to use the proprietary environment and receive 8 the benefits it is reasonably expected to confer, under the terms specified by the business, including 9 terms that specify the rights of the business and the obligations of the consumer, as long as the 10 consumer has reason to know that the use of the proprietary environment was offered subject to 11 those terms. The consumer has a reason to know if a reasonable notice is provided that use of the 12 proprietary environment (including the use upon recurring entries) is governed by legally binding 13 standard contract terms, which the consumer then has a reasonable opportunity to review (see 14 Comment 9). If such notice and opportunity to review are provided to the consumer prior to entry, 15 the standard contract terms are adopted upon entry. If, instead, the notice and opportunity to review 16 are provided only after entry (for example, when the consumer enters the business’s website and 17 only then is able to access a link governing the use of the website), the manifestation of assent to 18 the transaction and the adoption of the terms occur upon the continued use of the proprietary 19 environment and the receipt of its benefits. In such case, the consumer must receive a reasonable 20 notice that continued use will constitute adoption of the terms, a reasonable opportunity to review 21 the terms, and a reasonable opportunity to exit without being bound to the terms. In some contexts, 22 market norms and course of dealings may provide sufficient notice to the consumer that additional 23 standard contract terms are intended to apply to the transaction (see Comment 9). Compare 24 Restatement of the Law Second, Contracts § 69(1)(a), in which the taking of the benefit of offered 25 services can serve as a manifestation of assent by the recipient. Assent to the transaction and 26 adoption of the standard contract terms are effective only if the consumer has a reasonable 27 opportunity to terminate the transaction without being bound (thereby satisfying the “reasonable 28 opportunity to reject” requirement of § 69(1)(a)). 29 Illustrations: 30 8. A consumer parks her car in a private parking lot. A prominent sign at the 31 entrance to the lot states that a $10 per hour charge will be collected upon exit from the lot 24 © 2019 by The American Law Institute Tentative draft – not approved Tentative Draft §2 1 and that the business is not responsible for damage to the vehicle while parked in the lot. 2 By entering the lot, the consumer manifests assent to the transaction concerning the use of 3 the parking lot, and the terms posted on the sign are adopted under subsection (a). 4 9. A consumer visits a department store. A prominent sign posted at the entrance to 5 the store’s parking lot states that parking is free while visiting the store, and that the store 6 is not responsible for damage to the vehicle while parked in the lot. The consumer parks 7 the car in the lot and browses the store’s aisles but does not make any purchase. Upon exit, 8 the consumer discovers that the car was damaged. By entering the lot, the consumer 9 manifests assent to the transaction concerning the use of the parking lot and the terms 10 posted on the sign are adopted under subsection (a). 11 10. A consumer enters an information-service website’s homepage for the purpose 12 of gaining access to its information content, without creating an account or making a 13 purchase, and without checking a box or clicking a link evidencing assent to any 14 agreement. At the top of the homepage, a notice is posted in large font, underlined, and in 15 contrasting color: “By continuing past this page, you agree to abide by the Terms of Use 16 for this site.” The phrase “Terms of Use” is underlined and highlighted. If clicked, it directs 17 the consumer to a page that contains the full Terms of Use. By continuing past the 18 homepage, the consumer manifests assent to the transaction concerning the use of the 19 website and the Terms of Use are adopted under subsection (a). 20 11. A consumer is directed from Website A, a search platform where users can 21 search and access information from numerous sources, to linked content appearing on 22 Website B, a separate information-service website. Initially, when clicking on the link that 23 appears on Website A, only the first paragraph of the content on Website B’s page is 24 visible, with a “Read More” button obscuring the remainder of the content. A notice 25 prominently appearing near the “Read More” button states that the use of Website B is 26 governed by standard contract terms. Clicking on the “Read More” button allows the 27 consumer to enter and to access the full content of Website B’s page. By clicking “Read 28 More” the consumer manifests assent to the transaction with Website B governing the 29 access to the content posted on the page. If the consumer can view the terms prior to 30 clicking “Read More” (for example, if a link to the terms appears within the notice), the 31 standard contract terms are adopted under subsection (a). If, instead, the consumer can only 25 © 2019 by The American Law Institute Tentative draft – not approved §2 Consumer Contracts 1 view the terms after clicking “Read More” (for example, a prominent link to them appears 2 at the bottom of the full-content page), the terms may be adopted under subsection (b), but 3 only if the consumer has an opportunity to reject the application of the terms by exiting the 4 full page of Website B, and does not do so. 5 7. The possibility of multiple contracts. A single manifestation of assent could result in 6 multiple contracts, if the requirements of this Section are satisfied for each of those contracts. The 7 additional contract is formed only if it conforms to the reasonable expectations of the consumer, 8 so as to avoid imposing on the consumer an unwanted additional contractual relationship. The 9 consumer must be specifically notified, and thus must reasonably expect, that by manifesting 10 assent to the transaction an additional contract with this or another party will be created. 11 In particular, in connection with a purchase at a retail store, it is possible and convenient 12 for the consumer to enter, by one act of manifesting assent, into two contracts—one contract with 13 the retailer and a second contract with the manufacturer of the purchased product (and thus avoid 14 the inconvenience of multiple affirmative acts of manifesting assent). At times, the terms 15 governing the second contract, offered by the manufacturer of the product, are available for review 16 prior to the manifestation of assent, for example, when they are presented to the consumer as part 17 of the description of the product before checkout and payment to a retailer. In such cases, 18 subsection (a) determines whether the terms are adopted. Other times, the terms provided by the 19 manufacturer are available to review for the first time only after the consumer manifests assent to 20 the transaction. In such cases, subsection (b) determines whether the terms are adopted. Under 21 either case, the terms offered by the manufacturer are adopted if the consumer receives reasonable 22 notice, before manifesting assent to the transaction, that a separate contract with the manufacturer 23 will be formed and that the manifestation of assent to the transaction will apply also to this 24 additional contract. And, under either case, the requirements of either subsection (a) or subsection 25 (b) must also be met in order for the standard contract terms offered by the manufacturer to be 26 adopted. An attempt to impose on the consumer a contractual relationship with a third party, if that 27 contractual relationship does not satisfy the requirements of this Section and conflicts with the 28 consumer’s reasonable expectations, may also be deceptive under § 6. 26 © 2019 by The American Law Institute Tentative draft – not approved Tentative Draft 1 §2 Illustrations: 2 12. A consumer purchases a product at an online store and, at the checkout screen, 3 manifests assent to a list of standard contract terms governing the transaction with the 4 retailer, which are prominently offered for review prior to the transaction. In addition, a 5 notice on the screen titled “Additional Terms of Sale” appears in a manner reasonably 6 visible to the consumer, instructing that by clicking “Purchase Now” the consumer is 7 accepting terms stipulated by the manufacturer, which are available in a printed booklet 8 inside the box. In the booklet, at the top of the first page, the consumer is informed of her 9 right to return the product within 30 days at no cost if she does not agree with the terms. In 10 this scenario, two consumer contracts are formed by manifesting assent to the purchase at 11 the retail outlet. The first contract is with the retailer, and contains the core deal terms as 12 well as the standard contract terms that the retailer has specified, in accordance with 13 subsection (a). The second contract is with the manufacturer, assent to which is also 14 manifested at the time of purchase. It contains the standard contract terms specified by the 15 manufacturer, and they are adopted at the end of the 30-day return period, in accordance 16 with subsection (b). 17 13. A consumer purchases from a dealer a new car, which is delivered with a three- 18 month trial subscription for satellite radio. When the consumer manifests assent to the 19 purchase, no reference is made concerning a separate contract with a satellite-radio service 20 and the intent to adopt terms governing that service. A month after the purchase, the 21 consumer receives a Service Agreement by mail from the satellite-radio business, notifying 22 the consumer about the standard contract terms governing the service. Since the customer 23 had no notice prior to the manifestation of assent to the transaction with the dealer that such 24 manifestation of assent would apply also to a separate contract governing the satellite-radio 25 service and that the standard contract terms governing this service would be mailed, no 26 contract is formed between the consumer and the satellite-radio business. The standard 27 contract terms mailed to the consumer concerning the satellite-radio service are not 28 adopted. 29 8. Combined use of different adoption processes. A business might use different adoption 30 processes for different sets of terms within a single consumer contract. For instance, the business 31 may present some standard contract terms in advance and ask the consumer to explicitly 27 © 2019 by The American Law Institute Tentative draft – not approved §2 Consumer Contracts 1 acknowledge them in the course of manifesting assent to the transaction (e.g., by clicking “I 2 Agree”), and may present other standard contract terms in a separate format, which the consumer 3 is not asked to affirmatively acknowledge (e.g., the other terms may be posted on a website, or 4 packaged with the product). Thus, it is possible to adopt some standard contract terms under 5 subsection (a) and others under subsection (b). The combined adoption of different sets of terms 6 occurs if the requirements for adoption under either subsection (a) or (b) are fully satisfied for each 7 set of terms. 8 Illustration: 9 14. A consumer in State A uses a website to create a service account. The consumer 10 is asked to click “I Agree” at the bottom of a scroll box titled “Terms of Service” in which 11 some standard contract terms are presented. Immediately adjacent to the “I Agree” button 12 appears a clearly labeled, easily identifiable statement: “Additional terms relating to 13 subscribers in State A will be sent to you within 72 hours. They will become part of your 14 contract with us unless you notify us within 14 days of your decision to cancel your 15 account.” By clicking “I Agree” the consumer manifests assent to the transaction and 16 adopts the terms presented in the scroll box under subsection (a). The additional terms are 17 adopted under subsection (b) if the consumer does not cancel the account within 14 days 18 of their presentation. 19 9. Notice and opportunity to review. The consumer must receive reasonable notice of the 20 existence of the standard contract terms, including reasonable indication that they are intended to 21 be part of a legally binding transaction to which the consumer is manifesting assent, and a 22 reasonable opportunity to review the terms. In some contexts, market norms, or course of dealing, 23 may provide sufficient notice to the consumer that additional standard contract terms are intended 24 to apply to the transaction. The characteristics of the contracting parties may also be taken into 25 account when evaluating the reasonableness of the notice (e.g., when a product or service is offered 26 to a small segment of especially sophisticated consumers). These requirements of notice and 27 opportunity to review apply when the terms are available for review prior to the manifestation of 28 assent to the transaction and are adopted under subsection (a), as well as when the terms are 29 available for review only after the manifestation of assent to the transaction under subsection (b). 30 (Compare UCC § 1-202 (defining “Notice”).) 28 © 2019 by The American Law Institute Tentative draft – not approved Tentative Draft 1 §2 Illustrations: 2 15. A consumer visits a business’s website to purchase a product. During the 3 checkout process, the consumer enters her credit-card information and shipping address, 4 and is then required to click “I agree to purchase.” The business places a link to Terms and 5 Conditions at the bottom of every one of its webpages, including at the bottom of the 6 checkout page. The link is in a font smaller than the one used in the rest of the website, and 7 on the checkout page the link can only be seen and accessed by scrolling down the page, 8 otherwise it is not visible when the consumer clicks “I agree to purchase.” The link does 9 not provide reasonable notice, and therefore the linked terms are not adopted as part of the 10 contract. If, instead, there is a prominent, stand-alone notice in a central portion of the 11 checkout page, in contrasting, large font, not blended with other notices, stating that the 12 transaction is subject to Terms and Conditions that are noticeably linked for the consumer 13 to access, all visible when the consumer clicks “I agree to purchase,” then the terms are 14 adopted as part of the contract under subsection (a). 15 16. A purchase agreement is drafted by the business to be presented to consumers 16 on the business’s website, but is sometimes presented to consumers as a paper printout at 17 the business’s service desk in a department store. On the online version, the consumer is 18 asked to click “I Agree” at the bottom, and on the paper-printout version the consumer is 19 asked to affix a signature next to the “I Agree” box. Immediately above the location of the 20 “I Agree” click, there is a phrase stating “Additional Terms.” In the online version, the 21 phrase “Additional Terms” appears as a link, in distinct color font, which, if clicked, opens 22 a page with the additional terms. In the paper-printout version, the phrase “Additional 23 Terms” appears in an underlined, pale font, and no other information is provided as to what 24 this phrase implies or how to access the additional terms. The link appearance in the online 25 version provides the consumer reasonable notice and opportunity to review, and the 26 additional terms are adopted once the consumer manifests assent to the transaction, under 27 subsection (a). The underlined phrase in the paper-printout version does not provide the 28 consumer reasonable notice and opportunity to review, and the terms are not adopted under 29 subsection (a). If, however, along with the printout version the consumer receives an 30 explicit explanation that the Additional Terms apply to the transaction and could be 29 © 2019 by The American Law Institute Tentative draft – not approved §2 Consumer Contracts 1 obtained by asking the sales clerk for a readily available copy for the consumer to review, 2 the terms are adopted under subsection (a). 3 17. A consumer purchases a product at a retail store. During checkout, the consumer 4 signs a form titled “Agreement” which includes the store’s General Terms and Conditions. 5 Later, upon unpacking the product, the consumer finds attached a brochure from the 6 manufacturer that contains the manufacturer’s standard contract terms, including an End 7 User License Agreement for the software installed on the product. No advance notice was 8 given to the consumer about these “terms in the box” either during the purchase process 9 with the retailer or on the box presented to the consumer prior to purchase. Because such 10 notice is lacking, the terms in the brochure are not adopted as part of the consumer contract. 11 If, instead, there was a prominent notice, either on the box or presented by the retailer, that 12 further terms were available for review once the consumer opened the box, the notice 13 requirement would be satisfied. In such case, the terms in the brochure would be adopted 14 under subsection (b) (subject to notice to the consumer of the consumer’s right to terminate 15 the transaction within a reasonable time after reviewing the terms; see also Comment 10.) 16 18. A consumer visits a business’s website to order a service. During the checkout 17 process, the consumer is presented with a scroll window with the heading “Service 18 Agreement” in which the first two lines of the agreement’s text are visible. Below the scroll 19 window, a paragraph in bold text explains that by clicking “Accept and Continue” the 20 consumer authorizes the business to obtain the consumer’s personal credit profile from a 21 third party. It does not state that by clicking “Accept and Continue” the consumer also 22 adopts the “Service Agreement.” The consumer manifests assent to the transaction by 23 clicking the “Accept and Continue” button. The terms in the “Service Agreement” are not 24 adopted as part of the contract because the consumer did not receive adequate notice that 25 assent applies to the “Service Agreement.” 26 19. A consumer purchases a product at a retail store. During checkout, the consumer 27 is presented with a 120-page brochure titled “Operation Manual.” The brochure contains 28 instructions from the manufacturer on how to use the product. It also contains, on page 97, 29 an arbitration agreement applying to the contract with the manufacturer. Because the 30 presentation of the brochure as a “Manual” does not include any language indicating that 31 standard contract terms affecting the consumer’s rights are included in the Manual, there 30 © 2019 by The American Law Institute Tentative draft – not approved Tentative Draft §2 1 is no reasonable notice of the existence of the standard contract terms and they are not 2 adopted as part of the contract under subsection (a). 3 20. A consumer signs up for in-flight Wi-Fi service. On the “create account” page, 4 immediately below the boxes in which the consumer is instructed to enter personal 5 information, appears a prominent “NEXT” button that takes the consumer to a webpage on 6 which the consumer is instructed to enter credit-card information. Above the “NEXT” 7 button, the following statement appears in small font that is not distinguished—by size, 8 color, or typeface—from other text on the screen: “By clicking ‘NEXT’ I agree to the terms 9 of use and privacy policy.” The words “terms of use” and “privacy policy” are hyperlinks 10 and, if clicked, would take the consumer to webpages that include the business’s terms of 11 use and privacy policy, respectively. The consumer clicks “NEXT,” completes the 12 registration process, and proceeds to use the in-flight Wi-Fi service. There is no reasonable 13 notice of the existence of the standard contract terms and they are not adopted as part of 14 the contract under subsection (a). If instead the statement above the “NEXT” button was 15 made conspicuous through the use of large, different colored font (or large, bold-faced 16 font), the notice requirement would be satisfied and the terms of use would be adopted 17 under subsection (a). 18 21. A consumer installs an application on a smartphone and is prompted to enter 19 personal information in a sequence of screens. In the middle of the last screen, where the 20 consumer is asked to provide payment information, appears a conspicuous “Register” 21 button that the consumer must click to complete the installation. Immediately below that 22 button and in large, contrasting, and conspicuous font, against an otherwise uncluttered 23 background, there is a statement notifying the consumer that by clicking the “Register” 24 button the consumer is agreeing to the Terms of Service and Privacy Policy, both of which 25 are hyperlinked and underlined in contrasting colors. There is reasonable notice of the 26 Terms of Service and Privacy Policy under subsection (a) because their placement makes 27 them easy to find, and the design, placement, and language of the adjacent text make it 28 clear that the standard terms are intended to be part of the transaction when the consumer 29 chooses to register with the website. 30 10. Opportunity to terminate. Under subsection (b), the consumer must be given a 31 reasonable opportunity to terminate the transaction and a reasonable notice of the right to 31 © 2019 by The American Law Institute Tentative draft – not approved §2 Consumer Contracts 1 terminate. The duration of the review-and-terminate period has to be reasonable, providing 2 sufficient time for the consumer who is interested in reviewing the terms to complete a meaningful 3 review. In addition, the consumer’s opportunity to terminate the transaction after receiving the 4 terms must not place unreasonable cost, loss of value, or personal burden on the consumer. If a 5 reasonable right to terminate is granted, the consumer’s choice not to terminate constitutes the 6 adoption of the standard contract terms. Effective termination by the consumer discharges the 7 contract to which the consumer manifested assent. 8 Illustrations: 9 22. A consumer visits a store to purchase a product. Upon payment at the cash 10 register, the consumer is handed a receipt prominently referencing additional terms and 11 noting that these additional terms can be readily obtained on site at the customer-service 12 desk. If the service desk is nearby and readily accessible without undue delay or hardship, 13 and if the store allows the consumer to terminate the transaction after receiving the 14 additional terms (and reasonably notifies the consumer of the right to terminate), then they 15 are adopted under subsection (b). If, however, the additional terms are not readily available 16 upon the consumer’s request, or if the consumer is not allowed to reasonably terminate the 17 transaction after payment, or allowed but not reasonably notified about the right to 18 terminate, the additional terms are not adopted as part of the consumer contract. 19 23. A consumer purchases a computer online for $500. Prior to the purchase, a 20 notice that satisfies the requirements of subsection (b)(1) is provided. When the computer 21 is installed, a set of standard contract terms is displayed on-screen. The terms, which are 22 lengthy and complex, allow the consumer five days to return the computer and avoid being 23 bound by the terms. The standard contract terms are not adopted as part of the contract 24 because five days is not a reasonable time to perform the logistics required in the return of 25 a computer. 26 24. Same facts as in Illustration 23, but the consumer has 30 days to return the 27 computer. The terms further specify that, if the consumer returns the computer, the refund 28 will be only partial, as the business reserves the right to charge a 15 percent restocking fee. 29 While a restocking fee may be reasonable from the seller’s standpoint in light of the 30 handling and depreciation costs, it nevertheless restricts the opportunity of the consumer 32 © 2019 by The American Law Institute Tentative draft – not approved Tentative Draft §2 1 to terminate the contract upon review of the terms. Accordingly, the standard contract terms 2 are not adopted as part of the contract. 3 25. Same facts as in Illustration 23, but the consumer has 30 days to return the 4 computer and there is no restocking fee. The terms further specify that, if the consumer 5 returns the computer, the consumer will bear the return shipping cost. The shipping cost 6 may be reasonable, but it nevertheless restricts the opportunity of the consumer to terminate 7 the contract upon review of the terms. Accordingly, the standard contract terms are not 8 adopted as part of the contract. 9 26. Same facts as in Illustration 23, but the consumer purchases the computer at the 10 business’s local retail store (rather than online) and the terms specify that the consumer 11 may return the computer to the local retail store for a full refund within 60 days. Even 12 though driving back to the retail store imposes some cost or burden on the consumer, this 13 cost or burden is not unreasonable. In such case, the “opportunity to terminate” requirement 14 of subsection (b)(3) is satisfied. If, however, the store only accepts returns during limited 15 hours, or only when the box is unopened, the opportunity to terminate is unreasonably 16 restrictive and the standard contract terms are not adopted as part of the contract. 17 11. Legal consequences of nonadopted terms. Standard terms that fail to conform to the 18 adoption-process requirements of subsections (a) or (b) do not become part of the consumer 19 contract. In such a case, under subsection (c), there is a contract that contains the terms—standard 20 and nonstandard—that were effectively adopted, supplemented by gap-fillers supplied by law. A 21 consumer, however, has no obligation to assert that standard contract terms were not adopted. 22 Because the requirements of this Section are intended to provide consumers a reasonable 23 opportunity to review the terms, a consumer may waive these protections and may choose to get 24 the benefit of the standard contract terms. If the consumer so chooses, the business may not assert 25 that its standard contract terms were not adopted. (Compare § 7 for the consumer’s right to enforce 26 as part of the consumer contract an affirmation of fact or promise that does not appear in the 27 standard contract terms.) 28 Illustrations: 29 27. Same facts as in Illustration 23, but the standard contract terms include a statement by 30 the business that information about the transaction will not be provided to any other third 33 © 2019 by The American Law Institute Tentative draft – not approved §2 Consumer Contracts 1 party. The business, in violation of that statement, provides information about the 2 transaction to a third party, to the detriment of the consumer. While the standard contract 3 terms are not adopted as part of the contract, the consumer may assert a claim for breach 4 of a contractual promise as embodied in the nonadopted statement. 5 12. Mandatory rule. The rules restated in this Section specify mandatory requirements of 6 assent, notice, and opportunity to terminate, and cannot be excluded or derogated from by 7 agreement. A business is free to specify the precise manner or medium that the manifestation of 8 assent, notice, and termination take, as long as they are reasonable in the circumstances. If the 9 business specifies a process for adopting standard terms that does not meet these mandatory 10 requirements, that process is not effective and the standard terms it purports to adopt are not 11 adopted as part of the contract. (Compare § 9.) 12 13. Relation to other Sections. The adoption rules in this Section reflect the reality in which 13 the consumer’s consent to the standard contract terms is rarely informed. In classic contract law, 14 the requirement of assent was regarded as a meaningful mechanism that protects the contracting 15 party, under the premise that this party, with full knowledge of the terms and with sufficient 16 understanding of their impact, would manifest assent only to a contract that promotes his or her 17 interests. The length and complexity of standard-form contracts, and the large number of such 18 contracts consumers enter into, have diluted the effectiveness and plausibility of such front-end 19 self-protection. Accordingly, it is widely recognized that adoption procedures designed to achieve 20 informed consent would yield relatively little value to, and might even impose burdensome 21 transaction costs upon, the typical consumer. Courts have thus recognized the importance of 22 safeguards in consumer-contract law. Primary among these are the rules that strike down 23 unconscionable terms and other standard contract terms that undermine consumers’ benefit of the 24 bargain (§ 5). Adding to the protection afforded by the unconscionability doctrine are the good- 25 faith duties that govern contract modification and open discretionary terms (§§ 3 and 4) and rules 26 that police deception and enforce precontractual affirmations and promises (§§ 6 to 8). If, despite 27 reasonably communicated disclosures, consumers are not expected to scrutinize the legal terms up 28 front, courts should scrutinize them ex post. The ex post scrutiny is intended to uproot terms that 29 are so extreme that they would be unlikely to survive in an environment of meaningful assent, or 30 that peel off the value that consumers bargained for. 34 © 2019 by The American Law Institute Tentative draft – not approved Tentative Draft §2 1 14. Relation to the Uniform Commercial Code and to the Restatement of the Law Second, 2 Contracts. The common-law rules restated herein are consistent with, and elaborate on, the general 3 principles of contract formation, as articulated in Restatement of the Law Second, Contracts, 4 Chapter 3, and how a majority of courts have interpreted UCC § 2-204 in this context. With respect 5 to adoption of terms after manifesting assent to the transaction (subsection (b)), some courts have 6 interpreted UCC § 2-207 to bar adoption of those terms as part of the consumer contract. Most 7 courts, however, reject that interpretation of UCC § 2-207 and, as those courts have determined 8 that no other provisions of Article 2 address the question of which post-purchase terms become 9 part of the contract, apply instead UCC § 2-204 and—through the gateway provided by UCC § 1- 10 103(b)—general common-law principles. With respect to the adoption of standard contract terms 11 by entry to or continued use of a proprietary environment, the rule of this Section is consistent 12 with Restatement of the Law Second, Contracts § 69(1)(a), which allows silence to operate as an 13 acceptance when the offeree “takes the benefit of offered services with reasonable opportunity to 14 reject them and reason to know that they were offered with the expectation of compensation.” See 15 Comment 6 to this Section. REPORTERS’ NOTES 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 General. This Section is based on legal precedents that reflect three fundamental observations. First, credible empirical evidence, as well as common sense and experience, suggests that consumers rarely read standard contract terms no matter how those terms are disclosed. (See, e.g., Yannis Bakos, Florencia Marotta-Wurgler & David R. Trossen, Does Anyone Read the Fine Print? Consumer Attention to Standard Form Contracts, 43(1) J. LEGAL STUD. 1 (2014); OMRI BEN-SHAHAR & CARL E. SCHNEIDER, MORE THAN YOU WANTED TO KNOW: THE FAILURE OF MANDATED DISCLOSURE, Ch. 2 (2014).) Informed consent to the standard contract terms is, by and large, absent in the typical consumer contract. Second, the use of standardization in the production of contract terms is, like standardization in the production of goods and services, a source of potential benefits to consumers and businesses alike. Standardization supports efficient production and distribution, resulting in lower prices and lower transaction costs, and the introduction of new forms of products and services. Third, courts routinely enforce standard terms, even in the absence of informed consent to those terms, if several basic requirements are met. In particular, the consumer must manifest assent to the underlying transaction, must receive reasonable notice of the standard contract terms that are meant to be adopted as part of the contract, and must be provided a meaningful opportunity to review the terms. When the standard terms are provided only after the consumer manifests assent to the transaction (known as “Pay Now, Terms Later” (PNTL) or “shrinkwrap” contracts), courts 35 © 2019 by The American Law Institute Tentative draft – not approved §2 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 Consumer Contracts demand that the consumer have, instead of a reasonable opportunity to review the terms in advance, a reasonable opportunity to review the terms after manifesting assent to the transaction and a reasonable opportunity to avoid or terminate the transaction after the standard contract terms are made available for review. Some courts also require that a reasonable notice be provided prior to manifesting assent, explaining that further terms will be presented later, that the consumer has an opportunity to terminate the transaction after reviewing the terms, and that failure to terminate would lead to the adoption of the terms. The adoption of standard contract terms after manifesting assent to the transaction, as restated in this Section, has long been recognized as an effective adoption procedure in many areas of standard-form contracting. Most consumer goods, for example, arrive with a warranty statement in the box, binding despite its late arrival after the consumer manifested assent to the transaction. Most services ordered over the phone or directly from sales personnel, such as insurance or telecommunications services, are accompanied by standard contract terms that arrive after the consumer manifested the intent to enter into the transaction. The insurance context is particularly relevant, because it is exceedingly common for the insurance policy to be mailed to the consumer only after the consumer manifested assent; indeed, it would be entirely useless for the consumer to try to review the complex terms of the insurance policy in advance, and any practice prompting consumers to do so should be discouraged because it would yield little or no value and would merely agitate consumers. In sales-of-goods cases, some controversy has emerged whether the provisions of Article 2 of the Uniform Commercial Code permit such post-assent adoption of terms. A small minority of courts have read § 2-207 to deny enforcement of those terms. Analysis of case law, presented below, suggests that a large majority of courts have declined to use § 2-207 to limit the binding effect of terms in a merchant’s form that is sent to a consumer after the manifestation of assent. Courts have often found the consumer to be bound by terms on the merchant’s form by relying on § 2-204 and common-law rules of offer and acceptance not explicitly overturned by the UCC, reasoning that, as long as proper notices are provided to the consumer in advance and a reasonable opportunity to review and terminate the contract is provided after the delivery of the terms, no burden is imposed on the consumer by the post-assent delivery of the terms. Courts have also recognized that adoption of such terms reduces contracting costs and does not significantly reduce contract readership (also, as explained below, consumers must be provided the right to exit the transaction without undue burden after receiving the terms). Even in the presence of adequate notices concerning the adoption of standard contract terms, and regardless of how timely and prominent is the presentation of the terms, consumers rarely become meaningfully informed about the content and the effect of such terms. Accordingly, the prudent approach—reflected in this Restatement and in case law—is to protect consumers against terms that either overreach or undermine express promises made by the business. Those protections are presented in §§ 5 to 8 of this Restatement. Viewed in tandem, the provisions in this Restatement implement both the spirit and the practice of Karl Llewellyn’s vision of “blanket assent” to consumer contracts. Under this view, the “boilerplate” is part of the contract despite the 36 © 2019 by The American Law Institute Tentative draft – not approved Tentative Draft 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 §2 absence of informed consent to it, as long as it does not undermine the “dickered terms” and is not otherwise unfair to the consumer. (KARL N. LLEWELLYN, THE COMMON LAW TRADITION: DECIDING APPEALS 370 (New York: Little, Brown, 1960).) In explaining assent to unknown terms, Comment b of Restatement Second of Contracts § 211 states that “[a] party who makes regular use of a standardized form of agreement does not ordinarily expect his customers to understand or even to read the standard terms . . . . They trust to the good faith of the party using the form and to the tacit representation that like terms are being accepted regularly by others similarly situated. But they understand that they are assenting to the terms not read or not understood, subject to such limitations as the law may impose.” RESTATEMENT OF THE LAW SECOND, CONTRACTS § 211, Comment b (AM. LAW INST. 1981). Those limitations are embodied in the scrutiny of terms performed by courts under various doctrines, including those in this Restatement. Terms governing proprietary environments. Standard contract terms governing the proprietary environment of a business may be adopted as part of a consumer contract upon entry to, or continued use of, that environment. In the physical world, the terms are often posted and reviewable before entry into the proprietary environment, e.g., a sign near the entrance to a parking lot that stipulates the per-hour price for parking as well as the allocation of any risk of loss. In those cases, the act of entering the environment is a manifestation of assent to the transaction and adoption of the terms under subsection (a). In the online world, if the notice of the standard contract terms is provided to the consumer prior to entry into an online site, the terms are adopted if, after entry, the consumer can review the terms and avoid their effect by discontinuing use. A straightforward manner in which pre-entry notice can be provided in the online world is through a pop-up statement alerting the consumer to the presence of standard contract terms. In reality, such pop-up statements pose some disruption and annoyance to the great majority of consumers, and since most consumers who are interested in reviewing the standard contract terms governing the use of the website expect them to be posted on the website and be viewable upon entry, such advance notices are not likely to secure any meaningful informational benefit. Accordingly, the presence of demonstrated market norms that inform consumers’ expectations regarding the existence and availability of standard contract terms may substitute an explicit advance notice. Alternatively, a prominent link—to a separate webpage containing the standard contract terms— may provide the requisite notice, and the continued use of the website, rather than mere entry to the online environment, is the manifestation of assent to the transaction and adoption of the terms under subsection (a). Manifesting assent by entry to and continued use of a proprietary environment allows for silence or inaction, along with continued usage and the taking of the benefits, to substitute for an affirmative acceptance act in operating as manifestation of assent and adoption of the terms that apply to the use of the proprietary environment. This approach serves particularly well the convenience consumers and businesses value in the course of digital transactions. Users of digital environments often interact with multiple businesses in a short period of time, many of which provide them with useful services or information without charging money and without requiring a cumbersome sign-up ritual. The application of the assent and adoption rules to the context of entry 37 © 2019 by The American Law Institute Tentative draft – not approved §2 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 Consumer Contracts to and continued use of a proprietary environment is likely to promote the interest of the great majority of consumers who use digital environments and prefer to avoid the repeated formalities. Compare Restatement of the Law Second, Contracts § 69(1)(a) (Am. Law Inst. 1981), which allows silence or inaction to operate as an acceptance when the offeree “takes the benefit of offered services with reasonable opportunity to reject them and reason to know that they were offered with the expectation of compensation.” The use of the proprietary environment is the taking of the “benefit of offered services”; the notice provided by the business gives consumers a reason to know of the business’s “expectation of compensation (namely, that the terms will become part of the contract); and the reasonable opportunity to terminate the transaction under subsection (b)(3) is a “reasonable opportunity to reject” under § 69(1)(a). This view is also reflected in the caselaw. See, e.g., Schnabel v. Trilegiant Corp., 697 F.3d 110 (2d Cir. 2012). In affirming silence as a viable mode of acceptance, the court in Schnabel cited § 69(1)(a) and noted that “acceptance need not be express, but where it is not, there must be evidence that the offeree knew or should have known of the terms and understood that acceptance of the benefit would be construed by the offeror as an agreement to be bound.” Id. at 128. See also Register.com, Inc. v. Verio, Inc., 356 F.3d 393 (2d Cir. 2004) (endorsing, in dicta, the approach articulated in Restatement of the Law Second, Contracts § 69(1)(a) (Am. Law Inst. 1981) and stating that “[i]t is standard contract doctrine that when a benefit is offered subject to stated conditions, and the offeree makes a decision to take the benefit with knowledge of the terms of the offer, the taking constitutes an acceptance of the terms, which accordingly become binding on the offeree.” Id. at 403). Possibility of multiple contracts. Consumer transactions often involve relationships with more than one business. A purchase of hardware may lead to a contractual relationship with software makers governing preinstalled software. A purchase at a retail store may likewise lead to a contractual relationship with the manufacturer of the purchased product. If the requirements of subsections (a) or (b) are satisfied, more than one consumer contract may result from a single act of manifesting assent. For such multiple contracts to be formed by one act of assent, consumers must receive an additional reasonable notice that their assent would form a contract with more than one business. Illustration 12 is based on Norcia v. Samsung Telecomm. Am., LLC, 845 F.3d 1279 (9th Cir. 2017). While in that case the court refused to enforce the second contract (with the manufacturer), it laid out the principle that by manifesting assent to the transaction the consumer can enter into two separate contracts—one with the retailer and one with the manufacturer. As explained by the court in Norcia: “This prediction of how California courts would rule is not untenable: Where a notice on a package states that the user agrees to certain terms by opening the package, a court could reasonably conclude, consistent with California contract law, that the user has a duty to act in order to negate the conclusion that the consumer had accepted the terms in the notice.” Id. at 1287. Such a duty to “negate” could be discharged by returning the product to the retailer, as (in that case) expressly permitted by the manufacturer’s in-the-box terms. In Norcia, a second contract with the manufacturer was not concluded, because the consumer did not receive adequate notice of the second contract. Id. at 1289. See also In re Samsung Galaxy Smartphone 38 © 2019 by The American Law Institute Tentative draft – not approved Tentative Draft 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 §2 Marketing & Sales Practices Litig., 298 F. Supp. 3d 1285 (N.D. Cal. 2018) (enforcing the arbitration clause in the second contract after concluding that consumer purchasers of certain models of Samsung phones were given sufficient notice of the manufacturer’s standard terms when the boxes containing the phones included a clear and conspicuous legend stating: “Device purchase subject to additional Samsung terms and conditions,” and posted a conspicuous notice of the terms on the user manual, where the terms were presented. Id. at 1298.). Illustration 13 is based on Knutson v. Sirius XM Radio Inc., 771 F.3d 559, 568 (9th Cir. 2014). Here, too, a second contract was not formed because the necessary notice was lacking. But, as stated by the court explicitly, with appropriate notice, a second contract with the third-party service provider could be formed: “The Toyota purchase agreement could clearly state that Toyota has a relationship with Sirius XM to provide Toyota customers with a trial service, and that therefore the Toyota customer is entering into a contractual relationship with Sirius XM. Toyota could also provide its customers with literature that similarly explains the agreement between Sirius XM and the Toyota customer and ask for assent to such agreement.” Id. The court concluded that without such notice a second contract is not formed: “Because Sirius XM’s offer was not effectively communicated, there was no knowing consent to the Customer Agreement, including the arbitration clause within it.” Id. The critical elements of the assent doctrine restated in this Section require that in addition to the manifestation of assent by the consumer to the transaction as a whole, the consumer would receive adequate notices and a meaningful opportunity to avoid unwanted terms, as explained below. Notice. The rules restated in this Section require reasonable notice. The notice must alert the consumers to the existence of the standard contract terms and the intent to include them as part of the transaction formed by the manifestation of assent. If terms are adopted under subsection (b), the pre-assent notice must also alert the consumers to their post-assent arrival and to the consumer’s right to terminate the transaction after their review (and to the consequences of nontermination). See In re Zappo’s Litigation, 893 F. Supp. 2d 1058 (D. Nev. 2012) (holding that because the terms of use were inconspicuously “buried in the middle to bottom of every Zappos.com webpage among many other links, and the website never directs a user to the terms of use,” there was not sufficient notice for acceptance); Roller v. TV Guide Online Holdings, LLC, 2013 Ark. 285, 2013 WL 3322348 (Ark. Jun 27, 2013) (determining that TV Guide failed to meet its burden to show that an enforceable agreement existed between it and the appellants because it could not demonstrate that the appellants had constructive or actual knowledge of the terms of the agreement); Tompkins v. 23andMe, Inc., 2014 WL 2903752, at *6 (N.D. Cal. June 25, 2014) (deciding that 23andMe provided insufficient notice to customers and website visitors because the “only way for a customer to see the TOS . . . was to scroll to the very bottom of the page and click a link under the heading ‘LEGAL’”); Berkson v. Gogo LLC, 97 F. Supp. 3d 359, 401, 404 (E.D.N.Y. 2015) (holding that Gogo failed to provide sufficient notice because “[t]he design and content of the website, including the homepage, did not make the ‘terms of use’ readily and obviously available to [the consumer]”); Salameno v. Gogo Inc., 2016 WL 4005783 (E.D.N.Y. 39 © 2019 by The American Law Institute Tentative draft – not approved §2 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 Consumer Contracts July 25, 2016) (holding that Gogo’s revised disclosure provided reasonable notice because consumers “were notified of the link to terms and conditions each time they signed in to use the service, and they then received an e-mail containing a link to the terms and conditions of the particular purchase.”); Selden v. Airbnb, Inc., 2016 WL 6476934 (D.C. Cir. Nov. 1, 2016) (finding that Airbnb provided sufficient notice of its Terms of Service when it placed a sign-up box with the text “By signing up, I agree to Airbnb’s Terms of Service,” in the middle of the page, in contrasting, appropriately sized font, “unobscured by other visual elements”); Meyer v. Uber Technologies, 868 F.3d 66 (2d Cir. 2017) (concluding that the Uber App satisfied the test of providing reasonably conspicuous notice of the Terms of Service as a matter of California law). Several Illustrations in this Section are based on leading cases that examined the reasonableness of the notice provided to consumers. Illustrations 10 and 11 are based on Specht v. Netscape, 306 F.3d 17 (2d Cir. 2002). Illustration 16 is based on Holdbrook Pediatric Dental, LLC v. Pro Computer Service, LLC, Civil No. 14–6115 (NLH/JS), 2015 WL 4476017 (D.N.J. July 21, 2015) (finding that the “existence of the hyperlink in the document [from PCS], without any statement to draw attention to the link, is insufficient to demonstrate that Holdbrook had ‘reasonable notice’ that the ‘Terms and Conditions’ were part of the contract”). It embodies the principle that incorporation by reference of a separate document must include a clear reference to a specific document that can be accessed without undue burden. When agreements are delivered in electronic form, a separate document may be incorporated through a prominent hyperlink, accompanied by a statement drawing the consumer’s attention to the fact that clicking the button constitutes acceptance of the hyperlinked terms. But when the agreement is delivered in a printedpaper form, the printed appearance of the hyperlink does not afford consumers sufficient notice and opportunity to review. In such case, it is necessary to provide a clear statement as to where the additional terms may be found, and place them in a location that is easy for the consumer to access. Similarly, merely referring to “additional terms of sale” does not sufficiently alert the consumer. The reference needs to be specific, so that “the identity of the separate document may be ascertained beyond doubt.” Walker v. Builddirect.Com Technologies Inc., 349 P.3d 549, 554 (Okla. 2015). The business can accomplish successful reference “by drafting the Contract employing words of express incorporation or clearly referencing, identifying and directing the [consumers] to the document to be incorporated.” See id. (refusing to recognize a vague attempt at incorporation by reference under Oklahoma Law). Illustration 18 is based on Sgouros v. TransUnion Corp., 817 F.3d 1029, 1033-1034 (7th Cir. 2016). It embodies the principle that “the layout and language of the site [must] give the user reasonable notice that a click will manifest assent to an agreement.” This case emphasizes that an “I Agree” click, in and of itself, is not sufficient to manifest assent. The consumer must have reasonable notice of what he or she is agreeing to. In particular, an “I Agree” click will not manifest assent to standard terms when the layout and language of the site allow for a reasonable inference that, by clicking “I Agree,” the consumer is consenting to something else (in Sgouros that “something else” was authorization for TransUnion to obtain consumers’ personal information from a third party). 40 © 2019 by The American Law Institute Tentative draft – not approved Tentative Draft 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 §2 Illustration 19 is based on Noble v. Samsung Electronics America Inc., 2016 WL 1029790 (D.N.J. Mar. 15, 2016). It provides additional guidance as to what must appear in a notice to put consumers on alert that a document contains standard contract terms, and emphasizes that terms printed in a booklet or instruction manual may, in the circumstance, be insufficient to satisfy the notice-and-opportunity-to-review requirement, when reference to them was not given during the manifestation of assent. See also Jones v. Samsung Elecs. Am., Inc., No. 2:17-cv-00571-MAP, 2018 WL 2298670 (W.D. Pa. May 21, 2018) (refusing to enforce an arbitration agreement tucked in the middle of an extensive “Important Information” booklet under a section entitled “Manufacturer's Warranty,” when the product’s box only included a sticker listing the items included in the box and not making reference to the terms, because it failed the constructive-notice requirement). Similarly, an arbitration clause or other standard term printed on the wrapper of bundles of shingles to be installed by a roofer would not constitute reasonable notice under this Section. Hobbs v. Tamko Building Products, Inc., 479 S.W.3d 147 (Mo. Ct. App. 2015). Nor would an arbitration clause included in a sample contract on a checkout webpage that can only be accessed after having to click through two optional links placed far away from a “BUY NOW” button. Savetsky v. Pre-Paid Legal Servs., No. 14-03514 SC, 2015 WL 604767 (N.D. Cal. Feb. 12, 2015). Illustration 20 is based on Berkson v. Gogo LLC, 97 F. Supp. 3d 359 (E.D.N.Y. 2015). It demonstrates that courts will engage in fact-specific inquiries regarding elements of website design, such as text placement, size, color, and context, as well as the particular language of the notice in determining whether the consumer received reasonable notice. See also Nguyen v. Barnes & Noble, 763 F.3d 1171 (9th Cir. 2015) (in which the court focused on the design of the page where the standard terms were placed to determine that notice was insufficient); Meyer v. Kalanik, 291 F. Supp. 3d 526 (S.D.N.Y. 2018) (considering non-static elements of website design such the role of a pop-up keypad in possibly obscuring notice); Cullinane v. Uber Technologies, Inc., 893 F.3d 53 (1st Cir. 2018) (considering elements of website design, including graphics, in determining the reasonableness of notice); Bekele v. Lyft, Inc., 918 F.3d 181 (1st Cir. 2019) (generalizing the holding in Cullinane and stating that “[t]he reasonable notice standard has governed online contracts across jurisdictions since the early days of the internet, and the inquiry has always been context- and fact-specific”). Illustration 21 is based on Meyer v. Uber Technologies, 868 F.3d 66 (2d Cir. 2017). It demonstrates that courts will consider the totality of the circumstances, including the context of the placement and language, in determining whether notice is reasonable. See also Bernardino v. Barnes & Noble Booksellers, Inc., No. 17-CV-04570 (LAK) (KHP), 2017 WL 7309893 (S.D.N.Y. Nov. 20, 2017) (evaluating the language and placement of notices on the entire webpage and holding that notice was reasonable because “Barnes & Noble’s arbitration provision met the key aspects of being reasonably conspicuous by virtue of the format and design of the ‘Submit Order’ page and the fact that customers could easily learn of the existence of, and access and read, the TOU before deciding to purchase a DVD.”); Applebaum v. Lyft, Inc., 263 F. Supp. 3d 454 (S.D.N.Y. 2017) (concluding notice was not reasonable because, among other factors, the 41 © 2019 by The American Law Institute Tentative draft – not approved §2 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 Consumer Contracts registration process design was not formatted in a way that alerted consumers that clicking a pink box titled “Next” at the bottom of a screen constituted acceptance of the standard terms, and the design discouraged recognition of the existence of the terms. Courts also evaluate the reasonableness of a notice by considering whether the presentation of the standard terms comports with established market norms and the consumer expectations that such norms create. For example, the court in Cullinane v. Uber Technologies, Inc., 893 F.3d 53 (1st Cir. 2018), held that notice was not reasonable because Uber did not employ the typical method of presenting hyperlinks (which are usually in contrasting color and underlined), thus failing to inform consumers of the existence and location of standard terms. Courts also take into account whether a business’s revisions to the format by which the terms are presented provide reasonable notice in light of its own prior format of presentation. See, e.g., Applebaum v. Lyft, Inc., 263 F. Supp. 3d 454 (S.D.N.Y. 2017) (concluding notice was not reasonable because notice and terms were not as conspicuously presented to consumers as in previous registration processes). In addition, courts are evaluating whether the consumer received reasonable notice that the standard contract terms are intended to be adopted as part of the transaction. For example, within the context of a mobile platform, the court in Meyer concluded that “[a] reasonable user would know that by clicking the registration button, he was agreeing to the terms and conditions accessible via the hyperlink, whether he clicked on the hyperlink or not.” Meyer, 868 F.3d at 7980. Similar analyses can be seen in other contexts, in which courts consider the expectations and understanding of similarly situated consumers in determining whether consumers understood the offeror’s intent. In Applebaum v. Lyft, Inc., 263 F. Supp. 3d 454 (S.D.N.Y. 2017), the court refused to enforce a contract after holding that the company’s current mode of giving notice of the terms differed from a previous one that consumers had become accustomed to and that, partly as a result of this, the newer mode “discouraged recognition of the existence of lengthier contractual terms that should be reviewed.” See also Wickberg v. Lyft, Inc., 356 F. Supp. 3d 179 (D. Mass. 2018) (concluding that terms were communicated with reasonable notice when the business required the user to click on a box stating “agree to Lyft’s terms of services” before the user could continue with the registration process; in that case, the notice appeared toward the bottom of a screen, and it was written in smaller font and without the typical blue-colored hyperlink, but appeared in contrasting color and was distinguishable on the screen). Reasonable opportunity to terminate. Under subsection (b), terms presented to the consumer after the manifestation of assent are adopted only if the consumer has a reasonable opportunity to terminate the transaction after reviewing the terms. Whether such termination is viewed as nonacceptance of the offer (that is otherwise accepted by non-rejection), revocation of a previous acceptance, or withdrawal from a fully formed contract, it is an alternative template for granting consumers a reasonable opportunity to exercise meaningful assent. Such termination rights protect consumers by permitting them to avoid harmful terms. A right to terminate the transaction guarantees that consumers are only bound to terms they have a reasonable opportunity to review. In effect, the business’s prerogative to present the terms 42 © 2019 by The American Law Institute Tentative draft – not approved Tentative Draft 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 §2 post assent comes at a cost: the contract is not finalized until the termination period expires, and consumers have the option during that period to undo an undesirable transaction. The right to termination must be practical: consumers must be made aware of the right to terminate and be provided with a reasonable time to exercise this right at a cost that does not render the opportunity to terminate impractical. Most cases addressing the enforceability of delayed terms cite the importance of effectively communicating the right to terminate by returning the goods or cancelling the service. When a reasonable right to terminate is effectively communicated, the standard terms are enforced. See, e.g., ProCD v. Zeidenberg, 86 F.3d 1447 (7th Cir. 1996) (confirming that because “ProCD extended an opportunity to reject if a buyer should find the license terms unsatisfactory,” the contract was enforceable); Bischoff v. DirectTV, Inc., 180 F. Supp. 2d 1097, 1101 (C.D. Cal. 2002) (enforcing a DirecTV agreement that clearly communicated to the customer that if they did not accept the terms, the service would be cancelled upon immediate notification); Brower v. Gateway 2000, Inc., 676 N.Y.S.2d 569, 572 (N.Y. App. Div. 1998) (refusing to find a clause unenforceable as a contract of adhesion, because the consumer could easily reject Gateway’s terms by returning the merchandise and buying competitor’s product); M.A. Mortenson Co. v. Timberline Software Corp., 998 P.2d 305, 308-313 (Wash. 2000) (finding acceptance of additional terms when the customer was notified of the right to return the product for a refund). And when the right to terminate is not effectively communicated, the standard terms are not enforced. See, e.g., Defontes v. Dell, Inc., 984 A.2d 1061, 1072 (R.I. 2009) (holding that because it could not be said that it was reasonably apparent to the plaintiffs that they could reject the terms simply by returning the goods, the terms and conditions were not binding). Of course, notice of a right to terminate is not sufficient in and of itself. The consumer must be afforded a reasonable opportunity to exercise that right. Specifically, the consumer must be granted sufficient time to exercise the right to terminate, and the cost, loss of value, or burden involved in exercising the right must not be so large that it deters the exercise of the right. Cf. Lima v. Gateway, 886 F. Supp. 2d 1170, 1186 (C.D. Cal. 2012) (determining that a 15-day window and 15 percent restocking fee made the affirmative duty to reject so oppressive as to contribute to procedural unconscionability). A right to terminate is a condition for adopting the standard terms as part of the contract only when the terms are adopted under subsection (b). If the terms are reasonably available to the consumer before or at the time of manifesting assent to the transaction, a right to terminate is not required. See subsection (a). The rules regarding the adoption of terms that satisfy the requirements of notice and opportunity to review under subsections (a) and (b) and a right to terminate the transaction under subsection (b) are the result of relatively recent doctrinal evolution. These requirements were identified using the traditional approach that relies on reasoning articulated by courts, both in dicta and in holdings, in published appellate cases only. The traditional approach was then supplemented by a more comprehensive empirical analysis, as described in the Reporters’ Notes to § 1. This Restatement describes the results of both the traditional analysis and the comprehensive empirical analysis for three different types of relatively recent standard-term 43 © 2019 by The American Law Institute Tentative draft – not approved §2 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 Consumer Contracts adoption procedures: clickwrap, browsewrap, and “Pay Now, Terms Later” (PNTL). To be sure, consumer contracts often take other, more traditional forms, including acceptance by signature, by conduct, or by taking of benefit; and the requirements of notice and opportunity to review apply also to those traditional forms of assent. This Restatement nevertheless addresses the three-way classification below, as shorthand for three common procedures for the adoption of standard contract terms. The clickwrap analysis looks at procedures that adopt terms in the course of an affirmative manifestation of assent, such as a click on “I agree”; the browsewrap analysis looks at procedures that adopt terms in the course of entering a proprietary environment, without an affirmative and separate manifestation of assent; and the PNTL (or “shrinkwrap”) analysis looks at procedures that adopt terms after the manifestation of assent. (It is worth noting that, in electronic commerce, while the archetypal adoption procedures have often been classified as clickwrap, browsewrap, and PNTL, several hybrid forms are often used, and these labels are not dispositive. Of course, all procedures of adoption must conform to the rules of this Section. In deciding how to classify them, this Restatement looked to the component of the agreement that was the focus of the dispute.) Clickwrap. In electronic and web-based transactions, assent is often manifested by clicking an “I Agree” button. That procedure is the digital equivalent of a signature at the bottom of a printed form. (See UNIFORM ELECTRONIC TRANSACTIONS ACT § 7 (UNIF. LAW COMM’N 1999). The “I Agree” button commonly appears below a scroll-down window that contains the standard terms. See, e.g., Caspi v. Microsoft Network, LLC, 732 A.2d 528, 532 (N.J. Super. Ct. App. Div. 1999) (finding no violation of the public policy of New Jersey in enforcing the membership agreement for an online computer service in which prospective subscribers were required to click either “I agree” or “I don’t agree” to terms); Forrest v. Verizon Communications, Inc., 805 A.2d 1007, 1010 (D.C. App. 2002) (enforcing a forum-selection clause in a contract that the subscriber entered by clicking an “Accept” button below the scroll box); Moore v. Microsoft Corp., 741 N.Y.S.2d 91, 92 (N.Y. App. Div. 2002) (ruling that a validly binding contract was formed when the user indicated assent to the end-user license agreement by clicking on an icon before proceeding with the download of the software). In some cases, the “I Agree” button appears next to a link that would take the consumer to another page with the standard terms. See, e.g., Comb v. PayPal, Inc., 218 F. Supp. 2d 1165 (N.D. Cal. 2002) (classifying the PayPal user agreement, in which a link to the text of the terms is at the bottom of the application, as a clickwrap contract); Swift v. Zynga Game Network, Inc., 805 F. Supp. 2d 904 (N.D. Cal. 2011) (granting a motion to compel arbitration when a clickwrap presentation with hyperlinked terms provided the user notice and an opportunity to review the terms of service prior to acceptance); Fteja v. Facebook, 841 F. Supp. 2d 829 (S.D.N.Y. 2012) (ruling that a user assented to Facebook’s terms of use even though they were only available through a hyperlink). Those “clickwrap,” or “scrollwrap” (when the terms appear in a box above the “I agree” button) contracts are routinely enforced by courts, as long as the manner in which terms and notice of terms are presented satisfy the constructive-notice requirements that focus on language, placement, and conspicuousness of the terms. See, e.g., Berkson v. Gogo LLC, 97 F. Supp. 3d 359; Corwin v. NYC Bike Share, LLC, 238 F. Supp. 3d 44 © 2019 by The American Law Institute Tentative draft – not approved Tentative Draft 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 §2 475 (S.D.N.Y. 2017) (explaining how various forms of presenting terms online, regardless of the particular details, must meet the constructive-notice requirement). They are enforceable under subsection (a) of this Section. At times, the clickwrap text refers to additional terms, available on a different website. These referenced terms are also enforceable, as long as they are reasonably accessible by the consumer. See DeJohn v. TV Corp. Int’l, 245 F. Supp. 2d 913 (C.D. Ill. 2003) (finding that DeJohn was bound by the terms of an agreement, part of which were incorporated by reference). Importantly, the additional terms must be accessible by the consumer before he or she clicks “I Agree.” See State ex rel. U-Haul Co. v. Zakaib, 752 S.E.2d 586 (W. Va. 2013) (holding that UHaul was unsuccessful in its attempts to incorporate the Addendum because it was only provided to customers after the rental agreement was executed). A traditional analysis focusing exclusively on all the decisions by state supreme and appellate courts through 2014 reveals that courts routinely enforce clickwraps, absent fraud, unconscionability, or other intervening factors. (For instance, as noted above, the court in Sgouros refused to enforce the clickwrap because it concluded that consumers had no reasonable notice of what they were agreeing to.) In the 11 states in which there is a supreme-court or appellate-court decision on point, clickwraps were deemed to be enforceable absent an intervening factor. The supreme courts of two states, Washington and West Virginia, have ruled on the enforceability of clickwraps. In the remaining nine states, the opinions were written by state appellate courts. In the absence of decisions by state supreme or appellate courts, other Restatements have consulted opinions written by federal circuit courts interpreting state law. That approach is followed throughout this Restatement. The 10 state-court decisions (including one from the District of Columbia) are Forrest v. Verizon Communications, 805 A.2d 1007, 1010 (D.C. App. 2002) (District of Columbia: enforcing a forum-selection clause in a contract the subscriber entered by clicking an “Accept” button below the scroll box); Durrett v. ACT, Inc., 310 P.3d 1047 (Haw. Ct. App. 2011) (Hawaii: concluding that an agreement with an arbitration provision was binding because the plaintiff provided explicit assent by electronically checking the box); Swanson v. U-Haul Int’l, Inc., 2014 IL App (2d) 140227-U, 2014 WL 1673115 (Ill. App. Ct. Apr. 23, 2014) (Illinois: affirming the defendants’ motion to compel arbitration, when plaintiffs clicked to accept the terms and conditions of rental contract with a valid arbitration provision); Jallali v. Nat’l Bd. of Osteopathic Med. Exam’rs, Inc., 908 N.E.2d 1168 (Ind. Ct. App. 2009) (Indiana: finding the forum-selection clause and confidentiality clauses in a clickwrap agreement enforceable); Bonck v. White, 115 So. 3d 651 (La. Ct. App. 2013) (Louisiana: reversing summary judgment because of the existence of genuine issues of material fact, but finding that electronic signatures are acceptable under Louisiana law on a UMBI form); Caspi v. Microsoft Networks LLC, 732 A.2d 528, 532 (N.J. Super. Ct. App. Div. 1999) (New Jersey: finding no violation of the public policy of New Jersey in enforcing the membership agreement for an online computer service in which prospective subscribers were required to click either “I agree” or “I don’t agree” to terms); Moore v. Microsoft Corp., 741 N.Y.S.2d 91, 92 (N.Y. App. Div. 2002) (New York: ruling that a validly binding 45 © 2019 by The American Law Institute Tentative draft – not approved §2 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 Consumer Contracts contract was formed when the user indicated assent to the end-user license agreement by clicking on an icon before proceeding with the download of the software); Barnett v. Network Solutions, Inc., 38 S.W.3d 200 (Tex. App. 2001) (Texas: enforcing the forum-selection clause in an agreement in which the plaintiff had to electronically scroll through the contract in order to accept its provisions); Minnik v. Clearwire U.S. LLC, 275 P.3d 1127 (Wash. 2012) (Washington: determining that a fee was an alternative-performance provision and not a liquidated-damages provision in a clickwrap agreement); and State ex rel. U-Haul Co. v. Zakaib, 752 S.E.2d 586 (W. Va. 2013) (West Virginia: recognizing the legitimacy of clickwrap and other electronic contracts, but holding that U-Haul was unsuccessful in its attempts to incorporate the Addendum because it was only provided to customers after the rental agreement was executed). An additional decision by the Tenth Circuit, enforcing a clickwrap contract under Oklahoma law, is included here, Hancock v. American Tel. and Tel. Co., Inc., 701 F.3d 1248 (10th Cir. 2012) (seeing no reason that clickwrap agreements would not be valid and enforceable under Oklahoma law). A similar outcome is obtained from a comprehensive empirical study of all cases that are available through legal search engines and secondary sources (starting with Caspi in 1999), from state and federal courts, addressing, explicitly or implicitly, the enforceability of clickwraps in consumer transactions. Out of a total of 92 cases, courts have enforced clickwraps in every case, absent fraud, unconscionability, or other intervening factors, such as insufficient notice. Clickwraps have been enforced in 27 states and across all federal circuits. They were enforced when the terms were conspicuously and clearly presented above or next to an “I Agree” box, when they were available via hyperlink next to a box containing “I Agree” or similar language, and when they were incorporated by reference in a clickwrap. There is not a single reported case in which clickwrap, when the consumer was required to click on “I agree,” was deemed a priori an ineffective mode for adoption of terms. Browsewrap. Another common procedure in electronic and web-based transactions dispenses with the “I Agree” click. The website includes a link to another page with the standard terms, and consumers, by proceeding with the purchase or simply by continuing to use the website, are deemed to have adopted the standard terms as part of the contract. Browsewraps reduce the costs and hassle of explicit clickwrap contracting, especially in casual web browsing. See, e.g., Alan L. Montgomery, Shibo Li, Kannan Srinivasan & John C. Liechty, Modeling Online Browsing and Path Analysis Using Clickstream Data, MARKETING SCIENCE 23.4 at 585 (2004) (examining online browsing behavior by consumers and finding that reducing the number of clicks from the home page of a product to the purchase icon increases the probability that a purchase will be finalized). Every time consumers visit one of the many websites on which they browse for information without opening an account or making a purchase, the terms governing this use of the website (including data collection, warranty disclaimers, choice of law and forum, and many others) are listed on a separate page accessible through a link on the webhost’s main page. For those consumers, it would be a distraction to have to click “I Agree” to the term, and they would likely view the process of “closing the pop-up box” alerting them to the existence of such linked terms as redundant and annoying. Accordingly, courts have allowed businesses to create binding 46 © 2019 by The American Law Institute Tentative draft – not approved Tentative Draft 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 §2 contracts without explicit manifestation of assent, utilizing instead the doctrine of constructive assent. Courts generally enforce browsewraps as long as reasonable notice is provided, i.e., as long as the hyperlink to the standard terms is sufficiently conspicuous and/or a conspicuous statement alerting the consumers to the presence and location of the posted terms is provided. Such notice must also alert the consumers to the intent to include the terms as part of the consumer contract. In other words, consumers have to be put on notice that terms are being adopted, either by posting the terms in a prominent location or by including a prominent statement referring the consumers to the terms. While most courts have required that one of these two conditions be satisfied (prominent posting or prominent notice), some courts have required both. This approach has been the most prominent in recent decisions. See Nguyen v. Barnes & Noble Inc., 763 F.3d 1171 (9th Cir. 2014) (holding that “the proximity or conspicuousness of the hyperlink alone is not enough to give rise to constructive notice”). Hyperlinks or references to terms that are not prominently displayed and that require a consumer to actively look for them fail to provide reasonable notice of their existence. Failure to provide this notice will result in nonenforcement. See, e.g., Specht v. Netscape Communications Corp., 306 F.3d 17 (2d Cir. 2002) (denying defendants’ motion to compel arbitration because defendants did not provide reasonable notice of license agreements that were located on a submerged screen); Hines v. Overstock, 668 F. Supp. 2d 362, 366 (E.D.N.Y. 2009) (ruling that the plaintiff had no actual notice of the Terms and Conditions of Use, the link to which was not visible without scrolling down to the bottom of the screen); Hoffman v. Supplements Togo Mgmt., LLC, 18 A.3d 210 (N.J. Super. Ct. App. Div. 2011) (determining that a forum-selection clause was unreasonably masked from the view of the prospective purchasers because of its circuitous mode of presentation, and was therefore unenforceable). But see Bernardino v. Barnes & Noble Booksellers, Inc., No. 17-CV-04570 (LAK) (KHP), 2017 WL 7309893, at *11 (S.D.N.Y. Nov. 20, 2017) (holding that Barnes & Noble’s revisions to its checkout page, which included a prominent notice over the purchase button stating that “[b]y making this purchase you are agreeing to our TOU,” which were conspicuously hyperlinked, satisfied the constructive notice requirement). Some courts include, within the notice requirement, an additional requirement that the terms be easily accessible. See, e.g., Hubbert v. Dell Corp., 835 N.E.2d 113, 122 (Ill. App. Ct. 2005) (“The statement that the sales were subject to the defendant’s ‘Terms and Conditions of Sale,’ combined with making the ‘Terms and Conditions of Sale’ accessible online by blue hyperlinks, was sufficient notice to the plaintiffs that purchasing the computers online would make the ‘Terms and Conditions of Sale’ binding on them.”); Van Tessell v. United Marketing Grp., 795 F. Supp. 2d 770, 793 (N.D. Ill. 2011) (“[T]he absence of any reference to the Conditions of Use coupled with the multi-step process to locate the Conditions of Use means that, like the plaintiffs in Specht, users of the ChefsCatalog.com website could complete their purchases without ever having notice that their purchases are subject to the website’s Conditions of Use.”) This notice-and-opportunity-to-review doctrine is restated in subsection (a). Focusing only on the most recent state-supreme-court and appellate-court decisions through 2019 further supports the notice-and-opportunity-to-review doctrine. Those cases include 47 © 2019 by The American Law Institute Tentative draft – not approved §2 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 Consumer Contracts one from the Supreme Court of Arkansas, one each from the appellate courts of California, Florida, New Jersey, and Missouri, and one each from the U.S. Court of Appeals for the First Circuit applying Massachusetts law, the U.S. Court of Appeals for the Second Circuit applying Washington law, the U.S. Court of Appeals for the Third Circuit applying New Jersey law, and the U.S. Court of Appeals for the Ninth Circuit applying California law. In the only case in which notice of the terms was given and the hyperlinks to the terms were conspicuous, Major v. McCalister, 302 S.W.3d 227 (Mo. Ct. App. 2009), the browsewrap was enforced. The browsewrap terms were not enforced in the other cases because the court concluded that the notice was not sufficient to inform consumers about the terms. Those cases are: Roller v. TV Guide Online Holdings, LLC, 2013 Ark. 285, 2013 WL 3322348 (Ark. June 27, 2013); Long v. Provide Commerce, Inc., 200 Cal. Rptr. 3d 117 (Cal. Ct. App. 2016); Vitacost.com, Inc. v. McCants, 210 So. 3d 761 (Fla. Dist. Ct. App. 2017); Hoffman v. Supplements Togo Mgmt., LLC, 419 N.J. Super. 596, 18 A.3d 210 (Super. Ct. App. Div. 2011); Campbell v. Gen. Dynamics Gov’t Sys. Corp., 407 F.3d 546 (1st Cir. 2005); Nicosia v. Amazon.com, Inc., 834 F.3d 220 (2d Cir. 2016); James v. Glob. Tel.*Link Corp., 852 F.3d 262 (3d Cir. 2017); and Nguyen v. Barnes & Noble Inc., 763 F.3d 1171 (9th Cir. 2014). Similar results are obtained from a comprehensive empirical analysis of all state and federal cases addressing the enforceability of browsewraps in consumer transactions, starting with Specht in 2002, and ending with Resorb Networks, Inc. v. YouNow.com, 30 N.Y.S.3d 506 (N.Y. Sup. Ct. 2016) in April 2016. This resulted in a total of 32 cases from one state supreme court, six state appellate courts, one state trial court, four federal circuit courts, and 20 federal district courts. The cases include nine unpublished opinions. The examination reveals that browsewraps were enforced in all 13 cases in which the website included both a prominent statement of notice and conspicuous hyperlinks to the terms. Conversely, in 12 out of 13 cases in which the website lacked both a prominent statement of notice and conspicuous hyperlinks to the terms, courts refused to enforce the browsewraps on the basis of failure to provide sufficient notice. In five cases, courts refused to enforce the browsewrap when either the hyperlink was not reasonably accessible or the notice was not sufficiently prominent. In one case, the court enforced the browsewrap when only the notice of the terms, but not the hyperlink, was conspicuous. In another case, the court enforced the browsewrap when neither the notice nor the hyperlink were accessible and conspicuous. Browsewraps were enforced in 15 of the 32 cases, or slightly less than half of the time. Of the two cases of casual browsing, when the consumer was visiting the website without entering into a transaction, one court held that either notice of the terms or a conspicuously placed hyperlink with the terms, properly labeled, constitutes sufficient notice, and thus continued use of the website constitutes acceptance of the browsewrap’s terms. The other court held that both notice of the terms and a conspicuously placed hyperlink are required. When the consumer enters into a transaction with the seller, only three out of 18 cases required both elements, holding that merely including prominent hyperlinks without a statement explicitly referring to them did not constitute reasonable notice. (Cases in which the consumer downloads software free of charge are counted 48 © 2019 by The American Law Institute Tentative draft – not approved Tentative Draft 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 §2 in this Restatement as cases in which the consumer entered into a transaction with the seller. Under the “casual browsing” category, the only cases included are ones in which the consumer was just visiting a webpage, without any other interaction with the seller (i.e., without purchasing or downloading anything).) Pay Now, Terms Later (PNTL). Many consumer transactions begin with an agreement between the business and the consumer on the core terms of the transaction (e.g., the description of the purchased model or service, price, method of payment, or time of delivery). This agreement may be reached in a telephone conversation or through an in-person exchange in a brick-andmortar store. The standard terms arrive later, when the purchased item is delivered and opened. Even when a product is purchased online from a retailer with whom the consumer had a clickwrap agreement, the standard contract terms with the manufacturer may be first viewed only after delivery and installation. Initially, courts failed to reach a uniform resolution of the question whether the “terms in the box” become part of the consumer contract. In general, courts followed one of two approaches. The first approach enforces such terms as long as consumers received them after the purchase (with notice in advance of the purchase that they are forthcoming) and had an opportunity to review the terms and terminate the transaction once the terms arrived, if the consumers found the terms undesirable. See, e.g., ProCD v. Zeidenberg, 86 F.3d 1447 (7th Cir. 1996) (note that ProCD, while cited in many subsequent consumer-contracts cases, was not itself a consumer-contract case); Hill v. Gateway 2000, Inc., 105 F.3d 1147 (7th Cir. 1997). The second approach does not enforce such late-arriving terms, regarding them as offers for additional terms that need to be accepted affirmatively (the continued use of the product does not qualify as such affirmative acceptance under this approach). See, e.g., Bowdoin v. Showell Growers, 817 F.2d 1543 (11th Cir. 1987) (deciding that unless a disclaimer of implied warranties is conspicuously given prior to the purchase, it is ineffective); Sanco, Inc. v. Ford Motor Co., 771 F.2d 1081, 1086 (7th Cir. 1985) (enforcing a warranty disclaimer delivered to a customer after a sale had been consummated only because the parties understood beforehand that the warranty, and any disclaimers or limitations, were part of their deal); Klocek v. Gateway, Inc., 104 F. Supp. 2d 1332, 1341 (D. Kan. 2000) (finding that “the act of keeping the computer past five days was not sufficient to demonstrate that plaintiff expressly agreed to the Standard Terms”). In sales-of-goods cases, the first approach, enforcing PNTL contracts, has relied on UCC § 2-204 (Am. Law Inst. & Unif. Law Comm’n); the second approach, refusing to enforce PNTL contracts, has relied on UCC § 2-207 (the second approach has been applied only in sales-of-goods cases). Academic scholarship on that question has, by and large, endorsed the second approach. Consistent with the courts’ overall tendencies in enforcing clickwraps and browsewraps in which the requirements of constructive notice have been satisfied, state high courts have leaned toward enforcement. A traditional analysis focusing on the most recent supreme- and appellatecourt cases from each state indicates that the first approach, which enforces late-arriving terms, is the dominant jurisprudence in consumer-contract law. As long as reasonable notice and meaningful opportunity to review and reject are offered, assent mechanisms such as those 49 © 2019 by The American Law Institute Tentative draft – not approved §2 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 Consumer Contracts embodied in PNTLs facilitate commerce without undue burden, such as additional clicking or multistep signing, that are unlikely to further inform consumers. The policing of “unseen” terms is achieved by courts through other doctrines. As of 2019, the higher courts of 12 states, including seven supreme courts, have addressed the enforceability of PNTL contracts. Five additional states have decisions by circuit courts applying the law of their respective states, resulting in a total of 17 states with rulings on the enforceability of PNTLs. The most recent decisions by those courts reveal that PNTL contracts have been enforced in a majority, 13 out of 17, of states. PNTL contracts have been enforced in four out of six state supreme courts and four out of five state appellate courts. While all those courts embraced the doctrine that, in principle, renders PNTL contracts enforceable, in some cases, the court refused to enforce the contract because it found that either notice or opportunity to reject were inadequate, or because the terms at issue were unconscionable. For example, the court in Brower ruled that PNTL contracts are enforceable in principle (“We agree with the rationale that, in such transactions, there is no agreement or contract upon the placement of the order or even upon the receipt of the goods. By the terms of the Agreement at issue, it is only after the consumer has affirmatively retained the merchandise for more than 30 days—within which the consumer has presumably examined and even used the product(s) and read the agreement—that the contract has been effectuated”) but refused to enforce the arbitration clause at issue because it held it was unconscionable. This Restatement considers all cases in which courts embrace the PNTL logic either in dicta or in their holdings to be in support of such a form of contracting. Cases in which courts accepted the proposition that PNTL contracts are enforceable when the conditions of notice and termination are met are: Tiger Motor Co. v. McMurtry, 224 So. 2d 638 (Ala. 1969) (finding that a disclaimer provision in the vehicle’s owner’s manual could not defeat the express oral warranty made by respondent dealer to complainant, and that the consumer’s revocation of acceptance occurred within a reasonable time); Marion Power Shovel Co. v. Huntsman, 437 S.W.2d 784 (Ark. 1969) (holding that a written warranty was defective and so the award of damages was erroneous); Schnabel v. Trilegiant Corp., 697 F.3d 110 (2d Cir. 2012) (agreeing that in shrinkwrap cases, licenses become enforceable contracts upon the customer’s purchase and receipt of the package and the failure to return the product, but distinguishing the current case because of a lack of notice); James v. McDonald’s Corp., 417 F.3d 672 (7th Cir. 2005) (finding that arbitration was required because the customer, by participating in the game, agreed to follow its rules); Rico v. Cappaert Manufactured Hous., Inc., 903 So. 2d 1284 (La. Ct. App. 2005) (recognizing the legitimacy of PNTL contracts, but distinguishing the current case because the homeowner’s manual was not an “accept or return” offer, but contemplated signed acceptance of terms); Brower v. Gateway 2000, 676 N.Y.S.2d 569 (N.Y. App. Div. 1998) (ruling that a buyer assented to an arbitration clause shipped inside the box with computer and software by retaining items beyond a date specified by license terms); Defontes v. Dell, Inc., 984 A.2d 1061, 1072 (R.I. 2009) (agreeing with the ProCD line of shrinkwrap agreements it thought constituted the “better reasoned” and “majority view”); 1-A Equip. Co. v. ICode, Inc., 2003 Mass. App. Div. 30 (2003) (adopting the rationale that a “cash now, terms later” contract was formed not 50 © 2019 by The American Law Institute Tentative draft – not approved Tentative Draft 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 §2 when the order was placed, but only with the retention of the merchandise beyond the time limit); Goode v. Franklin Welding & Equip. Co., Inc., 50 Va. Cir. 441 (Cir. Ct. 1999) (the preexisting contract of sale was modified by mutual assent when the warranty disclaimers were delivered with the good); Hobbs v. Tamko Bldg. Prods., 479 S.W.3d 147 (Mo. Ct. App. 2015) (refusing to enforce the terms at issue by noting that, unlike the consumers in Hill, Hobbs had neither notice of the terms nor an opportunity to reject by returning the goods); M.A. Mortenson Co. v. Timberline Software Corp., 998 P.2d 305, 308 (Wash. 2000) (concluding that Washington allows the formation of “layered contracts” similar to those envisioned by ProCD, Hill, and Brower); Noble v. Samsung Elecs. Am., Inc., 682 F. App’x 113 (3d Cir. 2017) (finding that, unlike in Hill and ProCD, the consumers were not given reasonable notice that additional terms were included in the box); and Hill v. Gateway 2000, Inc., 105 F.3d 1147 (7th Cir. 1997) (overturning a refusal to compel arbitration because the customers were bound by the arbitration clause contained in the materials shipped to and accepted by them). The cases in which courts refused to enforce late-arriving terms are: Deering, Milliken & Co. v. Drexler, 216 F.2d 116 (5th Cir. 1954) (ruling that the invoice accompanying shipment did not operate to modify the original contract by including the arbitration provision); A.B.C. Home & Real Estate Inspection, Inc. v. Plummer, 500 N.E.2d 1257 (Ind. Ct. App. 1986) (determining that the inspector’s exculpatory clause in the inspection report delivered to the buyers after the inspection was ineffective to modify the inspector’s warranty); Whitaker v. Farmhand, Inc., 567 P.2d 916 (Mont. 1977) (finding that the disclaimer, which was received by the farm owners subsequent to the sale, did not limit the plaintiff’s recovery for the warranties); and Rogers v. Dell Comput. Corp., 138 P.3d 826 (Okla. 2005) (deciding that, in a case in which the seller sought to enforce an arbitration provision allegedly sent with an invoice with the purchased computer, the record was insufficient to allow the state supreme court to determine whether the arbitration provision was part of the contract and enforceable). Considering time trends further bolsters the conclusion that enforcement of PNTLs is the dominant approach. In five states, the decision predates ProCD (from 1954 to 1996), and in 10 states, the decision came after ProCD (from 1998 until 2016). Among the former cases, only two enforced the PNTL contract. Among the latter group, however, all but one case enforced PNTL contracts. The post-ProCD decisions of the state-supreme and appellate courts point to a convergence and to the emerging dominance of the ProCD approach. Even clearer trends emerge from a comprehensive empirical study of all published and unpublished PNTL cases involving consumer contracts in federal and state courts. Beginning in 1954 (with Deering, Milliken & Co. v. Drexler, 216 F.2d 116 (5th Cir. 1954)), there have been 67 cases addressing the enforceability of such contracts across 29 states and all federal circuits. Courts have endorsed the PNTL framework in 55 out of 67 cases and enforced such contracts as long as the requirements of notice, and opportunity to review and reject, were met, and as long as there were no other problems with the transaction (e.g., unconscionability or fraud). A closer look at the evolution of the doctrine over time reveals a clear trend toward increased enforcement of PNTL contracts and an increased influence of the landmark cases, 51 © 2019 by The American Law Institute Tentative draft – not approved §2 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 Consumer Contracts ProCD and Hill, that pioneered their enforcement. Through 1995, the year before ProCD was decided, PNTL contracts were enforced in half the cases (five out of 10). After ProCD, however, the trend shifted dramatically. From 1996 through 2016, courts enforced PNTL contracts in 50 out of 57 cases. In fact, the last time a PNTL contract was not enforced in this sample, simply because of the PNTL formation procedure, was 2005. This analysis reveals that the landmark case denying enforcement of PNTL contracts, Klocek, decided in 2000, has not generated nearly as much of a following as ProCD. An analysis of citations through January 2015 also indicates that cases enforcing PNTL contracts have been more influential. The most influential cases in this area, according to citations per year by out-of-state and out-of-federal-circuit courts, are those that enforce PNTL contracts. Cases enforcing the PNTL formation procedure, headed by ProCD (with a total of 169 out-of-state citations and an average of nine out-of-state citations per year) and followed by Hill (with five of such citations per year) and Brower v. Gateway 2000, Inc., 676 N.Y.S.2d 569 (N.Y. App. Div. 1998) (with three out-of-state citations per year), are considerably more likely to get cited out of state in a given year. The dominance of ProCD is apparent, and, cumulatively, all six cases enforcing PNTLs that have at least two out-of-state citations per year are cited an average of 25 times per year. The only reasonably influential case that did not enforce PNTL contracts, Klocek, is cited an average of twice per year and a total of 27 times. A number of cases brought between 2015 and 2019 presented courts with the opportunity to address the enforceability of novel forms of online contracting that blurred the lines between what are typically regarded as clickwraps, browsewraps, and shrinkwraps. Those included contracting for services through mobile-platform applications, where the process of securing assent typically involves guiding the consumer through a series of screens (e.g., Meyer v. Uber Technologies, 868 F.3d 66 (2d Cir. 2017)), or requiring consumers to signify assent by unambiguously clicking on a “buy now” button, while also presenting the standard contract terms alongside such buttons (e.g., Berkson v. Gogo LLC, 97 F. Supp. 3d 359, 401, 404 (E.D.N.Y. 2015); Cullinane v. Uber Technologies, Inc., 893 F.3d 53 (1st Cir. 2018)); Bekele v. Lyft, Inc., 918 F.3d 181 (1st Cir. 2019) (requiring consumers to agree to Lyft’s terms during a registration process interacting with three different screens on a mobile platform), among others. Some of those forms are exemplified in Illustrations 20 and 21. In those cases, courts rejected the need to fit the various modes of presentation into rigid categories, noting that, as the Meyer court aptly summarized: “there are infinite ways to design a website or smartphone application, and not all interfaces fit neatly into the clickwrap or browsewrap categories.” Instead, courts have focused on whether the manner in which standard terms were presented and the way in which the consumer was invited to manifest assent, provided reasonable notice of the standard terms, informed the consumer of the seller’s intent to make the standard terms part of the transaction, and gave the consumer a reasonable opportunity to review them, and (if the terms were disclosed after the purchase) a reasonable opportunity to reject them. The focus on reasonable notice and opportunity to review and reject is not new; it traces back to the foundational inquiry laid out in early cases involving online transactions, such as Specht, in 52 © 2019 by The American Law Institute Tentative draft – not approved Tentative Draft §3 1 2 which the court stressed that “[c]larity and conspicuousness of [. . .] terms are important in securing informed assent.” 3 4 5 6 7 This Section captures that approach and the entire arc of the case law by distilling the set of conditions that must be met, regardless of the contracting medium and the format of manifestation of assent, for standard contract terms to be adopted. Cases in which courts refused to enforce the allegedly adopted standard contract terms are ones in which the conditions stipulated in this Section were not met. 8 § 3. Modification of Standard Contract Terms 9 10 11 12 (a) A standard contract term in a consumer contract governing an ongoing relationship is modified if: (1) the consumer receives a reasonable notice of the proposed modified term and a reasonable opportunity to review it; 13 (2) the consumer receives a reasonable opportunity to reject the proposed 14 modified term and continue the contractual relationship under the existing term, 15 and a reasonable notice of this opportunity; and 16 (3) the consumer either: 17 (A) manifests assent to the modified term or 18 (B) does not reject the proposed modified term and continues the 19 contractual relationship after the expiration of the rejection period provided 20 in the proposal. 21 (b) A consumer contract governing an ongoing relationship may provide for a 22 reasonable procedure under which the business may propose a modification of the standard 23 contract terms, but may not, to the detriment of the consumer, exclude the application of 24 subsection (a), except that the established procedure may replace the reasonable opportunity 25 to reject the proposed modified term with a reasonable opportunity to terminate the 26 transaction without unreasonable cost, loss of value, or personal burden. 27 (c) A modification of a standard contract term in a consumer contract is enforceable 28 only if it is proposed in good faith and if it does not have the effect of undermining an 29 affirmation or promise made by the business that was made part of the basis of the original 30 bargain between the business and the consumer. 53 © 2019 by The American Law Institute Tentative draft – not approved §3 1 Consumer Contracts Comment: 2 1. General. Standard contract terms in consumer contracts governing ongoing 3 relationships, like other species of contracts, are often modified. This Section focuses on the 4 adoption of modifications to the standard contract terms. Similar principles may apply to the 5 modification of nonstandard terms. Many modifications may be justified by changes in the 6 economic or legal environment, by revisions in the service itself, or by the realization of other 7 unexpected contingencies. There is a concern, however, that businesses will make self-serving, 8 opportunistic modifications in standard contract terms once consumers are already locked into the 9 service. Accordingly, for a modification to be adopted, it is not enough that consumers have 10 manifested their assent to the modified standard terms after the terms have been presented to them. 11 Consumers may manifest such assent reluctantly, if termination of the contract would squander 12 some acquired value, would unreasonably undermine their reliance investments, or would be 13 practically infeasible. Thus, this Section provides two necessary safeguards, procedural and 14 substantive. First, procedurally, under subsection (a), the process of adoption of a modification 15 must satisfy requirements of assent analogous to those in § 2 (including the requirement, analogous 16 to that in § 2(b), that the consumer receive a reasonable opportunity to reject the modification and 17 continue the contract on the original terms). Subsection (b) allows the parties, usually at the 18 instance of the business, to establish in the initial contract a reasonable modification procedure 19 that implements these assent requirements, although it may replace the opportunity to reject with 20 a reasonable opportunity to terminate the transaction entirely (see Comment 6). Second, 21 substantively, under subsection (c), the modification may not undermine the benefit of the bargain 22 secured in the pre-modification contract. 23 2. Modification versus independent contract. New terms proposed by the business are, 24 depending on the circumstances, either an attempt to modify the terms of an existing contract 25 within an ongoing relationship (governed by this Section) or an attempt to form a new, 26 independent, contract, alongside or in succession to the original contract (governed by § 2). 27 Illustrations: 28 1. A consumer uses a website without creating an account or making a purchase. 29 The website has a link to Terms of Use in large, contrasting font on the lower portion of 30 the site, which the consumer can see immediately upon opening the page and without 31 scrolling down the page. The consumer can review the terms by clicking on the link and 54 © 2019 by The American Law Institute Tentative draft – not approved Tentative Draft §3 1 there is a clear notice that the terms are intended to become part of the contract governing 2 the current use of the website. The consumer visits the website regularly. The business 3 changes the Terms of Use from time to time. The current standard terms may be adopted 4 as a new contract each time the consumer visits the website, if the requirements of § 2 are 5 satisfied each time, and do not constitute a modification of a prior contract. 6 2. A consumer opens a checking account with a bank and signs a user agreement. 7 The bank seeks to change the terms of the agreement occasionally and sends notices to the 8 consumer in advance of each such change. Each change of terms is a proposed modification 9 under this Section, not a new contract. This is so even if the original agreement allows the 10 bank to terminate the contract at any time, as long as the bank did not effectively terminate 11 the original contract. 12 3. A consumer signs up for an ongoing web-based service, creating an account and 13 manifesting assent to the transaction by agreeing to pay the monthly service fee and 14 providing credit-card information. The website displays links to Terms of Use, which are 15 referred to during the sign-up process and are adopted as part of the consumer contract 16 upon the initial formation of the contract under § 2(a). The consumer can review the terms 17 by clicking on the links. The business changes the Terms of Use from time to time and 18 sends the consumer notices upon each such change. Each change is a proposed 19 modification governed by this Section. 20 4. A consumer signs up for a one-year service period with a business. If the contract 21 requires fresh assent to renew the service at the end of the year, new terms sent upon 22 renewal are not a modification; their adoption is governed by § 2. If, instead, the contract 23 provides for auto-renewal for a second year, unless the consumer explicitly terminates the 24 service, the original contract continues to govern during the second year, and any different 25 or additional terms sent upon the renewal or during the second year are a proposed 26 modification of the original contract and are governed by this Section. 27 3. Notice and opportunity to review. As with the adoption of original terms under § 2, 28 modified standard contract terms may be adopted only if the consumer receives reasonable notice 29 of the new terms and a reasonable opportunity to review them. In addition, the consumer must 30 receive reasonable notice of the opportunity to reject the modified terms, along with a reasonable 31 notice that continuing the contractual relationship without rejecting the modified terms will result 55 © 2019 by The American Law Institute Tentative draft – not approved §3 Consumer Contracts 1 in the modifications becoming legally binding. The appearance, placement, and timing of the 2 notice are factors that determine whether the notice and opportunity to review are reasonable. 3 Illustrations: 4 5. A consumer entered into a two-year service contract online. At the time of the 5 original contract formation, standard contract terms were adopted by satisfying all the 6 requirements of § 2(a), including reasonable notice of the Terms and Conditions. The 7 business later posts a modified version of the Terms and Conditions on its website, revising 8 the heading in the page on which the terms are posted and entitling it “Revised Terms and 9 Conditions.” If the business does not provide the consumer with a distinct or separate notice 10 of the modification, describing specific changes to the agreement and the effective date of 11 those changes, the new terms are not adopted as a binding modification. It is not reasonable 12 to expect consumers to revisit and check the Terms and Conditions webpage regularly, 13 and, in the absence of an affirmative, reasonable alert, the consumer does not have a 14 reasonable opportunity to review the proposed modification as required by subsection 15 (a)(1). 16 6. A consumer opens a checking account with a bank and signs a 20-page user 17 agreement. The bank seeks to change the terms of the agreement occasionally and sends 18 notices to the consumer in advance of each change. Each such notice arrives with a monthly 19 statement sent to the consumer, on a separate sheet titled “Change of Terms” describing 20 specific changes to the agreement and the effective date of those changes. The presentation 21 of the proposed modification in this manner satisfies the requirement of subsection (a)(1). 22 7. Same facts as in Illustration 6, but the bank seeks to change the terms by attaching 23 to the monthly statement the revised version of the 20-page agreement entitled “Revised 24 Agreement,” which includes most of the terms in the original agreement as well as some 25 additional or different ones. There is no explanation as to which terms are being changed 26 or added. The presentation of the proposed modification in this manner does not satisfy the 27 requirement of subsection (a)(1), because consumers cannot meaningfully compare and 28 analyze two such lengthy and technical documents and thus cannot effectively review the 29 proposed modification. 56 © 2019 by The American Law Institute Tentative draft – not approved Tentative Draft §3 1 4. Opportunity to reject the modification. A modification is binding only if the consumer 2 has a meaningful opportunity to reject it. Subsection (a)(2) requires that modified terms not be 3 adopted unless the business gives the consumer a reasonable opportunity (with reasonable notice) 4 to reject the modification and continue the relationship without the new terms. There is a close 5 conceptual relationship between adoption of standard terms after the consumer manifests assent to 6 the transaction under § 2(b) and modification of standard terms under this Section—in both 7 settings, the standard contract terms are presented to the consumer after a decision to enter into the 8 transaction was already made. Accordingly, the adoption of the standard contract terms in both 9 settings has to satisfy a similar requirement—the existence of a reasonable opportunity to reject 10 (which, in turn, requires affording the consumer a reasonable time period in which to exercise such 11 rejection). 12 Illustrations: 13 8. A consumer attempts to log in to an online web service that the consumer joined 14 as a member at an earlier time. The consumer is unable to log in without first clicking “I 15 Accept” to a list of new terms that are presented as a modification of the original contract. 16 Since the consumer is not given an opportunity to reject the modification, the terms are not 17 adopted. 18 9. A consumer receives a clearly labeled notice by mail regarding a change of the 19 data-privacy terms governing an ongoing service. The notice informs the consumer that 20 continued use of the service would constitute acceptance of the terms and a modification 21 of the agreement. It also explains that the change of terms will not apply and the original 22 terms will remain in place if the consumer requests an opt-out within 30 days, by signing 23 and submitting a pre-addressed opt-out form provided in the notice. The specified 24 procedure for rejection of the modification is reasonable and the requirement of subsection 25 (a)(2) is satisfied. 26 5. Adoption of the modified standard contract terms. With the receipt of a reasonable notice 27 of the proposed modification and a reasonable opportunity to reject it, the modification is effective 28 if the consumer either affirmatively manifests assent to it or continues to take the benefit of the 29 relationship (without rejecting the proposed modification). Subsection (a)(3) thus recognizes that 30 the consumer can adopt the modified terms by conduct that can fairly be treated as constituting 57 © 2019 by The American Law Institute Tentative draft – not approved §3 Consumer Contracts 1 acceptance. It maintains the dual adoption framework of § 2, under which terms may be adopted 2 either by an affirmative act of acceptance or by continuation of the relationship once the terms are 3 presented. In some cases, the conduct that adopts the modification is the consumer’s continued 4 participation in the contractual relationship, e.g., in a credit-card contract when the consumer 5 makes new purchases using the credit card. In such cases, the modification is adopted through 6 acceptance by performance. See Restatement of the Law Second, Contracts §§ 30, 62. 7 Illustration: 8 10. A consumer enters a pay-as-you-go agreement with a fitness club. Months later, 9 the business sends the consumer a notice by mail titled “Change of Terms of Service” 10 describing particular changes to the agreement and giving the consumer 30 days to opt out 11 of the modified terms (and retain the original terms). If the consumer does not exercise the 12 opt-out option, the new terms are adopted as a modification as soon as the 30-day, opt-out 13 period elapses. 14 6. Agreed procedures for modification. Businesses often include in consumer contracts 15 “modification clauses” that specify procedures for subsequent modifications. Such clauses may 16 give concrete effect to the requirements of subsection (a), but cannot derogate from them, except 17 that the agreed procedure for modification may replace the opportunity to reject in subsection 18 (a)(2) with a reasonable opportunity to terminate the transaction entirely. An opportunity to 19 terminate is reasonable if it does not impose unreasonable cost, loss of value, or personal burden 20 on the consumer. If termination of the contractual relationship by the consumer is not feasible or 21 practicable—for example, because such termination would impose a significant loss of value 22 acquired by the consumer prior to the proposed modification; would force the consumer to incur a 23 significant financial or other burden to enter a substitute contract; would squander a substantial 24 investment in the relationship; or would undermine the consumer’s reasonable, forward-looking 25 expectation from the relationship—then the consumer does not have a reasonable opportunity to 26 terminate. In such a case, the modified standard terms are usually not adopted, even if the consumer 27 manifested assent to the modification. In evaluating whether the costs imposed on the consumer 28 by the modification are reasonable, courts may take into account the circumstances that prompted 29 the business to propose the modification, including an increase in the business’s costs; changes in 30 market, technology, or regulatory environments; and improvements to the service provided by the 58 © 2019 by The American Law Institute Tentative draft – not approved Tentative Draft §3 1 business. If the modified terms confer substantial benefits, as in the example of new terms that are 2 needed to accommodate an upgrade to the business’s computer systems, the evaluation of the 3 reasonableness of the opportunity to terminate must consider those benefits in relation to any cost, 4 loss of value, or personal burden that a termination would impose on those consumers who prefer 5 the original terms. 6 Modification clauses that grant the business power to modify standard terms without 7 meeting the mandatory requirements of this Section are ineffective, and any modification 8 attempted under such clauses is unenforceable by the business. See § 9. 9 Illustrations: 10 11. A consumer attempts to log in to an online web service that the consumer joined 11 as a member at an earlier time. The original contract includes a modification procedure. 12 The consumer is unable to log in without first clicking “I Accept” to a list of new terms 13 that are presented as a modification of the original contract. Since the consumer is not given 14 an opportunity to reject the modification, the terms are not adopted unless the consumer is 15 provided a meaningful opportunity to cancel the membership (for example, by clicking on 16 a separate hyperlink that takes the consumer to a “Service Cancellation” page), and unless 17 such termination can be done without the consumer incurring unreasonable cost, loss of 18 value, or personal burden. 19 12. Same facts as in Illustration 8, but the cancellation options—although clearly 20 posted and processed without delay—trigger an early-termination fee (adopted as part of 21 the original contract). Because of the imposition of such termination fee, the consumer is 22 not offered a reasonable opportunity to terminate the transaction, and so the new terms are 23 not adopted. 24 13. A consumer purchases a home-surveillance-camera system. At the same time, 25 the consumer enters a one-year service agreement that allows the consumer to stream the 26 images recorded by the camera to a handheld device through an integrated streaming 27 service separately provided by the business. The agreements include a modification 28 procedure. A few months later, the business sends the consumer a notice explaining that 29 the Terms of Service for the service agreement will be modified in 30 days, that continuing 30 the service will constitute acceptance of the new terms, and that the terms may be rejected 31 by cancelling the service before the end of the 30 days. Despite the reasonable notice and 59 © 2019 by The American Law Institute Tentative draft – not approved §3 Consumer Contracts 1 cancellation method, the opportunity to terminate the contractual relationship is not 2 reasonable under subsection (b) because termination of the service agreement would 3 impose a significant loss of value of the camera equipment. 4 14. A consumer entered a six-month service agreement with a snow-removal 5 company to plow the consumer’s driveway after each snowfall for a fixed price of $100. 6 The agreement includes a modification procedure. Two months into the contract, the 7 consumer receives a letter stating “Due to the high demand for plowing services, we are 8 modifying the contract with you by raising the price for plowing your driveway after each 9 snowfall to $150. If you do not want to pay us $150, you may terminate our relationship 10 by sending us an email to that effect within 14 days.” Because termination of the transaction 11 would entail a loss of value, the opportunity to terminate is not reasonable under subsection 12 (b), and thus the consumer’s failure to terminate the transaction within 14 days does not 13 create an enforceable modification. In addition, the modification is separately 14 unenforceable under subsection (c) because modification would have the effect of 15 undermining the promise to plow for $100, which is part of the basis of the original bargain. 16 Agreements incorporating a flexible price formula may be enforceable. See § 9. 17 15. Same facts as in Illustration 14, except that the agreement does not include a 18 modification procedure. The modification would be unenforceable under subsection (a) 19 because the consumer is not provided with a reasonable opportunity to reject the 20 modification. In addition, the modification is separately unenforceable under subsection 21 (c) because modification would have the effect of undermining the promise to plow for 22 $100, which is part of the basis of the original bargain. 23 16. A consumer subscribes to a web-based service that provides a no-charge, ad- 24 free platform for posting and sharing photographs. The original agreement includes a 25 clause stating that the ad-free feature of the service may be revised in the future. It also 26 includes a modification clause that permits the business to change the terms of service any 27 time in the future, subject to providing the consumers an opportunity to terminate the 28 subscription upon such change. Later, in order to ensure its commercial viability, the 29 business decides to switch to a personalized-advertisement model that uses subscribers’ 30 personal data. It proposes a modification explaining the change and the type of data that 31 will be collected. The offer to modify gives the consumer an option to accept the new terms 60 © 2019 by The American Law Institute Tentative draft – not approved Tentative Draft §3 1 or terminate the contract by deleting the account. The opportunity to terminate is 2 reasonable despite imposing inconvenience on consumers who choose to delete the 3 account. 4 7. Good faith. Modifications must be made in good faith. See Restatement of the Law 5 Second, Contracts § 89 (adopting the related “fair and equitable” test) and UCC § 2-209. A 6 modification affects the performance of the contract, and it is thus governed by the general 7 obligation to perform contracts in good faith. See Restatement of the Law Second, Contracts 8 § 205 and UCC § 1-304. It is restated in subsection (c) because of the heightened role that it plays 9 in policing modifications of consumer contracts. Subsection (c) is intended to ensure that the 10 modification does not unduly disadvantage the consumer, even if the requirements of subsections 11 (a) and (b) have been met. It seeks, in particular, to prevent opportunistic modifications that purport 12 to take advantage of locked-in consumers who have already invested in the contractual 13 relationship. Thus, a modification of a standard contract term is not enforceable if it undermines 14 the benefit of the bargain guaranteed by the original contract, as when it contradicts an affirmation 15 of fact or promise by the business that has been made part of the basis of the original bargain 16 between the business and the consumer. Such contradiction may occur, for example, when the 17 business has promised in the original agreement or in a precontractual representation (see 18 Comment 8) that the standard contract term will not change for a fixed period of time. See also 19 Illustrations 17 and 18. Even if the consumer is afforded the opportunity to terminate the 20 relationship without unreasonable cost, loss of value, or personal burden (in line with an agreed- 21 upon modification procedure under subsection (b)), the modification is not enforceable if the 22 termination undermines the benefit of the bargain guaranteed by the original contract. In general, 23 a modification is more likely to satisfy subsection (c) if the modified standard terms are 24 simultaneously being offered, as original terms, to new customers. Then, there is less concern that 25 the modification intends to take advantage of consumers who are locked in by the cost of changing 26 the deal. Nevertheless, because the same term may affect entrenched consumers differently than 27 new ones, it may be enforceable as part of the contract with new consumers but not as a 28 modification. Thus, an important implication of subsection (c) is that some standard terms that 29 may be acceptable if presented as part of the original contract may not be enforceable if presented 30 as part of a proposed modification. Further, subsection (c) will generally bar the modification of 31 contracts fully performed, or of short-term contracts such as a one-shot purchase-of-product 61 © 2019 by The American Law Institute Tentative draft – not approved §3 Consumer Contracts 1 contract, unless circumstances are present that were not anticipated by the parties when the contract 2 was made. 3 Illustrations: 4 17. A consumer opens a checking account with a bank and signs a standard-form 5 checking agreement. The agreement specifies a fixed fee to be charged whenever a 6 consumer draws a check from an account with insufficient funds. Later, the bank proposes 7 a modification that would raise this fee, prospectively. The consumer manifested assent to 8 the modified term, or the agreement provided an appropriate procedure for the proposal of 9 modifications, such that the requirements of subsection (a)(3)(A) or of subsection (b) are 10 satisfied. The amount by which the bank may propose to increase the processing fee is 11 limited by subsection (c). 12 18. A consumer purchases and downloads hundreds of song tracks from an online 13 music store, along with software that is necessary to play the tracks. The initial contract 14 adopted as part of the purchase of the tracks states that the consumer may load the tracks 15 to seven different devices. Later, together with a mandatory software update, the business 16 proposes a modification that allows the consumer to load the tracks only to five devices. If 17 the new, five-device clause applies only to prospective track purchases by the consumer, it 18 does not violate subsection (c). If, instead, the new clause applies also to tracks already 19 paid for, it violates subsection (c) because it retroactively reduces the consumer’s benefit 20 from the bargain and partially squanders the consumer’s investment in previously 21 purchased tracks. 22 8. Modification adopted using a more passive process. It is not uncommon for the standard 23 terms to be adopted, initially, through one adoption process, such as requiring the consumer to 24 click “I Agree” to the terms, and then modified through a different process that does not require a 25 similar affirmative action by the consumer. Terms modified in such a way can be adopted as part 26 of the contract as long as the requirements of subsection (a) are met. There is concern, however, 27 that when the initial terms are adopted through a particular active process, the consumer would 28 expect the same or a similar process for modifications of the standard terms. Similarly, if the 29 business employed a particular process for prior modifications, the consumer would expect the 62 © 2019 by The American Law Institute Tentative draft – not approved Tentative Draft §3 1 same or a similar process for future modifications. A shift to a more passive process triggers a 2 heightened notice requirement. 3 9. Legal consequences of nonadopted terms. A consumer has no obligation to assert that 4 terms offered by the business as modifications were not adopted and may instead choose to get the 5 benefit of the modified terms. If the consumer so chooses, the business may not assert that its 6 modified contract terms were not adopted. (Compare § 2, Comment 11.) 7 Illustration: 8 19. A business posts a “New Privacy Policy” on its website, without giving 9 consumers a notice that the standard contract terms in this new policy purport to modify 10 the existing contract. The New Privacy Policy is not adopted as a modification. As part of 11 the New Privacy Policy, the business states that none of the consumers’ personal 12 information collected by the business will be shared with the government. A consumer may 13 enforce the business’s statement as a binding contractual promise, despite the fact that the 14 New Privacy Policy is not adopted as an enforceable modification of the original contract. 15 10. Relation to the Uniform Commercial Code and to the Restatement of the Law Second, 16 Contracts. The rule of subsection (c), that modifications of standard terms are enforceable only if 17 they are made in good faith and if they do not undermine an affirmation or promise made by the 18 business that has been made part of the basis of the bargain, is consistent with a principal element 19 of UCC § 2-209 and with Restatement of the Law Second, Contracts § 89 (see also Comment 7). 20 UCC § 2-309 provides that a contract of indefinite duration is valid for a reasonable time and can 21 be terminated on reasonable notice. REPORTERS’ NOTES 22 23 24 25 26 27 28 29 The standard contract terms are invisible to most consumers at both the formation and the modification phases. There is a concern, however, that the process of modification can be even more passive, from the consumer side, than the initial formation of the contract. Despite this concern, modified standard terms are adopted prospectively to govern the contractual relationship, as long as the consumer is provided with reasonable notice (and opportunity to review), and a reasonable opportunity to reject the modification (or, when applicable, to terminate it); and as long as the consumer manifests assent to the modified terms or does not reject the modified terms and continues the contractual relationship after the expiration of the rejection or termination period. 63 © 2019 by The American Law Institute Tentative draft – not approved §3 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 Consumer Contracts The modification must also satisfy the general, good-faith requirement and must not deprive the consumer of the benefit from the original bargain. Businesses often specify, in their original standard contract terms, a procedure for contract modification. Moreover, the specified modification procedures are often passive, requiring no affirmative acceptance by the consumer. Such procedures, however, cannot derogate from the requirements of this Section, although they can give concrete effects to these requirements. The business may specify a modification procedure that replaces the opportunity to reject the modified terms (and continue the relationship under the original terms) with an opportunity to terminate the transaction entirely without unreasonable cost, loss of value, or personal burden. This exception, restated in subsection (b), is supported by cases, cited below, in which only a termination option was offered and yet the courts enforced the modifications (as long as the other requirements of this Section were met). The requirements of notice and an opportunity to reject imply that continued use of the product or service, without more, is insufficient for the adoption of the modified terms as part of the contract. Courts review the adequacy of the notice and the meaningfulness of the opportunity to reject on a case-by-case basis, and tend to focus on those factors that ensure that the proposed modification is reasonably communicated to consumers and that the opportunity to reject is reasonable under the circumstances. When evaluating the reasonableness of the notice of modification, courts have focused on a number of factors related to placement, language, and salience of the notice, among other things, on a case-by-case-basis. Illustration 5 is based on Rodman v. Safeway, Inc., 2015 WL 604985 (N.D. Cal. Feb. 12, 2015), in which the court held that posting the modified standard terms alone, without any distinct or separate notice, fails to meet the notice requirement. To be effective, notice must reasonably inform consumers of the proposed modification. Illustration 6 is based on Badie v. Bank of America, 79 Cal. Rptr. 2d 273 (Cal. Ct. App. 1998) and exemplifies the principle that notices, when present, need to be reasonably communicated to be effective. Illustration 7 is based on Ozormoor v. T-Mobile USA, Inc., 2008 WL 2518549 (E.D. Mich. June 19, 2008), and reflects courts’ attention to both the appearance and the location of the notice in determining its reasonableness. See also Plazza v. Airbnb, Inc., 289 F. Supp. 3d 537 (S.D.N.Y. 2018) (holding that consumers had received sufficient notice of the modified terms when the seller presented the modified terms in a clickwrap format with a clear legend explaining that, to continue to use the services, the consumers had to assent to the modified terms, in addition to sending subsequent communications with notices regarding the changed agreement). Courts have also articulated a number of factors in determining the reasonableness of the opportunity to reject or terminate. See, e.g., Torres v. S.G.E. Management, L.L.C., 397 F. App’x 63 (5th Cir. 2010) (according to the initial contract, the business may modify the arbitration contract without providing the consumer with a meaningful opportunity to terminate; the original arbitration contract is illusory and thus unenforceable); Ackerberg v. Citicorp USA, Inc., 898 F. Supp. 2d 1172, 1176 (N.D. Cal. 2012) (consumer had a meaningful opportunity to terminate; the modified arbitration clause is enforceable); In re Zappos.com, Inc., Customer Data Sec. Breach 64 © 2019 by The American Law Institute Tentative draft – not approved Tentative Draft 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 §3 Litig., 893 F. Supp. 2d 1058 (D. Nev. 2012) (according to the initial contract, the business may modify the arbitration contract without providing the consumer with reasonable notice or a meaningful opportunity to terminate; the original arbitration contract is illusory and thus unenforceable); Grosvenor v. Quest Corp., 854 F. Supp. 2d 1021 (D. Colo. 2012) (same). In particular, the opportunity to reject or terminate must be meaningful and not deprive consumers of value acquired prior to the modification. See, e.g., Ackerberg v. Citicorp USA, Inc., 898 F. Supp. 2d 1172, 1176 (N.D. Cal. 2012) (compelling arbitration because the cardholder was provided with a realistic opportunity to exit the account when the new terms were added); Cayanan v. Citi Holdings, Inc., 928 F. Supp. 2d 1182, 1199-1200 (S.D. Cal. 2013) (confirming that a plaintiff’s failure to opt out after receiving change-of-terms notices constitutes acceptance of an arbitration clause); Rodriguez v. Instagram, LLC, No. CGC-13-532875, 2014 WL 895438 (Cal. Super. Ct. Feb. 28, 2014) (sustaining demurrer when plaintiff did not have to agree to new terms, but continued use of Instagram constituted acceptance); Bischoff v. DirectTV, Inc., 180 F. Supp. 2d 1097 (C.D. Cal. 2002) (concluding that a valid and enforceable arbitration agreement existed between the parties because the individual had accepted the terms of the agreement, including the arbitration clause, when he accepted the services); Lowman v. Citibank (South Dakota), N.A., No. CV 05-8097-RGK (FMOx), 2006 WL 6108680 (C.D. Cal. Mar. 24, 2006). In many cases, a business may use one adoption process for the initial standard terms, a clickwrap, say, and another, more passive adoption process for the modified terms. Courts have generally allowed for this disparity in adoption processes. As long as the requirements established in § 2 and in this Section—reasonable notice (and opportunity to review) and a right to reject or terminate—are met, the modifications have been enforced. Switching to a different adoption process, however, raises a concern that consumers accustomed to the original process might fail to notice the modification. Accordingly, a heightened notice requirement may be imposed in such cases. When sufficient notice is absent, the modified terms will not be enforced. See, e.g., Douglas v. United States Dist. Court, 495 F.3d 1062 (9th Cir. 2007) (refusing to find a customer bound by contract modifications, because, although the provider posted the revised contract on its website, it never notified the customer that the contract had changed); Martin v. Comcast, 146 P.3d 380, 389 (Or. Ct. App. 2006) (determining that despite the “bill stuffers” Comcast reportedly sent, subscribers could easily have continued using Comcast’s service without ever being aware of the arbitration clause, and so were not provided sufficient notice). Businesses commonly post modifications on their websites. Courts have generally found that such posting, without more, does not satisfy the notice requirement. See In re Zappos.com, Inc., Customer Data Sec. Breach Litig., 893 F. Supp. 2d 1058, 1066 (D. Nev. 2012) (deciding that a highly inconspicuous hyperlink buried among a sea of links does not provide proper notice); Grosvenor v. Qwest Corp., 854 F. Supp. 2d 1021 (D. Colo. 2012) (dismissing as insufficient the fact that Qwest posted the changes it made to its agreement to a remote webpage). The rule of subsection (a) provides some procedural protection against opportunistic modifications. The rule of subsection (c) provides stronger protection by targeting the substance of the modified terms, rather than the modification process. In Badie, the court found that good 65 © 2019 by The American Law Institute Tentative draft – not approved §3 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 Consumer Contracts faith limits the business to making modifications that were within the reasonable contemplation of the parties at the time of the initial contract. 79 Cal. Rptr. 2d at 284. Badie is one of the leading cases in this area, having been highly influential in the Ninth Circuit and California courts as well as having been favorably cited in 92 subsequent cases by out-of-state courts (only one other case addressing non-employment-related consumer modifications, Kristian v. Comcast Corp., 446 F.3d 25 (1st Cir. 2006), has more out-of-state citations). Badie has been cited in numerous cases for its articulation of the good-faith doctrine in the context of consumer-contract modifications. The good-faith requirement in subsection (c) is further bolstered by the requirement that the modification (or termination under subsection (a)(2)) not undermine the benefit of the bargain guaranteed by the original contract, as when it contradicts an affirmation or promise made by the business that has been made part of the basis of the original bargain between the business and the consumer. The unconscionability doctrine, which is restated in § 5, can also be used to police modifications of standard terms. A modification procedure that presents the new terms in a nonsalient manner, as exemplified by Illustrations 5 and 6, would satisfy the standard for procedural unconscionability with relative ease. Accordingly, the reasonableness of the modified terms would be adjudicated under the substantive-unconscionability standard. See, e.g., Powertel, Inc. v. Bexley, 743 So. 2d 570 (Fla. Dist. Ct. App. 1999) (holding that the revised telephoneservice contract, sent as an insert with the bill, was procedurally and substantively unconscionable and therefore unenforceable); Perdue v. Crocker Nat’l Bank, 702 P.2d 503 (Cal. 1985) (reversing a denial of a motion to amend so as to allow parties an opportunity to present evidence regarding whether an “NSF charge” (a handling charge for checks drawn on accounts without sufficient funds) was an unconscionable element of the contract). The discretionary-obligation doctrine, restated in § 4, provides additional protection against modification clauses that give the business explicit, unfettered discretion to modify the standard contract terms. The restated rules pertaining to the modification of standard contract terms are supported by an empirical study of all cases in state and federal courts through 2015 addressing the enforceability of modifications in consumer transactions or consumer contracts, both in holdings and in dicta (excluding employment cases), starting with Panorama Residential Protective Ass’n v. Panorama Corp., 627 P.2d 121 (Wash. Ct. App. 1981). The study includes 86 cases, including 37 unpublished cases. Courts have developed a fairly consistent approach to determining the enforceability of modifications. In particular, the requirements of notice and opportunity to reject or terminate figure prominently in courts’ reasoning. In 45 out of the 46 cases in which modifications were enforced and that involve the questions of notice as well as opportunity to reject or terminate, courts made explicit determinations that both the requirements of sufficient notice and opportunity to reject or terminate were satisfied. In the remaining case, the court made an explicit determination that sufficient notice was provided. (Modifications were enforced in eight additional cases, but at least one of those questions was not an issue in those cases.) Of the 32 cases in which modifications were not enforced, in 22 cases the courts found that either notice or an opportunity to reject or 66 © 2019 by The American Law Institute Tentative draft – not approved Tentative Draft §4 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 terminate was absent. In the remaining 10 cases, the courts refused to enforce the modifications because they were unconscionable, because they violated the duty of good faith, or for some other reason. Those findings from all courts also hold for state supreme courts and state appellate courts (hereinafter “high state courts”). In cases in which both notice and the opportunity to reject or terminate were at issue, high state courts enforced modifications when both the requirements of sufficient notice and opportunity to reject or terminate were satisfied, except in one case in which the modification was held to be unconscionable. Among the cases in which enforcement was denied, in all but one the high state courts explained their refusal to enforce the modification by the absence of either notice or an opportunity to reject or terminate (or both), or by finding that the modification was unconscionable. The good-faith requirement of subsection (c) also figures prominently in the case law. In 23 cases, courts have explicitly discussed the requirement of good faith. Courts enforced the modification in 15 of 16 cases in which the requirement was found to be satisfied, and denied the modification in all seven cases in which it was found to be violated. There is also support for the proposition that courts are comfortable accepting modifications presented by means different than the original terms, as long as the notice requirement is met. The manner in which the contract is originally presented as well as the mode of presentation of the modification are described in 78 opinions. In 61 of those cases, the business presented the modification in a manner different from the original. For example, courts have enforced modifications when the original contract was presented to the consumer in paper format and the modification was presented as a bill stuffer, a browsewrap, or an email, as long as the notice requirement was satisfied. See, e.g., Herrington v. Union Planters Bank, N.A., 113 F. Supp. 2d 1026 (S.D. Miss. 2000) (finding that a cover letter accompanying the revised agreement was enough to sufficiently notify the plaintiffs that the terms and conditions of their accounts would change). 27 § 4. Discretionary Obligations 28 (a) A contract or any term that grants the business discretion to determine its rights 29 and obligations must be interpreted, when reasonably susceptible to such interpretation, to 30 provide that such discretion will be exercised in good faith. 31 (b) A term in a contract that purports to grant the business absolute and unlimited 32 discretion to determine its contractual rights and obligations unconstrained by the good- 33 faith obligation is unenforceable by the business. 67 © 2019 by The American Law Institute Tentative draft – not approved §4 1 Consumer Contracts Comment: 2 1. Discretionary terms. A consumer contract may include provisions that grant the business 3 discretion to specify or adjust its contractual obligations. There are two types of discretion-granting 4 terms: (1) terms that grant the business discretion to resolve an issue that was left open in the initial 5 contract, e.g., when the initial contract states that any dispute will be settled by arbitration, does 6 not specify the arbitration forum, and grants the business discretion to choose the arbitration forum; 7 and (2) terms that grant the business discretion to adjust or change obligations that were specified 8 in the initial contract, e.g., when the initial contract states that any dispute will be settled by 9 arbitration in Arbitration Forum A and grants the business discretion to replace Arbitration Forum 10 A with another arbitration forum. This Section applies to both types of discretion-granting terms. 11 Discretion-granting terms of type (2) are modification clauses and thus governed also by § 3 (see 12 Comment 4). 13 2. Discretionary terms restricted by good faith. When a consumer contract includes a 14 provision that grants the business absolute and unlimited discretion to specify or adjust its 15 contractual obligations, the contract lacks consideration because it fails the basic requirement of 16 mutuality—that each party make a commitment to the other (Restatement of the Law Second, 17 Contracts § 77). But, following a long tradition in contract law, subsection (a) establishes that such 18 open-ended language does not ordinarily lead to nonenforcement if it can reasonably be read not 19 to exclude the implied limitation that the business is required to exercise its discretion in good 20 faith. Such implied limitation is consistent with the approach taken by the Uniform Commercial 21 Code (for example, in §§ 2-305 and 2-306)—to supplement discretionary terms by an obligation 22 to exercise the discretion in good faith. The implied duty of good faith applies more broadly in 23 shaping the performance obligation of both parties (see Restatement of the Law Second, Contracts 24 § 205 and UCC § 1-304). It is emphasized here because of the central role that it plays in policing 25 otherwise facially unlimited discretionary terms in consumer contracts and rendering contracts that 26 contain them enforceable. 27 Illustrations: 28 1. A contract contains a clause requiring disputes between a business and a 29 consumer to be resolved in a particular forum. It grants the business the power to set a 30 forum and procedures at its own discretion, and does not contain any express limitation on 31 such discretion. The term is enforceable, but the business must exercise its discretion in 68 © 2019 by The American Law Institute Tentative draft – not approved Tentative Draft §4 1 good faith, choosing a forum and procedures that conform to commercial standards of fair 2 dealing in the circumstances. 3 2. A contract contains a clause applying to the entire agreement, stating that the 4 business “reserves the right at any time to modify, revoke, suspend, terminate, or change 5 any or all terms of the contract, in whole or in part.” The clause is enforceable, but the 6 business must exercise its powers under this clause in good faith. Any subsequent 7 modifications of the contract attempted under this clause would be enforceable if consistent 8 with § 3. 9 3. Discretionary terms in violation of the good-faith restriction. When a term in the contract 10 purports to grant the business absolute and unlimited discretion to specify contractual obligations 11 in a way that cannot be reconciled with or that explicitly conflicts with the good-faith restriction, 12 the business’s promises as expressed in those terms are often labeled by courts as “illusory” 13 because by failing to constrain its discretion the business made no meaningful commitment to the 14 consumer with respect to the matters subject to the discretionary rights. Such a term, or—if it is 15 not severable—the entire contract, is an illusory promise and is not enforceable by the business 16 (but may be enforceable by the consumer; see Comment 7). The term or contract may also be 17 substantively unconscionable under § 5. 18 Illustrations: 19 3. A consumer enters into an agreement for a cruise service with a business that 20 operates cruise ships, pays a nonrefundable deposit to reserve a cabin on a specific cruise, 21 and agrees to pay the remainder of the price by a specified date. The standard contract 22 terms allow the business to cancel the reservation at any time and for any reason, without 23 prior notice and without providing any explanation or compensation. The contract is 24 unenforceable by the business because the business’s promise is illusory. This conclusion 25 does not change even if the business must return the deposit upon such termination. 26 4. A consumer purchases a hot tub along with a two-year service agreement. The 27 service component is priced separately, but marketed as an important complement to the 28 sale and as part of a single, unified transaction. The standard contract terms allow the 29 business to cancel the service component at any time and for any reason, by mailing back 30 the remaining balance of the prepaid service price. The entire contract is unenforceable by 69 © 2019 by The American Law Institute Tentative draft – not approved §4 Consumer Contracts 1 the business, including the hot-tub sale, because a significant source of value can be 2 eliminated by the business without any limitation. 3 4. Unilateral modification clauses. Businesses sometimes include, in their standard terms, 4 a clause that purports to grant the business unrestricted discretion to modify the terms of service. 5 When reasonably susceptible of such an interpretation, such clauses should be interpreted to allow 6 only good-faith modification, in accordance with this Section and § 3. When the explicit language 7 of the modification clause precludes such an interpretation, the clause is not consistent with 8 subsection (a) and is thus unenforceable by the business under subsection (b). The clause may also 9 be substantively unconscionable under § 5. The effects of such an attempt to derogate from the 10 good-faith restriction are described in § 9. 11 Illustration: 12 5. A contract between an airline and a consumer allows the airline to modify the 13 frequent-flyer program at its discretion. The provision is enforceable, and any subsequent 14 modification is enforceable, if it is adopted in accordance with the requirements of § 3, as 15 long as it is done in good faith. A modification that unreasonably reduces the value of 16 previously acquired perks is inconsistent with the good-faith requirement of this Section, 17 and it may also violate the requirement of § 3(a) if the airline does not afford the consumer 18 a meaningful opportunity to reject it. But a modification that reduces the value of 19 prospectively acquired miles does not conflict with the good-faith requirement. 20 5. Discretionary terms and course of performance. A contract or a term that grants the 21 business wide discretion is unenforceable by the business if the business exhibits a pattern of 22 conduct under which the discretion is exercised in bad faith. Similarly, a modification clause that 23 grants the business wide discretion to modify the terms of the contract is unenforceable by the 24 business if the business attempts to modify the contract with retroactive effect or otherwise in bad 25 faith. Those results apply even if, in the absence of such courses of performance, the discretion or 26 modification terms would be enforceable under subsection (a) because it is subject to the implied 27 obligation of good faith. In effect, the ability to invoke the implied obligation of good faith to save 28 the term is negated when there is a course of performance that is inconsistent with a good-faith 70 © 2019 by The American Law Institute Tentative draft – not approved Tentative Draft §4 1 exercise of the business’s discretion, and in the absence of such an implied restriction the 2 discretionary term is unenforceable by the business. 3 Illustration: 4 6. A contract contains an arbitration clause that allows the business to select the 5 arbitration body and procedure at its discretion. Under subsection (a), the clause is 6 enforceable, because the discretion is subject to an obligation to exercise it in good faith. 7 Invoking this power, the business refers consumers’ disputes to an arbitration body that is 8 inaccessible to most consumers, despite the existence of more readily accessible and more 9 reasonable alternatives. Such exercise of discretion by the business violates the good-faith 10 duty and is not enforceable. Depending on the circumstances, it may render the entire 11 arbitration clause unenforceable by the business. (See also § 9.) 12 6. No requirement of symmetry. Discretionary terms, by their nature, allocate contractual 13 rights in an asymmetric manner. Such allocations are a regular feature of contracting and require 14 no special justification. Thus, asymmetry alone does not make a contract unenforceable. As long 15 as the discretionary power is bounded by the requirement of good faith (and by other equivalent 16 contractual restrictions), it does not pose a problem of mutuality. 17 Illustration: 18 7. A consumer contract contains a choice-of-forum clause that requires all 19 consumer complaints to be resolved in a specified forum, but gives the business discretion 20 to pursue its own complaints in a different forum. The asymmetry alone does not render 21 the clause unenforceable by the business. 22 7. Legal consequences of unenforceable discretionary terms. Terms that provide for the 23 exercise of discretion without good faith are inconsistent with subsection (a) and are unenforceable 24 by the business under subsection (b). If such terms can be severed from the rest of the agreement, 25 they are replaced with gap-fillers, as described in § 9. If severance or restriction of the terms cannot 26 be accomplished by reformation or augmentation of the contract without undue burden (for 27 example, when the unenforceable term is the price or the quantity), the entire contract is 28 unenforceable by the business. Discretionary terms in explicit violation of the good-faith 29 restriction may also render the contract substantively unconscionable under § 5. Discretionary 71 © 2019 by The American Law Institute Tentative draft – not approved §4 Consumer Contracts 1 terms intended to provide value to the consumer may be enforced by the consumer, replacing the 2 business’s discretion with gap-fillers, as described in § 9. 3 Illustration: 4 8. A contract for installation of a home-alarm system provides for one-year, on-site 5 service in the event that the system malfunctions, at no additional charge. The service term 6 in the contract grants the business unlimited discretion to schedule any requested service 7 at its own convenience. It specifies that delayed scheduling of the repair would not give 8 rise to any claim against the business. Such unlimited discretion is not consistent with this 9 Section. The consumer may enforce the on-site service promise, stripped of the business’s 10 unlimited scheduling discretion. The consumer’s contractual right under the severed 11 agreement is to receive on-site service within a reasonable time. 12 8. Relation to the Uniform Commercial Code and to the Restatement of the Law Second, 13 Contracts. The rule of this Section is consistent with Restatement of the Law Second, Contracts 14 § 77, which deems discretionary terms illusory when the discretion is not limited (by the doctrine 15 of good faith or otherwise). It is also consistent with the approach of UCC §§ 2-305, 2-306, 16 2-309, and 2-311(1), which impose good-faith limitations on discretionary terms. UCC § 1-302(b) 17 specifies that the duty of good faith may not be disclaimed by agreement, but that the parties may 18 agree on “the standards by which the performance of [the good-faith obligation] is to be measured 19 if those standards are not manifestly unreasonable.” REPORTERS’ NOTES 20 21 22 23 24 25 26 27 28 29 30 31 Many consumer contracts include terms that give the business powers to modify, add, or negate its contractual obligations, and to set the precise details and scope of various obligations. Often those powers are stated explicitly in modification clauses or discretionary terms. But they may also arise out of vague drafting of the business’s obligations. If the business can derogate, without any limitation, from rights and obligations that were stated when the original assent was manifested, or if the business awards itself unfettered discretion to specify its obligations under the original contract, such that the promise the business made to consumers is lacking any meaningful commitment, the business’s promise is illusory and the contract fails for lack of consideration. In such cases, all the provisions in the agreement that contained the unlimited discretion may be unenforceable against the consumer, as they were never part of a contract with a bargained-for return promise. Compare RESTATEMENT OF THE LAW SECOND, CONTRACTS § 77 (AM. LAW INST. 1981). 72 © 2019 by The American Law Institute Tentative draft – not approved Tentative Draft 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 §4 This nonenforceability outcome is obtained only when the contractual language clearly grants the business unfettered discretion. In other cases, when a term in the contract grants the business wide discretion but does not state explicitly the boundaries of this discretion, contract law requires that the business exercise its discretion in good faith. For example, a business might include a clause giving it the right to modify any term of the contract for any reason, including an existing arbitration clause. Ordinarily, modifications done under such powers are enforced by courts. The approach of this Section supports this result, by restricting discretionary clauses to allow only reasonable modifications made in good faith. This approach thus dispenses with the need to include explicit “savings clauses” that limit the modification power. One of the primary concerns with unlimited discretionary terms is their retroactive application. Discretionary terms are often silent on the issue of retroactive application, and some courts have held that silence on this issue means that the discretion can be exercised with retroactive application, which renders the agreement unenforceable. Those courts have held that, to be valid, the discretionary terms must expressly state that they only apply prospectively. See, e.g., Morrison v. Amway Corp., 517 F.3d 248 (5th Cir. 2008) (determining that because there is nothing to suggest that once published the amendment would be inapplicable to disputes arising before such publication, it was unenforceable); Torres v. S.G.E. Mgmt., LLC, 397 F. App’x 63, 68 (5th Cir. 2010) (ruling that because no savings clause precluded application of amendments to disputes arising before amendment, the arbitration clause was illusory and unenforceable); Harris v. Blockbuster, Inc., 622 F. Supp. 2d 396 (N.D. Tex. 2009) (denying the provider’s motion to compel individual arbitration because there was nothing to suggest that once published the amendment would be inapplicable to disputes arising out of events occurring before the publication); Phox v. Atriums Management Co., Inc., 230 F. Supp. 2d 1279 (D. Kan. 2002) (finding an employee handbook to be an illusory contract because in the discretionary clauses the defendant reserved the right to modify or cancel provisions at any time). Along this line, courts examine whether the prospective application limit is expressly stated, and if it is, the discretionary term is enforceable. See, e.g., In Re Halliburton Co., 80 S.W.3d 566 (Tex. 2002) (holding that language in the agreement effectively prevented Halliburton from avoiding its promise to arbitrate by amending the provision or terminating it altogether). The approach of this Section, which includes an implied limitation of good faith in the exercise of unlimited-discretion clauses, instead follows the position adopted by provisions of Article 2 of the Uniform Commercial Code, §§ 2-305, 2-306, and 2-309 (Am. Law Inst. & Unif. Law Comm’n), which impose good-faith limitations on discretionary terms. It also follows courts that have imposed limitations originating from the duties of good faith and fair dealing and from the reasonable expectations of the parties to save otherwise unenforceable contracts—an approach that has been applied in both consumer and nonconsumer contracts. See, e.g., Padberg v. DISH Network LLC, 2012 WL 2120765 (W.D. Mo. June 11, 2012) (recognizing that although the contract grants Dish Network the discretion to change Padberg’s programming, Dish Network’s programming decisions are subject to an implied duty of good faith and fair dealing, and Dish Network must exercise its discretion reasonably); Lebowitz v. Dow Jones & Co., 508 F. App’x 73 © 2019 by The American Law Institute Tentative draft – not approved §4 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 Consumer Contracts 83, 84 (2d Cir. 2013) (noting that, because of the implied duty of good faith, under New York law, a contract is not illusory merely because its terms give discretion to one party to the contract); 24 Hour Fitness, Inc. v. Superior Court, 78 Cal. Rptr. 2d 533 (Cal. Ct. App. 1998) (determining that, because a petitioner employer’s power to modify the agreement included a duty of good faith, it was not illusory); Cobb v. Ironwood Country Club, 183 Cal. Rptr. 3d 282 (Cal. Ct. App. 2015) (constraining Ironwood’s right to amend the agreement governing the parties’ relationship by the covenant of good faith and fair dealing, which precludes amendments that operate retroactively); Serpa v. California Surety Investigations, Inc., 155 Cal. Rptr. 3d 506 (Cal. Ct. App. 2013) (finding that the obligation to arbitrate was not rendered illusory by the employer’s retention of a right to modify the agreement, because it had to be exercised in accordance with the implied covenant of good faith and fair dealing); Peleg v. Neiman Marcus Grp., Inc., 140 Cal. Rptr. 3d 38 (Cal. Ct. App. 2012) (finding an agreement illusory because it was not restricted by express language or by terms implied under the covenant of good faith and fair dealing); Martindell v. Lake Shore Nat’l Bank, 154 N.E.2d 683, 691 (Ill. 1958) (holding that the duty of good faith and fair dealing implied an interpretation that required the option period be left open for six months); Russ Berrie & Co. v. Gantt, 998 S.W.2d 713 (Tex. App. 1999) (deciding that the employment contract was not illusory under New Jersey law, because New Jersey law implied a duty of good faith and fair dealing in all contracts); Carrico v. Delp, 490 N.E.2d 972, 976 (Ill. App. Ct. 1986) (concluding that, in accordance with the implied duty of good faith, the agreement gave the bank reasonable, not absolute, discretion); Casas v. Carmax Auto Superstores Cal., LLC, 169 Cal. Rptr. 3d 96 (Cal. Ct. App. 2014) (ruling that under California law even a modification clause not providing for advance notice does not render an agreement illusory, because the agreement also contains an implied covenant of good faith and fair dealing). For example, the court in Cobb explained how a contractmodification clause that was silent on whether contract changes apply to existing claims was implicitly restricted by the duty of good faith: When one party to a contract retains the unilateral right to amend the agreement governing the parties’ relationship, its exercise of that right is constrained by the covenant of good faith and fair dealing which precludes amendments that operate retroactively to impair accrued rights. 183 Cal. Rptr. 3d at 284. But, if the term as written is explicitly unrestricted, it cannot be varied by the implied covenant of good faith and fair dealing. That term, or the entire contract, becomes unenforceable. The legal consequences are then determined by § 9. Returning to the example of a discretionary arbitration agreement, if it expressly applies a contract change to preexisting claims, the implied covenant of good faith cannot vary the plain language, and the agreement is unenforceable. (Compare Restatement of the Law, Employment Law § 2.06 (Am. Law Inst. 2015), allowing only prospective modifications of binding employer policy statements. Compare also Cheek v. United Healthcare of Mid-Atlantic, Inc., 835 A.2d 656 (Md. 2003); Salazar v. Citadel Communications Corp., 90 P.3d 466 (N.M. 2004), which found the language that grants a firm (in the employment 74 © 2019 by The American Law Institute Tentative draft – not approved Tentative Draft §5 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 context) the right to modify terms of the contract at its “absolute discretion” or “for any reason” sufficient to render the agreement illusory.) The rule that unlimited-discretion promises are not enforceable, as restated in this Section, does not require any symmetry of obligation. Consumer contracts do not fail for lack of consideration if, for example, the arbitration clause applies only to actions brought by consumers and not to actions brought by the business. Most of the rights and obligations in consumer contracts are asymmetric—the business has to perform some actions and the consumer other actions—and consideration exists as long as these asymmetric obligations are mutually exchanged. See Oblix v. Winiecki, 374 F.3d 488 (7th Cir. 2004) (finding that the arbitration clause was enforceable because it was supported by consideration, the employee’s salary—one of the things it paid her to do was agree to non-judicial dispute resolution). See also Harris v. Green Tree Fin. Corp., 183 F.3d 173 (3d Cir. 1999) (enforcing an agreement that bound only plaintiffs to submit to arbitration because mutuality is not a requirement of a valid arbitration clause when consideration is present); Lackey v. Green Tree Fin. Corp., 498 S.E.2d 898, 904 (S.C. Ct. App. 1998) (holding that there is no requirement that the consideration for one party’s obligation to arbitrate all issues under a contract be the other party’s obligation to arbitrate all issues under that contract); Randolph v. Green Tree Fin. Corp., 991 F. Supp. 1410, 1421-1422 (M.D. Ala. 1997) (denying the individual’s motion for reconsideration of the court’s decision to grant the corporation’s motion to compel arbitration). Problems of asymmetric obligation have been dealt with by courts under the label of “illusory promise” or “mutuality” but have addressed a different issue altogether—unconscionability. 21 § 5. Unconscionability 22 (a) An unconscionable contract or term is unenforceable, to the extent stated in § 9. 23 (b) A contract or a term is unconscionable if at the time the contract is made it is: 24 25 26 27 (1) substantively unconscionable, namely fundamentally unfair or unreasonably one-sided, and (2) procedurally unconscionable, because it results in unfair surprise or results from the absence of meaningful choice on the part of the consumer. 28 In determining that a contract or a term is unconscionable, a greater degree of one of the 29 elements in this subsection means that a lesser degree of the other element is sufficient to 30 establish unconscionability. 31 32 33 34 (c) Without limiting the scope of subsection (b)(1), a contract term is substantively unconscionable if its effect is to: (1) unreasonably exclude or limit the business’s liability or the consumer’s remedies that would otherwise be applicable for: 75 © 2019 by The American Law Institute Tentative draft – not approved §5 Consumer Contracts 1 (A) death or personal injury for which, in the absence of a contractual 2 provision in the consumer contract, the business would be liable, or 3 (B) any loss to the consumer caused by an intentional or negligent act 4 or omission of the business; 5 (2) unreasonably expand the consumer’s liability, the business’s remedies, or 6 the business’s enforcement powers that would otherwise be applicable in the event of 7 breach of contract by the consumer; or 8 9 (3) unreasonably limit the consumer’s ability to pursue or express a complaint or seek reasonable redress for a violation of a legal right. 10 (d) In determining whether a contract or a term is unconscionable, the court should 11 afford the parties a reasonable opportunity to present evidence as to its commercial setting, 12 purpose, and effect. 13 Comment: 14 1. The two prongs of unconscionability. The doctrine of unconscionability has the primary 15 goal of protecting contracting parties against fundamentally unfair and unreasonably one-sided 16 terms. It thus represents one of the primary safeguards necessary in an environment in which 17 complex terms are adopted without meaningful scrutiny by consumers. Because consumers rarely 18 read or review the non-core, standard contract terms, and because such faintly reviewed terms may 19 nevertheless be adopted under the principles developed in the case law and reflected in §§ 2 and 3 20 of this Restatement, the doctrine of unconscionability is a primary tool against the inclusion of 21 intolerable terms in the consumer contract. While the principal element of the unconscionability 22 doctrine is the substantive prong that identifies such intolerable terms, the doctrine recognizes that 23 sometimes consumers may choose to accept harsh terms in exchange for another benefit (such as 24 low price). The doctrine asks whether consumers in fact meaningfully chose to accept a harsh term 25 by also requiring (except in rare circumstances) a showing of some quantum of procedural 26 unconscionability. In determining whether a contract or a term is unconscionable, a court has to 27 examine its expected effects as they appear at the time that the contract was made (compare 28 Restatement of the Law Second, Contracts § 208 and Uniform Commercial Code (UCC) § 2-302). 29 2. Sliding scale. In general, both the substantive and the procedural prongs are necessary 30 for a finding of unconscionability. But they need not be present in the same degree. Under 31 subsection (b), the two prongs are viewed in tandem and a sliding-scale approach is applied: a 76 © 2019 by The American Law Institute Tentative draft – not approved Tentative Draft §5 1 large quantum of one prong means that a relatively small quantum of the other is sufficient to 2 establish unconscionability. Because the ultimate goal of the unconscionability doctrine is to deny 3 enforcement to contract terms that are fundamentally unfair, in appropriate circumstances a high 4 degree of substantive unconscionability is sufficient to find that a standard contract term, ordinarily 5 not one of the core-deal terms of which most consumers are aware, is unconscionable. 6 3. Substantive unconscionability. The substantive-unconscionability test in subsection 7 (b)(1) addresses the unfairness and one-sidedness of a contract term that potentially undermines 8 the consumer’s benefit from the bargain, and for which the business cannot show a reasonable 9 justification. There are various ways to characterize the required severity of the substantive 10 unconscionability—e.g., “shock the conscience,” “oppressive,” “unreasonably harsh,” or 11 “fundamentally unfair.” Those tests, as articulated by courts and in the Uniform Commercial Code, 12 are all intended to capture a limiting criterion, that the doctrine is to be used only when the one- 13 sidedness of a term in the contract is extreme. 14 In general, it is impossible to evaluate the one-sidedness of a particular term at the time the 15 contract is made without looking at the contract as a whole, including the price, and the context 16 surrounding the contract. What might appear as unfair may be merely a bargain-basement deal in 17 which the pro-business term is matched by a pro-consumer price or other consumer advantage. 18 Thus, for example, a contract that provides few rights to a consumer may not be problematic if a 19 low price reflects those minimal rights, but might be problematic without the corresponding benefit 20 of a low price. Likewise, an extreme pro-business term may not be unfair if, in the context 21 surrounding the contract, it reflects or offsets a large risk taken by the business. While the presence 22 of a competitive market environment may suggest that, in ordinary commerce, pro-business terms 23 would lead to more favorable prices or other terms for consumers, it does not preclude a legal 24 finding that a term is substantively unconscionable. 25 4. Contract terms that are substantively unconscionable. Subsection (c) provides a 26 nonexhaustive list of categories of standard contract terms that are substantively unconscionable, 27 if their effect is to impose: 28 (a). Unreasonable limit on the business’s liability or the consumer’s remedies. 29 Subsection (c)(1) establishes that it is unconscionable to unreasonably exclude or limit the 30 business’s liability or the consumer’s remedies that would otherwise be applicable for (A) death 31 or personal injury for which, in the absence of a contractual provision in the consumer contract, 77 © 2019 by The American Law Institute Tentative draft – not approved §5 Consumer Contracts 1 the business would be liable, or (B) any loss to the consumer caused by an intentional or negligent 2 act or omission of the business. Subsection (c)(1) applies both to limits on the consumer’s remedies 3 and to limits on the business’s liability, including disclaimers of implied warranties. Standard 4 contract terms stating that the liability or remedy limitations are specifically agreed upon, or that 5 conduct that would otherwise be regarded by law as negligent is contractually agreed upon to be 6 non-negligent, do not necessarily render the limit on liability reasonable. A limit on liability for 7 personal injury may be reasonable, for example, in situations in which the consumer is well 8 positioned to prevent the loss or in which the activity is broadly known to involve significant 9 physical risks. But even then the waiver may not apply if the business failed to take cost-effective 10 measures to reduce the risk. 11 Illustrations: 12 1. A consumer purchases fitness equipment for her household use. The contract 13 contains standard terms that release the seller from liability for all risk of personal injury 14 arising from the use of the equipment, including injuries arising from defects in the 15 equipment that would otherwise constitute breach of warranty. This limitation of 16 consequential damages is substantively unconscionable. See also UCC § 2-719(3), which 17 states that this limitation is prima facie substantively unconscionable. 18 2. A consumer enters an agreement with a fitness club that uses the same equipment 19 as in Illustration 1. The agreement contains standard contract terms releasing the club from 20 liability for all risks of personal injury, including injuries arising from defective or poorly 21 maintained equipment. While this service contract does not come under UCC § 2-719(3), 22 the same principle of unconscionability applies under this Restatement. The release from 23 liability is substantively unconscionable if, in the absence of such standard contract terms, 24 the business would be liable. 25 3. A consumer purchases a lift ticket at a ski resort. The ticket recites standard 26 contract terms that disclaim the resort’s liability for personal injuries to the consumer while 27 the consumer is using the skiing facilities. The disclaimer is not substantively 28 unconscionable because skiing is an activity broadly known to involve significant risk of 29 death or personal injury and the disclaimer is thus not unreasonable. Nevertheless, the 30 application of the disclaimer to risks caused not by an inherent risk of skiing but directly 31 by the resort’s negligence—such as negligently allowing fallen logs to remain on the ski 78 © 2019 by The American Law Institute Tentative draft – not approved Tentative Draft §5 1 runs, or failing to prevent malfunctions of the ski lifts—is substantively unconscionable 2 under subsection (c)(1)(B). 3 (b). Unreasonable expansion of the consumer’s liability, the business’s remedies, 4 or the business’s enforcement powers. Subsection (c)(2) establishes that consumers’ liability for 5 breach may not unreasonably exceed the liability that would otherwise apply, and that consumers 6 may not be subject to enforcement measures that unreasonably expand the enforcement measures 7 that would otherwise apply. What is reasonable depends on the lost profit incurred by the business, 8 the difficulty of obtaining redress, and the value of the unpaid-for benefits the consumer enjoyed 9 before breach. Under longstanding case law and statutes in many jurisdictions, excessive 10 liquidated damages and early-termination fees are not enforceable, even if they do not rise to the 11 level of substantive unconscionability. (See Restatement of the Law Second, Contracts § 356; UCC 12 § 2-718(1).) Other instances in which expansion of a business’s remedies and enforcement tactics 13 may be substantively unconscionable include, but are not limited to, cross-collateral clauses, 14 waiver-of-defense clauses, and debt-collection clauses. They are unconscionable under consumer- 15 contract law even if, at the same time, they may also be prohibited under other legal rules. A 16 finding of substantive unconscionability can be avoided by showing that the remedial provision is 17 reasonable, for example, when the consumer received some front-end value in exchange for the 18 expanded remedies. 19 Illustrations: 20 4. A cellphone-service provider enters into a two-year contract with a consumer. 21 The consumer does not receive any meaningful, up-front benefit, like a subsidized device 22 or a lower-than-market rate for the service. The contract stipulates that a consumer who 23 exits the relationship before the end of the two-year commitment period must pay a fee of 24 $250, regardless of the timing of exit. The termination fee satisfies the substantive- 25 unconscionability test. It may also be an unenforceable penalty for breach (see Restatement 26 of the Law Second, Contracts § 356). If, however, the consumer receives meaningful, up- 27 front benefits for agreeing to the two-year commitment, the termination fee may not be 28 unreasonable and therefore not substantively unconscionable. 29 5. A car dealership enters into a three-year lease contract with a consumer. The 30 contract stipulates that a consumer who terminates the lease prematurely must pay damages 79 © 2019 by The American Law Institute Tentative draft – not approved §5 Consumer Contracts 1 that exceed the sum of the remaining payments under the lease contract. The liquidated- 2 damages clause is substantively unconscionable. See also UCC §§ 2A-504 and 2A-528(1). 3 6. An online news source enters into a three-year subscription with a consumer. The 4 contract stipulates that a consumer who terminates the subscription prematurely must pay 5 damages that exceed the sum of remaining payments under the subscription. The 6 liquidated-damages clause is substantively unconscionable because it unreasonably 7 expands the consumer’s liability that would otherwise apply, above the business’s lost 8 profit.
 9 (c). Unreasonable limit on consumer’s ability to enforce a legal right. Subsection 10 (c)(3) establishes that it is substantively unconscionable to specify an excessively burdensome 11 redress mechanism and, by doing so, to unreasonably limit consumers’ ability to enforce their legal 12 rights. Such limitations are unconscionable because they undermine the substantive rights 13 consumers acquired under the contract. They are substantively unconscionable for the same reason 14 that limitations on remedies are—that it is the essence of a contract that at least minimum adequate 15 recovery for breach be available (UCC § 2-719, Official Comment 1). A business may try to limit 16 consumers’ reasonable redress through unreasonable choice-of-forum clauses, choice-of-law 17 clauses, or arbitration arrangements that in each case impose unreasonably high costs on 18 consumers; waivers of aggregate-litigation processes in situations in which individual suits are 19 impractical; unreasonably short limitations periods; unjustified denial of statutory damages and 20 attorneys’ fees; and more. While consumers may agree to limit their process rights, the agreed- 21 upon arrangements must enable some reasonably effective pursuit of legally available redress for 22 breach of contract or for violation of legal rights that govern the contractual relationship. A limit 23 on the consumer’s ability to enforce a legal right is not substantively unconscionable if it is not too 24 severe or if it serves to screen meritless claims, or when the consumer received some value in 25 return for it. 26 Subsection (c)(3) states a principle of consumer-contract law and does not express a 27 preference for a particular mode of dispute resolution, such as litigation, arbitration, or mediation. 28 The requirement that a consumer’s right to seek redress not be unreasonably hindered may be 29 further strengthened or weakened by other laws and regulations governing the choice of law and 30 forum. For example, it may be bolstered by the doctrine of “effective vindication” in arbitration 80 © 2019 by The American Law Institute Tentative draft – not approved Tentative Draft §5 1 law, or by laws that prohibit pre-dispute arbitration agreements in specific sectors. And, 2 conversely, the requirement in subsection (c)(3) may be weakened by federal law’s preference for 3 some forms of dispute resolution, even if those erode the right to seek redress. In stating a principle 4 of consumer-contract law, subsection (c)(3) does not address the possible interaction of such a 5 contract-law principle with federal law, and specifically, it does not address its possible preemption 6 under the Federal Arbitration Act. 7 Illustrations: 8 7. A business’s standard contract terms include a dispute-resolution term specifying 9 a forum in a distant location, such that the consumer would have to bear travel and 10 accommodation expenses exceeding the value of the remedy sought. The dispute- 11 resolution forum requires a nonrefundable filing fee exceeding the value of the remedy 12 sought. Either one of these two features unreasonably limits the consumer’s ability to 13 enforce legal rights and renders the dispute-resolution clause substantively unconscionable. 14 That result applies to any type of dispute-resolution forum that imposes such an 15 unreasonable cost or personal burden, be it a public court or a private arbitration tribunal. 16 8. A business’s standard contract terms include a class-action waiver. A common 17 grievance for consumers entering this contract involves low damages, no more than a few 18 dollars each. A court may determine that the class-action waiver is substantively 19 unconscionable if the waiver unreasonably limits consumers’ ability to enforce low-stakes 20 legal rights. This result applies regardless of the type of dispute-resolution forum specified 21 in the contract, be it a public (small-claims) court or a private arbitration tribunal. 22 9. A business’s standard contract terms require that all claims against the business 23 be made within three months after the conclusion of the transaction. The clause is 24 substantively unconscionable to the extent that it covers claims arising from latent defects. 25 (Compare UCC § 2-725(1).) 26 (d). Limits on consumers’ ability to pursue or express a complaint. In the same 27 spirit, it is substantively unconscionable for the business to unreasonably limit the consumer’s 28 ability to express or pursue a complaint, or to restrict the ability of the consumer to engage in 29 review, assessment, or analysis of the business’s performance. (Compare the Consumer Review 30 Fairness Act of 2016, 15 U.S.C. § 45b.) 81 © 2019 by The American Law Institute Tentative draft – not approved §5 1 Consumer Contracts Illustration: 2 10. A business includes in its standard-form contract a clause that charges a high 3 monetary penalty every time a consumer posts a negative review of the business online or 4 obligates the consumer to indemnify the business for any loss caused by the negative 5 review. This “anti-disparagement” clause is substantively unconscionable, because it 6 unreasonably limits the consumer’s ability to pursue or express a complaint about the 7 product. 8 5. Substantive unconscionability versus statutory standards. The substantive- 9 unconscionability standard may capture contract terms that are considered “unfair acts or 10 practices” under the Federal Trade Commission (FTC) Act and state Unfair and Deceptive Acts 11 and Practices (UDAP) statutes. The extensive jurisprudence identifying such unfair acts and 12 practices ought to continue to guide courts in evaluating unfair standard contract terms under the 13 unconscionability doctrine. In addition, the Dodd–Frank Wall Street Reform and Consumer 14 Protection Act prohibits “abusive acts or practices” (12 U.S.C. §§ 5531, 5536(a)). Practices 15 defined by regulatory and enforcement agencies as unfair or abusive may also be substantively 16 unconscionable when authorized in the standard contract terms. However, a finding of substantive 17 unconscionability requires a degree of fundamental unfairness (or abusiveness) that may be higher 18 than the level of unfairness (or abusiveness) that supports some claims under those consumer- 19 protection statutes. Compliance with statutory standards would ordinarily support a finding that a 20 term is not substantively unconscionable, but in proper circumstances would not bar a finding of 21 substantive unconscionability. 22 Illustrations: 23 11. A retail installment-sales contract includes a grant of a nonpossessory security 24 interest in household goods of the consumer other than those acquired in the transaction (a 25 “cross-collateral” clause). The term is unfair under the FTC Credit Practices Rule, 16 26 C.F.R. § 444.2. It is also substantively unconscionable. 27 12. A sales contract contains a waiver-of-defenses clause, under which the 28 consumer promises not to assert against any assignee of the contract any defense the 29 consumer might have against the seller. The term is unfair under § 5 of the FTC Act and 82 © 2019 by The American Law Institute Tentative draft – not approved Tentative Draft §5 1 the FTC Preservation of Consumers’ Claims and Defenses Rule, 16 C.F.R. § 433. It is also 2 substantively unconscionable. (Compare UCC § 9-403(d).) 3 13. A dance studio solicits a client to commit to a large number of dance classes, 4 more than the client can use, and at a price that does not reflect a significant bulk discount. 5 The arrangement is unfair under state UDAP case law. It is also substantively 6 unconscionable. 7 6. Procedural unconscionability. 8 (a). Identifying procedural unconscionability; sliding scale. The procedural prong 9 of the unconscionability doctrine refers to some defects in the bargaining process, like a surprising 10 and unexpected term, or lack of meaningful choice. A finding of procedural unconscionability 11 based solely on the fact that a term was presented in standard, non-negotiable form, without more, 12 constitutes the lowest quantum of procedural unconscionability and would have to be matched 13 with a high degree of substantive unconscionability to render the contract or term unenforceable. 14 (b). Consumer awareness; market context. The procedural-unconscionability test 15 may look to consumer awareness of the term in a market context. The question would be whether 16 ordinary consumers would be aware of the term or would expect its inclusion, and thus would be 17 more likely to take it into account when making contracting decisions. When consumers expect or 18 are aware of a term, the term can (but does not always) affect their contracting decisions. In those 19 situations, the reasons for intervention in the substance of the deal are diminished. One question, 20 then, in applying the procedural unconscionability test, is whether a term is likely to affect the 21 contracting decisions of a large enough number of consumers. (If the market is segmented, the 22 question is whether a term is likely to affect the contracting decisions of a large enough number of 23 consumers in the relevant segment.) 24 A term that affects the contracting decisions of a substantial number of consumers is more 25 likely to be subject to forces of market competition, even if it is not negotiated and even if it 26 appears in the contracts of all businesses in the relevant market. Such a term may be policed by 27 market forces, and so policing by courts—through the unconscionability doctrine—may be less 28 necessary and may lead to undesirable results, including a reduction in consumer choice. On the 29 other hand, when drafting terms that do not affect consumers’ contracting decisions, the business 30 is not subject to market discipline, and so the unconscionability doctrine is all the more necessary 31 to police such terms. 83 © 2019 by The American Law Institute Tentative draft – not approved §5 Consumer Contracts 1 The prevalence, in the relevant market, of similar pro-business terms does not negate a 2 finding of procedural unconscionability. Indeed, if a term does not affect consumers’ contracting 3 decisions, all businesses might be tempted to draft a similar term in a one-sided, pro-business 4 fashion. 5 (c). Market forces and non-core standard contract terms. Ordinarily, non-core 6 standard contract terms do not affect the contracting decisions of a substantial number of 7 consumers. This observation applies most forcefully when the standard contract term is part of a 8 long list of fine-print terms. Non-core standard contract terms do not affect the contracting 9 decisions of consumers even if they are presented in larger font or positioned in a prominent place 10 in the form contract, because it is exceedingly common for consumers to be unaware even of such 11 bolstered disclosure. In contrast, when the standard contract term is part of the core-deal terms, 12 e.g., a bottom-line price or delivery fee, it ordinarily affects the contracting decisions of consumers. 13 Moreover, some non-core standard contract terms may affect the contracting decisions. 14 In determining whether a standard contract term affects the contracting decisions of a 15 substantial number of consumers, courts ought to look at factors like consumers’ limited 16 sophistication, the business’s use of incomprehensible language in the standard contract terms, the 17 business’s use of high-pressure sales tactics, and the existence of external circumstances (not 18 created by the business) that compelled consumers to execute the contract. In addition, in situations 19 of extreme inequality in bargaining power between the business and the consumer, when 20 consumers are compelled to transact with the business regardless of the standard contract term, the 21 term is unlikely to affect the contracting decisions of many consumers. Of course, a business may 22 demonstrate that a term does affect consumers’ contracting decisions with appropriate evidentiary 23 support, for example by survey evidence (as commonly used in litigation involving aspects of 24 unfair competition), or by any other indicia suggesting that the affected term was noticeably 25 communicated in the course of the precontractual representations. 26 Illustrations: 27 14. A fitness center advertises two membership plans: Plan 1 charges a lower 28 membership fee but requires a two-year commitment and imposes an early-termination fee. 29 Plan 2, titled “No Contract,” charges a higher membership fee, but allows consumers to 30 terminate with no penalty anytime. The zero-termination-fee feature is made explicit in the 31 marketing of the “No Contract” plan. By virtue of the explicit advertising, the possibility 84 © 2019 by The American Law Institute Tentative draft – not approved Tentative Draft §5 1 and cost of early termination become known to consumers. Consumers can reasonably 2 weigh the value of the choice. Accordingly, the termination penalty in Plan 1 is not 3 procedurally unconscionable. 4 15. A sales contract includes a nonpossessory security-interest clause, like the 5 substantively unconscionable one presented in Illustration 11. The clause is part of a long 6 “boilerplate” form, presented to the consumer during the closing of the transaction, which 7 the consumer must sign to complete the transaction. In circumstances in which consumers 8 have limited financial sophistication, the clause is procedurally unconscionable. 9 7. Procedural unconscionability—related concepts. 10 (a). Subjective knowledge. Subjective knowledge of an individual consumer does 11 not preclude a finding of procedural unconscionability, if the finding of procedural 12 unconscionability is based on the objective test of consumer awareness. Subjective knowledge 13 does not cure the market failure caused when a term does not affect the contracting decisions of a 14 substantial number of consumers. 15 (b). Disclosure. The procedural-unconscionability inquiry should be distinguished 16 from a conspicuousness test. It is not enough that the harsh terms were disclosed in larger typeface 17 or that a ritual of a separate affirmation of assent to the harsh terms was mechanically followed. 18 While such enhanced presentation may satisfy other rules mandating disclosure (e.g., 19 Magnuson−Moss Warranty Act, 15 U.S.C. § 2301) and may be a factor in determining whether 20 there was a “surprising and unexpected term,” it does not establish a safe harbor against a finding 21 of procedural unconscionability. Because of the length, complexity, and accumulation of standard- 22 form contracts, an enhanced-format disclosure of a term does not guarantee that consumers will 23 not be surprised and thus does not guarantee meaningful choice. The harsh effect of the standard 24 terms can continue to be hidden even in full daylight, given that consumers rarely read those terms 25 and, even if they do, often may not understand or appreciate their effect at the time of contracting. 26 In particular, the display of standard contract terms in ALL CAPS or other enhanced typeface does 27 not, in and of itself, avoid procedural unconscionability. The Uniform Commercial Code provides 28 guidance in this area. While a disclaimer may be conspicuous under UCC § 2-316(2) by virtue of 29 the typeface used to display it (UCC § 1-201(b)(10)), it may still be ineffective under the UCC and 30 procedurally unconscionable. While the UCC stipulates that a conspicuous disclaimer of 31 warranties is effective, it also explains that the underlying purpose is to “protect the buyer from 85 © 2019 by The American Law Institute Tentative draft – not approved §5 Consumer Contracts 1 surprise,” namely to deny enforcement to “unexpected and unbargained language” (UCC § 2- 2 316(2) and Official Comment 1). As long as the disclosure is not effective in protecting the 3 consumer from surprise and the disclosed term is not likely to affect the contracting decisions of a 4 substantial number of consumers entering such a transaction, it does not preclude a finding of 5 procedural unconscionability. 6 Illustration: 7 16. Goods purchased by a consumer are found to be totally worthless. The standard 8 terms include a disclaimer of the implied warranty of merchantability in large font and in 9 a manner that satisfies the requirements of UCC § 2-316 and of the Magnuson–Moss 10 Warranty Act. If a court finds that the disclaimer is substantively unconscionable, the court 11 may also find that the disclaimer was procedurally unconscionable on grounds that it was 12 “surprising and unexpected” and refuse to enforce it, even if the disclaimer was printed in 13 conspicuous font. 14 8. Unconscionable price. The substantive unconscionability test can be applied to 15 scrutinize the contract price, but this should be done with extra care. An excessively high price, 16 substantially in excess of the price at which similar products are obtainable in similar consumer 17 transactions by like consumers, or bearing no reasonable relationship to the cost of providing the 18 good or service, may be found to be substantively unconscionable. The procedural- 19 unconscionability test may be more difficult to satisfy because the price is usually the most 20 prominent element of a transaction and a critical factor in the consumer’s contracting decision (see 21 Comment 6). Still, an egregiously high price may be held unconscionable by courts if it occurs in 22 connection with unfair surprise or the absence of meaningful choice. A price term itself may 23 surprise consumers, for example when a product is sold via a complex pricing scheme. A consumer 24 may be unfairly surprised when the price is multidimensional and certain price dimensions do not 25 affect the contracting decisions. A consumer may also be unfairly surprised when the price is 26 contingent or deferred and the consumer underestimates the likelihood of triggering the relevant 27 price or the importance of certain deferred price dimensions (e.g., a long-term interest rate that 28 replaces a low teaser rate after a long introductory period, or the long-term, overall price of a 29 repeatedly rolled-over short-term loan), and thus underestimates the true cost of the contract. An 30 egregiously high price may also result from absence of meaningful choice when there are market 86 © 2019 by The American Law Institute Tentative draft – not approved Tentative Draft §5 1 imperfections that make it less likely that the price was set by a freely competitive market to reflect 2 the cost or the fair value of the product. And it may arise in situations in which the consumer’s 3 levels of literacy and numeracy or urgency of needs impede the exercise of the sophisticated, 4 prudent judgment needed to evaluate the price. In those circumstances, a court might find that the 5 price term is procedurally unconscionable. When the price, or some element of the price, is hidden 6 from consumers, it may also be policed under § 6 (Deception). 7 Illustrations: 8 17. A consumer contracts for a two-year home-security plan, when a one-year plan 9 with much lower monthly payments is available to the consumer from the same business. 10 The business does not advise the consumer of the availability of the one-year plan. It is 11 substantively unconscionable to contract for the two-year plan, which provides no benefit 12 to the consumer relative to the cheaper one-year plan. It is procedurally unconscionable to 13 withhold information about the clearly superior (from the consumer’s perspective) one- 14 year plan. 15 18. A business promises to help a consumer obtain a $14,000 unclaimed surplus 16 from a real-estate foreclosure sale in exchange for half the surplus, i.e., for a $7,000 fee. In 17 the circumstances, the consumer is aware that the surplus is obtainable, but does not know 18 that it could be easily obtained by visiting the court’s help desk (which is easy to find and 19 use), without paying any fee. The $7,000 fee is substantively unconscionable. The 20 procedural-unconscionability test is also satisfied, because the availability of the court’s 21 help desk was withheld from the consumer and a typical consumer dealing with such a 22 business and accepting such advice would not have known that the surplus could be 23 obtained easily and without cost at the court’s help desk. The outcome would be different 24 if the business had to expend substantial resources in identifying consumers with such 25 unclaimed surpluses—consumers who, without this contract, would have received nothing. 26 19. A set of cookware is sold, by home solicitation, for $375 in an area where a set 27 of comparable quality is readily available for $125 or less. The high price satisfies the 28 substantive-unconscionability test. The procedural-unconscionability test is satisfied if the 29 high-pressure, door-to-door sales method prevented the consumer from obtaining 30 information on the prevailing market price. 87 © 2019 by The American Law Institute Tentative draft – not approved §5 Consumer Contracts 1 20. A consumer borrows $5,000 under a three-year unsecured loan contract 2 carrying an interest rate of 135%. The interest rate is substantively unconscionable if, under 3 the facts of the case, it is excessive relative to the cost of credit the consumer can obtain on 4 a comparable loan elsewhere, or relative to the expected cost for the business of supplying 5 the credit, taking into account the risk of default. The procedural-unconscionability test is 6 satisfied if the interest-rate term was obscured at the time of entering the contract, or if the 7 consumer was under pressure to enter the contract. 8 9. Noncommercial activity. The rule of this Section does not draw a distinction between 9 commercial and noncommercial activity. Some courts, for example, have held that the rule of 10 subsection (c)(1) does not apply when the business that supplies the standard contract terms is 11 operating not for profit, or applies those terms only to its noncommercial activity. The black letter 12 rejects this approach. However, the noncommercial nature of the transaction or the presence of a 13 not-for-profit participant may be taken into account by a court in determining whether a contract 14 or a term satisfies the definition of “unconscionable.” 15 10. Effects of unconscionability. Under subsection (a), an unconscionable contract or term 16 is unenforceable to the extent stated in § 9. In particular, § 9 restates the power of a court to choose 17 between not enforcing the unconscionable term or contract in its entirety or merely limiting the 18 application of any unconscionable clause so as to avoid any unconscionable result. 19 11. Illegality. The doctrine of unconscionability is related to but distinct from the doctrine 20 of illegality or unenforceability on grounds of public policy. A contract or a term is unenforceable 21 if its performance is inconsistent with statutory or regulatory law or with public policy. See 22 Restatement of the Law Second, Contracts § 178. The legal implications of unenforceability are 23 restated in § 9 of this Restatement. 24 Illustration: 25 21. Same facts as in Illustration 10. The “anti-disparagement” clause, in addition to 26 being substantively unconscionable, may also be unenforceable under the doctrine of 27 illegality or on grounds of public policy. 28 12. Shield versus sword. An unconscionability claim can be used as a defense (“shield”). 29 For example, if a business sues to collect money charged to, but unpaid by, the consumer, the 88 © 2019 by The American Law Institute Tentative draft – not approved Tentative Draft §5 1 consumer can defend by showing that the charge is unconscionable. The same unconscionability 2 claim can be made by the consumer as a plaintiff, if, for example, an unconscionable charge was 3 already collected by the business, and the consumer is suing to recover it. In that procedural 4 posture, it is sometimes said that the unconscionability claim is used as a “sword.” That description 5 is misleading. The unconscionability claim is used to challenge the business’s exercise of an 6 alleged contractual right, as in the traditional “shield” cases. A true “sword” application would 7 arise if the consumer has a cause of action for the mere inclusion of an unconscionable term in the 8 contract. Some state consumer-protection laws create an unconscionability-based affirmative right 9 of action and allow consumers to sue for statutory damages. Such statutory claims fall outside the 10 scope of this Restatement. 11 13. Relation to the Uniform Commercial Code and to the Restatement of the Law Second, 12 Contracts. The rules restated herein are consistent with Restatement of the Law Second, Contracts 13 § 208 and UCC § 2-302, as applied by courts. The unconscionability doctrine has long been 14 understood as being comprised of a procedural prong and a substantive prong. Even in sales-of- 15 goods transactions, warranty disclaimers and limitations of remedies are tested not only against 16 the specific rules of UCC §§ 2-316(2) and 2-719(3), but also against the general overarching 17 unconscionability norm of UCC § 2-302. Such scrutiny may add additional circumstances under 18 which provisions may be found unconscionable, beyond those stipulated in the specific rules. REPORTERS’ NOTES 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 For decades, courts have sought to lay a dual foundation for the unconscionability doctrine—substantive and procedural. (The dual test was initially proposed in Arthur Leff, Unconscionability and the Code—The Emperor’s New Clause, 115 U. PA. L. REV. 485 (1967).) While the motivation for the unconscionability doctrine is grounded in the substantive flaw—the extreme unfairness of a term—courts have also recognized that parties should be free to agree to one-sided deals, as long as the process of agreement leads to a meaningful quid pro quo. When the agreement process is proper, courts ordinarily do not second-guess the substance of the contract. “People are free to opt for bargain-basement adjudication—or, for that matter, bargain-basement tax-preparation services; air carriers that pack passengers like sardines but charge less; and blackand-white television. In competition, prices adjust and both sides gain. ‘Nothing but the best’ may be the motto of a particular consumer but is not something the legal system foists on all consumers.” Carbajal v. H & R Block Tax Servs., Inc., 372 F.3d 903, 906 (7th Cir. 2004) (Easterbrook, J.). Notwithstanding the dual-prong test that pervades American contract law, the doctrine of unconscionability has permitted courts to put greater emphasis on the substantive prong. (Other 89 © 2019 by The American Law Institute Tentative draft – not approved §5 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 Consumer Contracts doctrines, like duress and misrepresentation, put greater emphasis on the procedural flaw and allow courts to vacate agreements even if they are substantively within reason). The main technique through which the emphasis on the substantive element is achieved is the “sliding scale” approach. When the degree of substantive unconscionability is greater, a lesser degree of procedural unconscionability is required. See, e.g., 1 E. ALLAN FARNSWORTH, FARNSWORTH ON CONTRACTS § 4.28, at 585 (3d ed. 2004); Sitogum Holdings, Inc. v. Ropes, 800 A.2d 915 (N.J. Super. Ct. Ch. Div. 2002) (collecting cases); Melissa T. Lonegrass, Finding Room for Fairness in Formalism— The Sliding Scale Approach to Unconscionability, 44 LOY. U. CHI. L.J. 1, 12-13 (2012) (collecting cases). In appropriate circumstances, a high degree of substantive unconscionability is sufficient to find that a contract term, not within the core terms of which the consumer was aware at the time of contracting, is unconscionable. See Brower v. Gateway 2000, Inc., 676 N.Y.S.2d 569 (N.Y. App. Div. 1998) (“While it is true that, under New York law, unconscionability is generally predicated on the presence of both the procedural and substantive elements, the substantive element alone may be sufficient to render the terms of the provision at issue unenforceable.”). Put differently, presenting standard contract terms in a long “boilerplate” may be sufficient to satisfy the procedural unconscionability prong, when a strong showing of substantive unconscionability is made. Substantive unconscionability. The approach taken in this Section encourages the continued development of the substantive-unconscionability doctrine in the common-law method, case by case. Rather than enumerate a comprehensive list of “gray” or “black” terms, the commonlaw method relies on a general standard and delegates to courts the discretion to apply it in individual cases. The substantive standard applied by courts prohibits terms that are so one-sided as to lead to intolerable results. One principle that underlies the substantive test applies to the contract as a whole. It asks whether the inclusion of a term has the potential to remove a primary benefit of the transaction— a benefit that motivated the consumer to enter into the contract in the first place. (Compare UNIFORM CONSUMER SALES PRACTICES ACT § 4(c)(3) (UNIF. LAW COMM’N 1970): “In determining whether an act or practice is unconscionable, the court shall consider circumstances such as the following of which the supplier knew or had reason to know: . . . that when the consumer transaction was entered into the consumer was unable to receive a substantial benefit from the subject of the transaction.”) A similar test asks whether the consumer would have refrained from entering the entire transaction were it known to the consumer that the term was included in the bargain. (Compare Restatement of the Law Second, Contracts § 211(3) (AM. LAW INST. 1981).) In addition, the substantive test applies to individual terms even if they do not have the potential to remove a main benefit of the transaction, but only to remove important rights that are attached to the transaction. Here, this Section lists several types of harsh terms, which have been regarded as unconscionable by courts and statutes. The use of specific categories of substantive unconscionability in subsection (c) provides the benefit of greater certainty for businesses at the front end, and for consumers at the back end. It is also consistent with much of the law of 90 © 2019 by The American Law Institute Tentative draft – not approved Tentative Draft 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 §5 unconscionability. State UDAP statutes often include lists of terms that are presumed to be unconscionable acts and practices. See, e.g., OHIO REV. CODE § 1345.031; MICH. COMP. LAWS § 445.903. The first category listed as substantively unconscionable in subsection (c) is terms that unreasonably exclude the business’s liability or limit the consumer’s remedies for death or personal injury. This rule extends the presumption of unconscionability in UCC § 2-719(3) (AM. LAW INST. & UNIF. LAW COMM’N) beyond the sale-of-goods context. Not all limits of liability for personal injury are unreasonable. See, e.g., Larsen v. Pacesetter Sys., Inc., 837 P.2d 1273 (Haw. 1992) (holding that “[l]imitation of consequential damages for injury to the person in the case of consumer goods is prima facie unconscionable,” but stating that the presumption is rebuttable by the business); Horn v. Boston Sci. Neuromodulation Corp., 2011 WL 3893812 (S.D. Ga. Aug. 26, 2011) (stating that “defendant’s attempt to limit damages for breach of its express warranty to replacement of the product is prima facie unconscionable” and that they failed to rebut this presumption). Specifically, when the risk is known to the consumer and the consumer understands and accepts the contractual allocation of that risk, and the shifting of the risk does not lead to the delivery of unreasonably dangerous goods or services by the business, the limit on liability is not unreasonable. Additionally, under subsection (c)(1)(B), terms excluding the business’s liability or limiting the consumer’s remedies for losses caused through an intentional or negligent act or omission of the business are also substantively unconscionable. The second category of terms listed as substantively unconscionable covers attempts to unreasonably expand the business’s remedies or enforcement powers. Those include, for example: (1) Unreasonably high liquidated damages for consumer breach. Compare RESTATEMENT OF THE LAW SECOND, CONTRACTS § 356 (AM. LAW INST. 1981); UCC § 2-718 (AM. LAW INST. & UNIF. LAW COMM’N). See also In re Cellphone Termination Fee Cases, 122 Cal. Rptr. 3d 726 (Cal. Ct. App. 2011) (stating that “because liquidated damage clauses in consumer contracts are presumed void, the burden is on the proponent of the clause to rebut that presumption”); Mitchell v. Ford Motor Credit Co., 702 F. Supp. 2d 1356, 1368 (M.D. Fla. 2010); Fritz v. Nationwide Mut. Ins. Co., 1990 WL 186448 (Del. Ch. Nov. 26, 1990) (including “the inclusion of penalty clauses” in a multifactor test of unconscionability). (2) Cross-collateralization clauses. Compare 16 C.F.R. § 444.2 (Unfair Credit Practices); Williams v. Walker-Thomas Furniture Co., 350 F.2d 445 (D.C. Cir. 1965). (3) Terms attempting to disclaim legal defenses that a consumer can assert against an assignee of the debt. Compare 16 C.F.R. § 433.2 (Preservation of Consumers’ Claims and Defenses); UCC §§ 9-403(d), 9-404(d) (AM. LAW INST. & UNIF. LAW COMM’N); Unico v. Owen, 232 A.2d 405 (N.J. 1967); Holt v. First Nat’l Bank of Minneapolis, 214 N.W.2d 698 (Minn. 1973). The third category of terms that are listed as substantively unconscionable addresses terms that unreasonably limit consumer redress. This Section does not take a position on the question whether arbitration agreements or class-action waivers are unconscionable under the rules of consumer-contract law. Rather, it restates the contract-law principle that courts have regularly utilized to evaluate a broader set of limitations. Since a contract is the right to receive performance 91 © 2019 by The American Law Institute Tentative draft – not approved §5 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 Consumer Contracts from the other party or, failing that, remedies in its place, limitations on the power to seek remedies that render this option impractical undermine the basis of the contract, including the value of the right to seek performance. The test stated in subsection (c)(3) examines whether contract provisions “[u]nreasonably limit the consumer’s ability to pursue or express a complaint or seek reasonable redress for a violation of a legal right.” See, e.g., Brower v. Gateway 2000, 676 N.Y.S.2d 569 (N.Y. App. Div. 1998). Most federal and state courts consider limitations on the consumer’s ability to seek redress as an important factor when deciding whether to enforce a contract or clause. State courts that have considered the issue include: California, see, e.g., Discover Bank v. Superior Court, 113 P.3d 1100 (Cal. 2005) (considering the role of a class action, which can sometimes be a singular means of redress); Florida, see, e.g., S.D.S. Autos, Inc. v. Chrzanowski, 976 So. 2d 600 (Fla. Dist. Ct. App. 2007) (determining that as a matter of public policy, a private enforcement scheme could not effectively deter violations of a statute if consumers were prevented from seeking relief as a class); Massachusetts, see, e.g., Feeney v. Dell Inc., 908 N.E.2d 753 (Mass. 2009) (valuing the right to a class action in a consumer-protection case because, often, aggregation of small claims is likely the only realistic option for pursuing a claim); Missouri, see, e.g., Ruhl v. Lee’s Summit Honda, 322 S.W.3d 136 (Mo. 2010) (determining that simply severing an unconscionable class waiver was an insufficient remedy and that the appropriate remedy in that case was to invalidate the entire arbitration agreement as unconscionable); New Mexico, see, e.g., Fiser v. Dell Computer Corp., 188 P.3d 1215 (N.M. 2008) (noting that in view of the fact that the consumer’s alleged damages were just 10 to 20 dollars, by attempting to prevent him from seeking class relief, the corporation had essentially foreclosed the possibility that the consumer could obtain any relief); Ohio, see, e.g., Schwartz v. Alltel Corp., No. 86810, 2006 WL 2243649 (Ohio Ct. App. June 29, 2006) (holding that the limitation of consumer rights found within the arbitration provision establishes a quantum of substantive unconscionability); Tennessee, see, e.g., Pyburn v. Bill Heard Chevrolet, 63 S.W.3d 351 (Tenn. Ct. App. 2001) (the ability to seek redress is an important factor, but class-action waivers do not interfere with the ability to seek redress); Washington, see, e.g., Scott v. Cingular Wireless, 161 P.3d 1000 (Wash. 2007) (ruling that a class-action-waiver clause was an unconscionable violation of Washington’s policy to protect the public and foster fair and honest competition because it drastically forestalled attempts to vindicate consumer rights); West Virginia, see, e.g., State ex rel. Dunlap v. Berger, 567 S.E.2d 265 (W. Va. 2002) (finding that the provisions in the purchase-andfinancing-agreement document that severely limited the buyer’s rights and remedies were unconscionable). The federal courts that have considered the issue are: First Circuit, see, e.g., Kristian v. Comcast, 446 F.3d 25 (1st Cir. 2006) (severing certain provisions of the arbitration clause because they prevented the vindication of statutory rights); Second Circuit, see, e.g., In re Currency Conversion Fee Antitrust Litig., 265 F. Supp. 2d 385 (S.D.N.Y. 2003) (determining that cardholders did not sufficiently demonstrate the likelihood that they would incur large arbitration costs that would effectively preclude them from vindicating their federal statutory rights in arbitration in order to make the agreements unconscionable); Third Circuit, see, e.g., Homa v. Am. Express Co., 558 F.3d 225 (3d Cir. 2009) (holding that because claims were of too little value to 92 © 2019 by The American Law Institute Tentative draft – not approved Tentative Draft 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 §5 pursue individually, class-action waiver was unconscionable); Fourth Circuit, see, e.g., Snowden v. Checkpoint Check Cashing, 290 F.3d 631 (4th Cir. 2002) (the Fourth Circuit may be setting a higher bar for limitations on redress that justify nonenforcement; in this case, the court enforced the contract because the attorney’s fees were recoverable); Fifth Circuit, see, e.g., Iberia Credit Bureau, Inc. v. Cingular Wireless LLC, 379 F.3d 159 (5th Cir. 2004) (the Fifth Circuit recognizes the importance of accountability, but considers the Attorney General’s enforcement powers as a substitute for the consumer’s ability to sue); Seventh Circuit, see, e.g., Livingston v. Assocs. Fin., Inc., 339 F.3d 553 (7th Cir. 2003) (determining that borrowers had not met their burden of proving that arbitration costs were prohibitively high); Eighth Circuit, see, e.g., Pleasants v. Am. Express Co., 541 F.3d 853 (8th Cir. 2008) (denying an unconscionability claim because the provisions did not limit the consumer’s remedies); Ninth Circuit, see, e.g., Chalk v. T-Mobile USA, Inc., 560 F.3d 1087 (9th Cir. 2009) (finding an arbitration clause substantively unconscionable and unenforceable based on the unilateral nature of the waiver and the disincentive to litigate that was created); Eleventh Circuit, see, e.g., Jones v. DirecTV, Inc., 381 F. App’x 895 (11th Cir. 2010) (holding that the arbitration agreement with the providers was unconscionable because the costs of arbitration would significantly deter the subscriber from pursuing her complaint against the provider). A few courts, while not expressly denying the importance of the ability to seek redress, have enforced contracts or clauses that limit the ability to seek redress; for example, the Seventh Circuit in Carbajal v. H & R Block Tax Servs., Inc., 372 F.3d 903 (7th Cir. 2004) (consumer can waive statutory rights in exchange for lower prices); and the Delaware Superior Court in Edelist v. MBNA Am. Bank, 790 A.2d 1249 (Del. Super. Ct. 2001) (no discussion of impact on redress when surrender of class action was clearly articulated). This principle—that unreasonable limitations on the ability to seek redress undermine the basis of the contract—applies equally to litigation and arbitration, to individual and aggregate forms of dispute resolution, and to provisions that impose costs in the form of filing fees, procedural inconvenience, or unreasonable limitations periods. The focus is on the costs and burdens of the dispute-resolution process, not on its tribunal classification. Contractual clauses that simplify or reduce costs of dispute resolution, or promote informal procedures, are not substantively unconscionable under this test, whereas clauses that complicate or increase costs of dispute resolution, or promote biased procedures, may be. It is possible that the application of the cost criterion would have a differential impact on private arbitration versus public litigation. Arbitration clauses could satisfy this criterion more easily (when the cost of arbitration is lower, due to its informality); or they could satisfy it less easily (when the cost of arbitration is higher, due to fees and procedures that restrict access). This criterion does not have a definitive implication as to the enforceability of class-action waivers under consumer-contract law. While class aggregation is a method to reduce the costs and burdens of dispute resolution, individual procedures are, in many cases, a reasonable form of dispute resolution. However, contractual clauses that select individual forms of dispute resolution for the purpose of imposing unreasonably high costs on a consumer seeking to enforce a legal right are substantively unconscionable. See, e.g., Scott v. Cingular Wireless, 161 P.3d 1000 (Wash. 93 © 2019 by The American Law Institute Tentative draft – not approved §5 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 Consumer Contracts 2007) (finding a class-action waiver unconscionable because it drastically forestalled attempts to vindicate consumer rights and functioned to exculpate the drafter from liability for a broad range of undefined wrongful conduct, including potentially intentional wrongful conduct). The principle restated in subsection (c)(3) is consistent with the general approach taken by contract law toward limitations on redress. For example, the Uniform Commercial Code stipulates that “it is of the very essence of a sales contract that at least minimum adequate remedies be available. If the parties intend to conclude a contract for sale . . . they must accept the legal consequence that there be at least a fair quantum of remedy for breach of the obligations or duties outlined in the contract.” UCC § 2-719, Official Comment 1 (AM. LAW INST. & UNIF. LAW COMM’N). This principle is also consistent with provisions in federal consumer-protection statutes that envision private class actions as a form of redress for low-stakes collective causes of action. (See, e.g., Truth in Lending Act § 130 (15 U.S.C. § 1640); Fair Credit Reporting Act § 707 (15 U.S.C. § 1691e); Fair Debt Collection Practices Act § 813 (15 U.S.C. § 1692k); Electronic Fund Transfer Act § 915 (15 U.S.C. § 1693m); Credit Repair Organizations Act § 409 (15 U.S.C. § 1679g). But note that the scope of some of these statutory rights has been curtailed by CompuCredit Corp. v. Greenwood, 132 S. Ct. 665 (2012).) Accordingly, if particular forms of arbitration or other remedial procedures place an unreasonable burden on consumers and undermine the principle of minimum adequate redress, they are substantively unconscionable. Subsection (c)(3) states a principle of consumer-contract law, that unreasonable limits on consumers’ ability to seek redress for breach of contract are substantively unconscionable. In particular, subsection (c)(3) does not address the possible preemption of contract-law claims under the Federal Arbitration Act. See AT&T Mobility v. Concepcion, 563 U.S. 321 (2011). In the wake of Concepcion, courts have considered the enforceability of arbitration clauses and class-action waivers, and the limits of their power to strike them down under state law in light of the preemption holding of the U.S. Supreme Court. When the procedures of the agreed-upon arbitration clause are more costly or burdensome than reasonable, courts have struck them down as unconscionable, without overstepping the boundaries of state law under the preemption holding. See, e.g., Lau v. Mercedes-Benz USA, LLC, 2012 WL 370557 (N.D. Cal. Jan. 31, 2012) (holding that the arbitration clause was substantively unconscionable because it imposed unreasonably high costs on the consumer). See also Penilla v. Westmont Corp., 3 Cal. App. 5th 205 (Cal. 2016) (finding that an arbitration clause was substantively unconscionable because it imposed prohibitively expensive arbitration fees and significant limitations on remedies, and distinguishing the case from Concepcion by noting that the latter involved class-action waivers, not limitations on arbitral remedies); Gandee v. LDL Freedom Enters., Inc., 293 P.3d 1197 (Wash. 2013) (finding that the arbitration clause at issue was unconscionable and distinguishing it from Concepcion by explaining that the arbitration clause “here contained numerous unconscionable provisions based on the specific facts at issue in the current case. Concepcion provides no basis for preempting our relevant case law, nor does it require the enforcement of Freedom’s arbitration clause.”); Brewer v. Mo. Title Loans 364 S.W.3d 486 (Mo. 2012), cert. denied, 133 S. Ct. 191 (2012) (ruling that the FAA did not preempt the defense of unconscionability, and that the class arbitration waiver 94 © 2019 by The American Law Institute Tentative draft – not approved Tentative Draft 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 §5 was in fact unconscionable because the evidence, including the lack of available counsel, demonstrated that there was no practical, viable means of individualized dispute resolution). The gist of those decisions is to require that a term drafted by the business mandating arbitration of a consumer’s complaint not impose unnecessary costs on the consumer, particularly when other, more accessible or less costly arbitration avenues exist. Subsection (c)(3) also covers other restrictions and burdens that businesses may impose on consumers seeking to complain or respond to breach. For example, some businesses try to prevent consumers from posting their complaints publicly through negative reviews, by inserting so-called anti-disparagement clauses in their standard-form contract. Such attempts to limit the consumer’s ability to voice a complaint have been scrutinized by courts and legislatures. See, e.g., People v. Network Associates, Inc., 758 N.Y.S.2d 466 (N.Y. Sup. Ct. 2003) (enjoining the LLC from selling software under conditions that prohibited consumers from publishing reviews of the LLC’s products without the LLC’s consent); Palmer v. Kleargear, No. 13-cv-00175 (D. Utah 2013) (entering judgment against the defendant for violating the Fair Credit Reporting Act when the internet retailer billed customers following a negative review in accordance with its antidisparagement clause in the site’s terms and conditions); CAL. CIV. CODE § 1670.8 (making it unlawful for a contract to include a provision “waiving the consumer’s right to make any statement regarding the seller or lessor or its employees or agents, or concerning the goods or services”); Consumer Review Fairness Act of 2016 (Public Law No. 114-258). Such restrictions undermine the reputation mechanism. In consumer markets, in which legal forms of redress are often impractical or delayed, the existence of a robust reputation mechanism is particularly important. Contractual arrangements that purport to weaken it are therefore against public policy and substantively unconscionable. Subsections (c)(1) to (c)(3) enumerate important categories of substantively unconscionable terms, but they do not constitute an exhaustive list of such terms. The concept of substantive unconscionability has been developed in case law to encompass other contractual practices as well. Importantly, substantive unconscionability is closely related to the standard of “unfairness” under FTC law (compare FTC Act, 15 U.S.C. § 45(n)) and UDAP statutes. Seventeen state UDAP statutes prohibit unconscionable practices. See NATIONAL CONSUMER LAW CENTER (NCLC), UNFAIR AND DECEPTIVE ACTS AND PRACTICES (8th ed. 2012 & Supp. 2013). See also UNIFORM CONSUMER SALES PRACTICES ACT § 4 (UNIF. LAW COMM’N 1970). For example, charging an unconscionably high price has been found to be unfair under UDAP statutes. See NCLC, UNFAIR AND DECEPTIVE ACTS AND PRACTICES 289 n.818 (8th ed. 2012) (collecting cases). In UDAP case law, terms have been found to be substantively unconscionable when, for example, the contract price grossly exceeded the price at which similar goods or services were readily obtainable. See, e.g., Besta v. Beneficial Loan Co. of Iowa, 855 F.2d 532 (8th Cir. 1988) (holding that not telling Besta that she could have repaid the same loan with lower monthly payments in one-half the time deprived her of fair notice and amounted to unfair surprise, constituting procedural unconscionability); NCLC, UNFAIR AND DECEPTIVE ACTS AND PRACTICES 293 n.866 (8th ed. 2012) & Supp. 2013, at 44 (collecting cases). Terms have been found to be unfair also 95 © 2019 by The American Law Institute Tentative draft – not approved §5 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 Consumer Contracts when there was a low likelihood that the consumer would be able to receive the benefit of the bargain. See, e.g., Bennett v. Bailey, 597 S.W.2d 532 (Tex. 1980) (soliciting a client of a dance studio to commit to more service than she can potentially use). Terms have also been found to be unconscionable when there was a low likelihood that the consumer could pay the obligation in full and avoid debt collection and the associated losses. Beyond the more traditional “unfairness” criterion under FTC law and UDAP statutes, a new standard of “abusiveness” has been recently introduced by the Dodd–Frank Wall Street Reform and Consumer Protection Act of 2010, Pub L. No. 111-203, 124 Stat. 1376 (2010). The Consumer Financial Protection Bureau (CFPB), which was put in charge of enforcing that standard in the consumer-credit area, sees it as protecting against exploitation of consumers’ imperfect understanding and limited sophistication. CFPB Supervision and Examination Manual v. 2 (Oct. 2012). As the new standard is developed by courts and regulatory agencies, it may also inform the continued development of the unconscionability doctrine. Finally, the substantive-unconscionability test can be applied to scrutinize the contract price, but that should be done with extra care. When prices are salient—and they often are the most salient element of the transaction—egregiously high prices ought not to be held unconscionable by courts, unless they are specifically prohibited by statute, or unless special circumstances of the case justify a finding of procedural unconscionability. Prices are not always salient, and nonsalient, egregious prices (as well as salient but underappreciated egregious price dimensions) can be found unconscionable. An example is an excessively high fee for service that is incidental to the main purpose of the transaction (and which, therefore, the consumer may not have appreciated when ordering the service). See, e.g., Perdue v. Crocker Nat’l Bank, 702 P.2d 503 (Cal. 1985), which found that the overdraft fee charged by a bank might be substantively unconscionable. (Compare UNIFORM CONSUMER SALES PRACTICES ACT § 4(c)(2) (UNIF. LAW COMM’N 1970), adopted by many UDAP statutes.) A price may also be found procedurally unconscionable when it results from absence of meaningful choice due to market power of the business, pressure tactics during the negotiation and formation of the contract, or urgency. Accordingly, a price term has also been found to be unconscionable when it exceeded, by a substantial margin, market prices for similar goods or services that are readily available. See, e.g., UNIFORM CONSUMER SALES PRACTICES ACT § 4(c)(2) (UNIF. LAW COMM’N 1970). (See also Fritz v. Nationwide Mut. Ins. Co., Civ. A. No. 1369, 1990 WL 186448 (Del. Ch. Nov. 26, 1990) (including “a significant cost-price disparity or excessive price” in a multifactor test of unconscionability).) While cases finding a price term to be unconscionable are not common, the basic test—whether the term is overly harsh and whether it results in unfair surprise or from absence of meaningful choice—applies to price terms as it does to any other term in the contract. Such cases commonly involve short-term loan agreements with exceedingly high interest rates and other fees. See, generally, De La Torre v. CashCall, Inc., 422 P.3d 1004 (Cal. 2018); James v. National Financial, LLC, 132 A.3d 799 (Del. 2016). Procedural unconscionability. Since general contract law already provides for processbased invalidation doctrines (like duress, mistake, and misrepresentation), courts have labored to identify the type of procedural flaw that would be sufficient to render substantive 96 © 2019 by The American Law Institute Tentative draft – not approved Tentative Draft 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 §5 unconscionability actionable. While the stated procedural tests often require “absence of meaningful choice” or “undue surprise,” in many cases the procedural flaw is nothing more than the delivery of the terms in a nonnegotiable, standard-term document (sometimes labeled derogatorily “contract of adhesion”). The problem with that solution is that it proves too much. Are all consumer contracts procedurally unconscionable? Does the procedural unconscionability prong establish any meaningful requirement? The absence of a clear criterion for procedural unconscionability has diminished the usefulness of that requirement, and has led courts to set it aside in many cases. Courts have used the “sliding scale” approach to minimize the proceduralunconscionability requirement and emphasize the substantive-unconscionability requirement. See, e.g., Larry A. DiMatteo & Bruce Louis Rich, A Consent Theory of Unconscionability: An Empirical Study of Law in Action, 33 FLA. ST. U. L. REV. 1067 (2006) (surveying a large number of cases and finding that courts tend to focus on substantive, rather than procedural, unconscionability). To maintain the dual-test doctrine, but rest it on a more coherent conceptual framework that more closely tracks the doctrine’s normative underpinnings, this Section adopts an approach that is consistent with the notion of salience. A term is salient if it is likely to affect the contracting decisions of a substantial number of consumers. Salience is the heart of the procedural test. The great majority of standard terms are not salient, and such nonsalience alone—without additional procedural flaws—ought to meet the minimum quantum necessary for the procedural test. Accordingly, if standard terms are prima facie nonsalient, courts adjudicating an unconscionability claim can focus their attention on the substantive inquiry. And yet, if the standard form presentation of the term and its nonsalience are the only grounds for procedural unconscionability, a greater quantum of substantive unconscionability would be required. As a normative matter, salience is a suitable underlying test because competition can normally be counted on to police salient terms, but not nonsalient ones. If competition scrutinizes salient terms, courts need not provide additional discipline. Because competition does not police nonsalient terms, the existence of alternative sellers that the consumer could have purchased from should not provide a defense against unconscionability claims vis-à-vis nonsalient terms. If the relevant term is nonsalient, that term would not affect consumers’ choice among alternative sellers, and thus competition would not drive sellers to produce terms that respond to demand. As a result, even in a fiercely competitive market, sellers might all offer similarly unfairly one-sided standardform terms. See Russell Korobkin, Bounded Rationality, Standard Form Contracts, and Unconscionability, 70 U. CHI. L. REV. 1203 (2003). Note that a term may affect the purchasing decisions of many consumers and yet be misunderstood by (imperfectly rational) consumers who misinterpret the effect of the term to increase, rather than decrease, their benefit of the bargain. That term would affect the purchasing decisions of many consumers, but in the wrong direction. Courts may find such terms procedurally unconscionable. Such terms may also be policed under § 6 (Deception). Standard terms are not salient, even if they meet technical criteria of disclosure, or even if affirmed by signatures, because it is cognitively impossible to process and comprehend dense 97 © 2019 by The American Law Institute Tentative draft – not approved §5 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 Consumer Contracts quantities of information packaged in standard forms. Most consumers are not capable of carefully reading, and businesses that seek to take advantage of consumers who are unable to fully understand the standard contract terms should not enjoy full immunity simply by “shoving” comprehensive disclosure in front of such consumers. See Verna Emery v. American General Finance, Inc., 71 F.3d 1343 (7th Cir. 1995) (determining that the allegation that the plaintiff “belongs to a class of borrowers who are not competent interpreters of such forms and that the defendant knows this and sought to take advantage of it” was sufficient to withstand a motion to dismiss). However, a court may find that other processes of formation and of negotiation, including processes by which sellers disseminate information in the marketplace or processes by which consumers share such information among themselves, render a standard term salient. The concept of salience underlies the metrics regularly used by courts to evaluate the procedural-unconscionability claim. For example, a “lack of meaningful choice” occurs when the terms do not affect consumers’ contracting decisions. Similarly, an “unfair surprise” occurs only when the terms were not salient. Other tests, such as “hidden” or “unduly complex” contract terms, or “uneven bargaining power” are either synonymous with, or direct results of, nonsalience. The salience test is also similar to the test employed by the Uniform Commercial Code to evaluate warranty disclaimers. Under UCC § 2-316(2), the disclaimer must be “conspicuous,” as the Code “seeks to protect a buyer from unexpected and unbargained language of disclaimer” thus “permitting the exclusion of implied warranties only by conspicuous language or other circumstances which protect the buyer from surprise.” UCC § 2-316, Official Comment 1 (AM. LAW INST. & UNIF. LAW COMM’N) (emphasis added). If courts were to focus on the criterion of salience, rather than on technical elements like disclosure, they would be able to avoid undesirable circumvention of the unconscionability test. When the procedural-unconscionability test is based on formalistic tests like conspicuousness of the typeface or the comprehensiveness of the disclosure, businesses can be ensured that the terms will be enforceable, even if they are substantively unconscionable and nonsalient. Businesses design forms with large-type and bold-face fonts—but that are just as likely to remain unread by consumers. Rather than scrutinizing unread, standard-form terms, a conspicuousness-of-disclosure procedural-unconscionability test immunizes those terms from substantive scrutiny. The conspicuousness-of-disclosure rule brings about an outcome that is inconsistent with the rule’s underlying purpose. The salience criterion restores harmony between doctrine and policy. Further, using salience to determine whether disclosure was successfully conspicuous would provide appropriate underpinning to the conspicuousness test. The test should examine whether the term was surprising to many consumers. Using large typeface or all caps in printing the standard terms should not guarantee conspicuousness or salience. Nevertheless, various statutes provide a safe harbor for businesses that technically comply with disclosure or conspicuousness requirements. The salience test does not purport to override the explicit instruction of such provisions. The salience test could, however, provide a metric by which courts determine whether a disclosure was indeed conspicuous. Other statutes specify that conspicuousness is a necessary condition for enforceability, but not a sufficient condition. In those 98 © 2019 by The American Law Institute Tentative draft – not approved Tentative Draft §6 1 2 3 4 5 6 7 8 9 10 11 cases, courts must still apply the unconscionability doctrine, as restated here. For example, UCC § 2-316(2) (AM. LAW INST. & UNIF. LAW COMM’N) requires that disclaimers of warranties be conspicuous, and courts, after finding that the conspicuousness requirement has been met, have proceeded to scrutinize the disclaimers for unconscionability. See Martin v. Joseph Harris Co., 767 F.2d 296 (6th Cir. 1985) (considering the fact that the purchasers were uncounseled lay persons and that they were not at all aware of the fact that the disclaimer clauses in question altered significant statutory rights); Jefferson Credit Corp. v. Marcano, 302 N.Y.S.2d 390, 393-394 (N.Y. Civ. Ct. 1969) (“It can be stated with a fair degree of certainty that [the consumer] neither knew nor understood he had waived the implied warranty of merchantability and the implied warranty of fitness for a particular purpose, despite the fact that those waivers are printed in large black type in the contract.”). 12 § 6. Deception 13 14 15 16 (a) A contract or a term adopted as a result of a deceptive act or practice by the business is unenforceable by the business to the extent stated in § 9. (b) Without limiting the scope of subsection (a), an act or practice is deceptive if it has the effect of: 17 (1) contradicting or unreasonably limiting in the standard contract terms a 18 material affirmation of fact or promise made by the business before the consumer 19 assented to the transaction; or 20 21 22 (2) obscuring a charge to be paid by the consumer or the overall cost to the consumer. Comment: 23 1. Deception renders a contract or term voidable. This Section provides the consumer with 24 the power to avoid any contract or term that is a result of a deceptive act or practice by the business. 25 Deception undermines the premise that the contract term was agreed to and that it promotes the 26 interests of all contracting parties. Deception under this Section does not require an intent to 27 deceive. This Section expands the rule in the Restatement of the Law Second, Contracts, to permit 28 voidability for all terms that conflict with acts and practices that preceded the manifestation of 29 assent, even though the acts or practices may not be made or undertaken with an intent to deceive 30 and may not be material. Deception is evaluated in context: how the act or practice alleged to be 31 deceptive typically affects a consumer who is the target of such act or practice. Compare 99 © 2019 by The American Law Institute Tentative draft – not approved §6 Consumer Contracts 1 Restatement of the Law Second, Contracts § 164 (contract voidable as a result of a 2 misrepresentation that is either fraudulent or material). The consumer may avoid the specific term, 3 or, if the deceptive terms undermine the value of the contract as a whole, the entire contract. The 4 effect of severing a term from the contract is addressed in § 9. 5 2. Specific forms of deception. Subsection (b) lists two examples of acts or practices that 6 are prima facie deceptive. These two examples share a pattern in which the business draws the 7 consumer in with a false or misleading affirmation of fact or promise, which the business then 8 attempts to undo or qualify in a less noticeable manner. 9 Subsection (b)(1) establishes that it is deceptive to make a material affirmation of fact or 10 promise that is contradicted by or unreasonably limited in the standard contract terms. (See 11 § 1(a)(6) for the definition of “affirmation of fact or promise.”) For example, it is deceptive to 12 represent that a service is covered by an extensive warranty when the standard contract terms 13 include broad disclaimers of implied warranties and other limitations on the business’s liability. In 14 the same spirit, a clause in the standard contract terms claiming precedence over contract terms 15 individually and expressly negotiated is voidable. 16 A consumer alleging that a standard contract term contradicts or unreasonably limits an 17 affirmation of fact or promise under subsection (b)(1) has to prove the existence of such a deceptive 18 affirmation of fact or promise. It would be easier to prove the claimed prior affirmation of fact or 19 promise if it was made in the form of a public advertisement. It would be more difficult for a 20 consumer to prove the claimed prior affirmation of fact or promise if it was made privately in the 21 form of an oral statement by an agent of the business to the consumer (see § 8.) If the consumer 22 provides evidence of the affirmation of fact or promise, the business may then seek to demonstrate 23 circumstances that render its affirmation or promise nondeceptive, for example by showing that 24 additional precontractual communications between the parties reflected the provision subsequently 25 adopted in the standard contract terms. 26 Subsection (b)(2) establishes that it is deceptive to make a false or misleading 27 representation about price. In many consumer contracts, price is multidimensional, comprised of 28 different fees, rates, discounts, rebates, add-ons, etc. It is misleading for a business to unduly 29 emphasize certain price dimensions, while relegating other price dimensions to the standard 30 contract terms, if such emphasis obscures the total cost. When certain price dimensions are 31 contingent upon the occurrence of future events, it is deceptive for a business to make a false or 100 © 2019 by The American Law Institute Tentative draft – not approved Tentative Draft §6 1 misleading affirmation of fact or promise about the likely occurrence or nonoccurrence of such 2 events. It is also deceptive to induce consumers to pay an additional price for add-ons or services 3 that are reasonably available to the consumer for little or no charge, implicitly representing that 4 such payments are necessary to obtain the services. 5 Illustrations: 6 1. A business advertises on its website a “complete assembled product,” but the 7 product is delivered as a “do it yourself” kit for assembly by the consumer. The standard 8 contract terms to which the consumer clicked “I Agree” when purchasing the product 9 contained a disclaimer “notwithstanding any representation made elsewhere, it is agreed 10 that the product will be delivered unassembled and will require further assembly by the 11 consumer.” The explicit advertisement on the website, which is an affirmation of fact, is 12 deceptive, and the disclaimer in the standard contract terms is voidable by the consumer. 13 (Compare UCC § 2-316(1).) 14 2. A business sells a service along with the statement: “free cancellations with full 15 refunds, without restrictions, up to 90 days, no questions asked.” During checkout, the 16 consumer agrees to Terms and Conditions that contain a provision permitting cancellations 17 and refunds of purchased service only if the service has not been used. The “free 18 cancellations” affirmation is deceptive and the limitation on returns in the standard contract 19 terms is voidable. 20 3. A consumer orders a concert ticket on a website. On the checkout webpage, a 21 service fee of $10 appears, as well as a prominent link to “Terms and Conditions.” The 22 consumer manifests assent to the transaction by clicking “I Agree.” Among the standard 23 contract terms in the “Terms and Conditions” page is a two-dollar surcharge added to all 24 services, to be charged separately to the consumer’s credit card. The representation that the 25 service fee amounts to $10 is deceptive and the two-dollar surcharge term is voidable. 26 4. A business advertises, “Free Phone” for new customers joining the service. An 27 easily visible asterisk is attached to the phrase “Free Phone” referring the recipient to a 28 footnote, printed at the bottom of the advertisement page, which states: “some fees and 29 charges may apply.” The consumer is charged a sales tax and connection fees when 30 receiving the phone. The “Free Phone” affirmation in the advertisement is not deceptive 101 © 2019 by The American Law Institute Tentative draft – not approved §6 Consumer Contracts 1 because the qualification was presented in a manner that is reasonable and therefore 2 becomes part of the affirmation itself. 3 3. Deception as to value. An affirmation of fact or promise is deceptive if it would imply 4 to a reasonable consumer that the contract’s value substantially exceeds the actual value a 5 consumer derives from the contract. 6 Illustration: 7 5. A business sells a kitchen appliance and with it sells, for an additional price, a 8 two-year service contract, commencing on the date of purchase. The appliance comes with 9 a manufacturer’s warranty offering the same protection as the service contract, albeit for a 10 period of one year. Selling the service contract is deceptive, unless the business explains 11 that the service contract provides only one year of additional coverage. 12 4. Deception in solicitation of acceptance. It is deceptive to solicit consumers’ entry into 13 an ancillary contract without their knowledge. Such deception may be done by inducing the 14 consumer to receive and not reject an unsolicited free product, accompanied by standard terms 15 that, unbeknownst to the consumer, stipulate recurring deliveries by the business at a stated price. 16 “Negative option” contracts can be beneficial, as they allow consumers to receive uninterrupted 17 services without the hassle of having to renew them. However, “negative options” are deceptive 18 when the business misrepresents the scope of acceptance, obscuring the obligation to pay and 19 relegating it to the standard contract terms. 20 Illustrations: 21 6. A business offers a product to a consumer for free during a trial period, and then 22 charges the consumer periodically until she cancels the arrangement. Unless the automatic 23 renewal is clearly stated in the inducing solicitation and the consumer is informed how to 24 cancel the arrangement, it is deceptive. 25 7. A business offers the consumer a service with “no contract.” The service is 26 governed by standard contract terms to which the consumer clicked “I Agree.” Those terms 27 do not include any duration commitment and do not reflect a termination fee. The 28 affirmation of “no contract” is not deceptive because consumers frequently view the term 29 “no contract” as implying there is no long-term commitment and no termination fee. If, 102 © 2019 by The American Law Institute Tentative draft – not approved Tentative Draft §6 1 however, the standard contract terms contain a termination fee, the “no contract” 2 affirmation is deceptive and any term inconsistent with free exit is voidable. 3 5. Relevance of reliance. The rules in this Section provide for avoidance of a contract or 4 term when that contract or term was agreed to “as a result of” a deceptive act or practice. Compare 5 Restatement of the Law Second, Contracts § 167 (When a Misrepresentation Is an Inducing Cause). 6 The causation requirement can be satisfied either by the satisfaction of (i) an actual-reliance 7 requirement (as in the common law of fraud; see Restatement of the Law Third, Torts: Liability 8 for Economic Harm § 11; Restatement of the Law Second, Torts § 552), or (ii) a requirement that 9 a typical consumer entering such transactions is entitled to rely on the allegedly deceptive act or 10 practice when agreeing to the contract or term (compare the Federal Trade Commission’s Policy 11 Statement on Deception (1983), which rejects an actual-reliance requirement and states that 12 deception occurs when a material representation or omission is “likely to mislead” consumers 13 acting reasonably in the circumstances; see also the “basis of the bargain” test under UCC § 2- 14 313). Elaborating on interpretation (ii), a deceptive advertisement can affect the market 15 equilibrium (e.g., by raising the market price) and may thus affect all consumers alike, including 16 those who were not aware of it and did not rely on it. Accordingly, deception under this Section 17 could result in the avoidance of a contract or term, even if the specific consumer-plaintiff did not 18 see the advertisement. The rule in this Section is also consistent with the general principle of 19 estoppel, preventing a business that engaged in a deceptive act or practice from claiming a right to 20 the detriment of a consumer who was entitled to rely on the business’s conduct. 21 6. Effects of deception. The ordinary consequence of a conflict between an affirmation of 22 fact or promise and a standard contract term under this Section is the removal of the standard 23 contract term from the agreement, to the extent necessary to avoid the conflict. If severance of 24 specific standard contract terms is not sufficient to undo the conflict with the affirmation of fact or 25 promise, the consumer may avoid the contract in its entirety. Any terms voided under this Section 26 may be replaced by provisions consistent with the affirmation of fact or promise made to the 27 consumer and, if necessary, by gap-fillers in accordance with the guidelines in § 9. 28 7. Shield versus sword. A deception claim can be used as a defense (“shield”). For example, 29 if a business sues to collect money charged to, but unpaid by, the consumer, the consumer can 30 defend by showing that the charge had arisen from a deceptive term. The same deception claim 31 can be made by the consumer as a plaintiff, if, for example, a deceptive charge was already 103 © 2019 by The American Law Institute Tentative draft – not approved §6 Consumer Contracts 1 collected by the business, and the consumer is suing to recover it. In that procedural posture, it is 2 sometimes said that the deception claim is used as a “sword.” That description is misleading. The 3 deception claim is used to challenge the business’s exercise of an alleged contractual right, as in 4 the traditional “shield” cases. A true “sword” application would arise if the consumer has a cause 5 of action for the mere inclusion of a deceptive term in the contract. Some state consumer-protection 6 laws create a deception-based affirmative right of action and allow consumers to sue for statutory 7 damages. Such statutory claims fall outside the scope of this Restatement. 8 9 8. Relation to other law. The rules restated in this Section are related to several other legal doctrines, both within and beyond traditional contract law: 10 (a). Law of precontractual misrepresentation. This Section is consistent with the 11 general principle that agreements reached as a result of a material misrepresentation are not 12 binding. See Restatement of the Law Second, Contracts, Chapter 7, Topic 1. It is also consistent 13 with the tort of misrepresentation. See Restatement of the Law Second, Torts § 552; Restatement 14 of the Law Third, Torts: Liability for Economic Harm § 9. Whereas the standard result of 15 precontractual misrepresentation under contract law is to render the entire agreement voidable, and 16 under tort law to recover the pecuniary loss caused by reliance on the misrepresentation, this 17 Section as an alternative enables courts to strike the standard contract terms that are inconsistent 18 with the affirmations of facts or promises and enforce the remainder of the contract (see § 9), 19 thereby protecting the consumer’s forward-looking expectation. That result is often more practical 20 and favorable to consumers than outright cancellation of the contract or the recovery of reliance 21 damages. 22 (b). Federal and state anti-deception law. This Section is consistent with federal 23 and state anti-deception law. At both the federal and state level, statutory law, as applied by 24 agencies and courts, protects consumers against deception. Those laws share the same goal as 25 this Section—to prevent deceptive affirmations of fact or promises—and they often provide 26 redress beyond the avoidance of a contract or term or the enforcement of a specific contract. This 27 Section does not expand the reach of the statutory anti-deception law, but merely clarifies an 28 additional consequence of deception—the voidability of some contract terms. 29 (c). Parol-evidence rule. This Section affects the resolution of conflicts between 30 standard contract terms and prior oral representations, and, specifically, prevents standard contract 31 terms from overriding or modifying prior affirmations of fact or promises that are part of the 104 © 2019 by The American Law Institute Tentative draft – not approved Tentative Draft §6 1 bargain in fact. See, in particular, subsection (b)(1). While the common law’s parol-evidence rule 2 generally gives precedence to written terms over prior oral statements, the fraud or 3 misrepresentation exception to the parol-evidence rule is consistent with the rule restated in this 4 Section. (See Restatement of the Law Second, Contracts § 214(d).) Indeed, the parol-evidence rule 5 gives precedence to a written document when the parties intend for that document to be the only 6 source of their contractual obligations (superseding prior oral or written agreements and 7 contemporaneous oral agreements); no such intent can be inferred when an affirmation of fact or 8 promise is deceptively undermined by the standard contract terms that are only weakly scrutinized 9 by consumers. See also § 8. 10 (d). Exclusion or modification of warranties. Some of the rules restated in this 11 Section prevent a business from making an express promise and then attempting to exclude or 12 modify this promise in the standard contract terms. See, in particular, subsection (b)(1). These 13 rules are consistent with UCC § 2-316, which requires that an express warranty and its disclaimer 14 “be construed wherever reasonable as consistent with each other” or, when that cannot be done, 15 requires that the limitation be rendered inoperative (see, in particular, Official Comment 1), and 16 the Magnuson–Moss Warranty Act, 15 U.S.C. § 2308. REPORTERS’ NOTES 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 Deception is one of the main concerns permeating consumer-contract law. This Section restates the general rule that a contract or term agreed to as a result of deception is voidable. This Section then proceeds to delineate acts or practices that are deceptive. These acts or practices share a common theme: affirmations or promises undermined by subsequent standard contract terms. The concern is that a business would make a representation designed to attract consumers and then undermine that representation in its standard contract terms. The rules restated in this Section designate such acts or practices as deceptive, rendering voidable any standard contract term that is inconsistent with the prior representation. The law of deception plays a central role not only in consumer-contract law (and the common law in general), but also in statutory consumer-protection law. In practice, deceptive acts and practices give rise to lawsuits that raise both contract-law claims and claims under the relevant consumer-protection statute. Recognizing the similarity between those bodies of law—their shared policy to combat deception and their application in similar situations—this Section explicitly incorporates doctrines originally developed under federal and state anti-deception law (specifically, Section 5 of the Federal Trade Commission Act and state unfair and deceptive acts and practices statutes). 105 © 2019 by The American Law Institute Tentative draft – not approved §6 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 Consumer Contracts Deception should be understood broadly to encompass not only outright fraud, but any act or practice that is likely to mislead the reasonable consumer. The emphasis is on the consumer’s false perception, not on the business’s intent to deceive. Indeed, a reasonable consumer might be deceived, even when the business had no intention to deceive. (Compare FTC Policy Statement on Deception, Letter to John D. Dingell, Chairman, Subcommittee on Oversight and Investigations, Committee on Energy and Commerce (Oct. 14, 1983), reprinted as applied to In re Cliffdale Assoc., 103 F.T.C. 110, 174 (1984).) The law of deception, so understood, places a burden on the business to police representations made by its agents and verify that they are not inconsistent with the standard contract terms that it offers. Deception may apply to the mere presence of an obligation to pay. A business is acting deceptively when it induces consumers to enter a contract and accept an obligation to pay without their knowledge. Such is the case when consumers receive unsolicited products that are reasonably perceived to be provided for free, and when the obligation to pay for those products appears only in the standard contract terms. That may occur at the initiation of a transaction, or at the time of renewal. Misleading, negative options are regarded as an unfair and deceptive practice by the Federal Trade Commission and a number of state attorneys general. See, e.g., Federal Trade Commission and State of Connecticut v. LeanSpa, LLC, 920 F. Supp. 2d 270 (D. Conn. 2013) (denying motions to dismiss complaints regarding how LeadClick defendants deceptively solicited consumers to sign up for an allegedly free trial of the product); Federal Trade Commission v. NextClick Media, LLC., C08-1718-VRW (N.D. Cal. Nov. 3, 2009); Federal Trade Commission v. UltraLife Fitness, CV08-07655-DSF-PJW (C.D. Cal. Dec. 3, 2008); State ex rel. Miller v. Vertrue, Inc., 834 N.W.2d 12 (Iowa 2013) (dealing with an action brought by the state attorney general against Vertrue for consumer fraud, including deceptively offering consumers free trial memberships with negative options). To curb the potential for abuse, the Federal Trade Commission enacted a rule that requires sellers who engage in negative-option marketing to satisfy a “clear and conspicuous” standard of disclosure. The rule also requires that consumers manifest affirmative consent to the negative-option offer and that businesses establish simple cancellation procedures that allow consumers to easily exit negative-option plans at any time. See 16 C.F.R. Part 425 (1998). A related deceptive practice under subsection (b)(2) is “post-transaction marketing,” in which a third-party company deceptively offers purportedly discount subscription services for a fee while a consumer completes the online check-out process from a known vendor. The offer is often deceptively entitled “Reward” or “Bonus” and at first glance appears to be some sort of gift. The consumer is asked to accept the offer by entering his or her email address, completing a survey, or entering the last four digits of his or her credit-card number. Once this step is completed, the known merchant will automatically transfer the consumer’s payment information to the third-party vendor and the consumer’s credit card will be automatically billed a small amount each month until the consumer notices the charge and figures out how to cancel it. Notice of the obligation to pay for the membership rewards is generally hidden in tiny print under deceptive titles, such as “Claim Prize Here” or “Free Coupon” for services associated with the known vendor. This practice 106 © 2019 by The American Law Institute Tentative draft – not approved Tentative Draft §7 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 has been declared deceptive in actions brought by the Federal Trade Commission and various state attorneys general. See, e.g., Minnesota ex rel. Hatch v. U.S. Bancorp, Inc., No. 99-872 (D. Minn. 1999); In re AT&T Mobility, No. 09-2-00463-1 (Wash. Dist. Ct. Feb. 26, 2009); FTC v. Smolev, No. 01-8922-CIV-ZLOCH (S.D. Fla. Nov. 27, 2001); Illinois v. Blitz Media, Inc., No. 2001-CH592 (Sangamon Co. Ill. Dec. 2001). Furthermore, the practice of automatic transfer of consumerpayment information from a merchant to a third-party vendor has been rendered illegal by the Restore Online Shoppers’ Confidence Act, 15 U.S.C. § 8401 (2010). The Act also makes it unlawful for a post-transaction third-party seller to charge, or attempt to charge, a consumer for products sold online unless the material terms of the transaction are clearly disclosed to the consumer, and the seller obtains the consent and payment information directly from the consumer. Price is one of the most important elements of a consumer contract—an element that the consumer will often be keenly aware of. It would thus seem more difficult to deceive the consumer about price. Still, deception about price exists, and is addressed in subsection (b)(2) (see also Comment 2). In many consumer contracts, price is multidimensional, including multiple, possibly contingent fees and rates, discounts, rebates, add-ons, etc. Price deception might occur when the seller emphasizes one (or more) price dimension(s), while obscuring other price dimensions. An unnecessarily complex and multidimensional pricing scheme designed to conceal the true cost of the product or service can be deceptive in and of itself. Adding nonsalient price dimensions that are likely to be ignored or underestimated by the consumer can also be deceptive. 20 § 7. Affirmations of Fact and Promises That Are Part of the Consumer Contract 21 (a) An affirmation of fact or promise made by the business that creates a reasonable 22 expectation by a reasonable consumer who is its intended audience that the subject matter 23 of the contract will have the described attribute becomes part of the consumer contract. 24 (b) An affirmation of fact or promise made by a third party that creates a reasonable 25 expectation by a reasonable consumer who is its intended audience that the subject matter 26 of the contract will have the described attribute: 27 (1) becomes part of the contract between the business and the consumer if: 28 (A) the business knew or reasonably should have known of it, and 29 (B) the consumer could have reasonably believed that the business 30 intended to stand behind the affirmation or promise; and 31 (2) creates a contractual obligation of the third party to the consumer, even if 32 the third party did not transact directly with the consumer, so long as the third party 33 has an appreciable financial interest in the contract between the business and the 34 consumer. 107 © 2019 by The American Law Institute Tentative draft – not approved §7 Consumer Contracts 1 (c) Standard contract terms that purport to negate or limit affirmations of fact or 2 promises that become part of the consumer contract under subsections (a) and (b) are not 3 enforceable. 4 Comment: 5 1. Generally. This Section deals with representations made by businesses that become part 6 of the consumer contract and that address various objective aspects of the value the consumer can 7 expect from the transaction. Those affirmations of fact and promises include matters that 8 traditionally come under the law of express warranties, but also aspects like comparative cost, 9 price, and discounts (including rebates). The affirmations of fact and promises may be made in 10 any statement, description of the subject matter of the contract, exhibitions of a sample or model 11 depicting that subject matter, promises made by businesses’ representatives, or any other form of 12 communication in the course of contracting (see § 1), as well as communications made in the 13 precontractual phase by parties who are not in immediate contractual relation with the consumer 14 but who have an appreciable financial interest in the transaction. 15 2. Reasonable expectations. An obligation under this Section arises from an affirmation of 16 fact or a promise that creates reasonable expectations by a consumer who is their intended 17 audience, that the subject matter of the contract will have the described attributes. The test is an 18 objective one—whether a reasonable person would have formed such expectations—and does not 19 require proof of the specific expectation formed by the consumer. Factors such as the materiality, 20 salience, and prominence; specificity and definiteness; certainty; and verifiability of the 21 representation determine whether the representation is indicative of a commitment and is made 22 part of the consumer contract. Sales talk that is reasonably understood as “puffing” or statements 23 of opinion do not become part of the basis of the bargain. 24 3. Advertising. A contractual obligation can arise based on affirmations or promises made 25 in advertising. In the context of advertising, some puffing is more likely and therefore some degree 26 of skepticism about the information content is reasonable. Nevertheless, language in advertising 27 that is specific, verifiable, and/or indicative of commitment should be treated no differently than 28 such language used in any other context. 108 © 2019 by The American Law Institute Tentative draft – not approved Tentative Draft 1 §7 Illustration: 2 1. A business advertises that a gaming hardware is compatible with gaming 3 software of another system. A consumer purchases the gaming hardware. The 4 advertisement creates an obligation that the device be compatible with the other system. 5 4. Timing of affirmations or promises. Normally, the affirmations or promises that are part 6 of the consumer contract are made prior to the consumer’s manifestation of assent. However, this 7 Section does not restrict its application to such precontractual statements. Some are made after the 8 consumer manifests assent, in accordance with § 2, or in the course of a modification of the 9 contract. See Uniform Commercial Code (UCC) § 2-313, Official Comment 7 (explaining that a 10 post-assent affirmation or promise can become a modification). It is common for warranty 11 statements to be sealed in the box, and consumers reasonably expect the party making the warranty 12 to stand by its promise. 13 Illustrations: 14 2. One year after purchasing a software program, a consumer receives a notice from 15 the business that an update is available for download. The notice also highlights some new 16 functionalities of the updated version and a statement that it is compatible with more 17 hardware platforms. The consumer downloads the software update. The notice creates an 18 obligation that the updated version conform to the description. 19 3. A consumer purchases a car from a dealership. Two weeks later, on an icy day, 20 when the consumer picks up the car from the lot, in response to the consumer’s inquiry, 21 the salesperson tells the consumer that the car is equipped with anti-lock brakes. The 22 affirmation becomes part of the consumer contract, which thus includes an obligation to 23 supply anti-lock brakes. 24 4. A consumer purchases an appliance from a store, along with an installation and 25 extended-service contract. Two week later, when the appliance is delivered and installed, 26 the store’s installer tells the consumer that the service contract includes a 10 percent 27 discount on parts. The affirmation becomes part of the consumer contract, which thus 28 includes the 10 percent discount. 109 © 2019 by The American Law Institute Tentative draft – not approved §7 Consumer Contracts 1 5. Affirmations of fact or promises by third parties. An obligation of the business can arise 2 from precontractual affirmations of fact or promises made by other parties, if the consumer could 3 reasonably view the business as standing behind the affirmation or promise and the business knew 4 or should have known of the affirmation or promise. Those third parties are typically parties who 5 are prior links in the normal chain of distribution or involved in procuring customers for the 6 business. For example, such affirmations or promises are often made by a manufacturer and appear 7 in advertising, or as claims made on the package, although the consumer only transacts directly 8 with a retailer. In those circumstances, the affirmations or promises that contribute to the 9 consumer’s willingness to enter into the contract and to pay for its subject matter directly benefit 10 the business (i.e., the retailer). Further, consumers often do not know which entity is responsible 11 for making the affirmation or promise—whether it is the entity with whom they transact or a prior 12 link in the chain of distribution—and reasonably believe that the business intends to stand behind 13 the claims made in the affirmations or promises. It would be both inefficient and unfair to place 14 on consumers the burden of distinguishing between the representing and contracting parties. Thus, 15 even a business that did not know of such affirmations or promises may nevertheless be bound to 16 them, unless it can also be established by the business that it could not have reasonably known of 17 them. The rule in subsection (b)(1) does not apply to standard terms supplied by the third party, 18 such as warranty statements sealed in the box, unless the third party made reference to those terms 19 in a manner that could reasonably have brought them to the attention of the consumer and the 20 business prior to the contract. But, under subsection (b)(2), such standard terms may create a direct 21 obligation of the third party to the consumer. 22 6. Obligation without contract privity. A third party that makes an affirmation of fact or a 23 promise that creates a reasonable expectation by a reasonable consumer who is its intended 24 audience that the subject matter of the contract will have the described attribute may be 25 independently obligated under subsection (b)(2) to ensure that the contract conforms to its 26 affirmation of fact or promise, even if it does not contract directly with the consumer. Such 27 obligation to a remote consumer is consistent with the manifest intention of the party making the 28 affirmation of fact or promise, and with longstanding market norms. For example, a “limited 29 warranty” statement enclosed in the box by a manufacturer who has not contracted directly with 30 the consumer creates an obligation on the manufacturer to stand by its promise. (Compare § 2 31 Comment 7, explaining when the obligation by a third party is adopted as part of the contract.) 110 © 2019 by The American Law Institute Tentative draft – not approved Tentative Draft §7 1 This obligation generally applies to third parties that are businesses in the supply chain, 2 such as a manufacturer or wholesale distributor, who have an appreciable financial interest in the 3 specific transaction that is the subject of the contract between the business and the consumer. But 4 the obligation could potentially apply to third parties not in the supply chain but who nonetheless 5 have an appreciable financial interest in the specific transaction. For example, it could apply to 6 affirmations or promises by a third party hired by the business to solicit customers for the business, 7 or by a trade organization representing a group of businesses with similar interests. In contrast, it 8 would not apply to affirmations or promises by individual consumers based on their personal 9 experiences with the business or the product or service, or by agents of the consumer, or by 10 independent testers and reviewers not affiliated with the business or others in the supply chain. 11 Liability would chill the activity and speech of such third parties, and they are unable to reallocate 12 that liability to the business with whom they do not have a contractual relationship. In some 13 circumstances, however, the consumer may have a separate contractual relationship with advisors 14 or other third parties who shape the consumer’s expectations and decisions, and separate causes of 15 action may arise under those contracts. 16 Illustration: 17 5. A consumer purchases a car from a dealer and does not transact directly with the 18 car’s manufacturer. The car comes with an owner’s manual from the manufacturer that 19 contains a “limited warranty,” which is intended to inform the consumer about the scope 20 of the express warranty provided by the manufacturer. Under subsection (b)(2), the 21 “limited warranty” creates a contractual obligation by the manufacturer to the consumer. 22 Because the “limited warranty” does not create a reasonable expectation that the dealer 23 would be obligated on the warranty, it does not become part of the contract between the 24 consumer and the dealer. 25 7. Inability to negate or limit the effects of an affirmation or promise. When a business or 26 third party makes an affirmation or promise that becomes part of the contract between the business 27 and the consumer or creates an obligation of the third party toward the consumer, the effect of that 28 affirmation or promise cannot be negated or limited in the standard contract terms. See also § 8, 29 Comment 3. Compare: UCC § 2-316(1). Note, however, that when an affirmation of fact or 30 promise contains its own limitation, the affirmation of fact or promise and the limitation must be 111 © 2019 by The American Law Institute Tentative draft – not approved §7 Consumer Contracts 1 construed whenever reasonable as consistent with each other, but the limitation is inoperative to 2 the extent that such construction is unreasonable. 3 8. Remedy. Affirmations and promises that may become part of the contract under this 4 Section, if they are not honored by the business or the third party, give rise to standard remedies 5 for breach of contract. 6 9. Relation to the Uniform Commercial Code and to warranty law. The rule restated in 7 subsection (a) is consistent with UCC § 2-313 and reflects the application of the “basis of the 8 bargain” principle beyond the sales-of-goods context without the use of that language. The rule 9 restated in subsection (b)(1), while formally broader than UCC § 2-313, derives from the same 10 principle. The rule of subsection (b)(2) goes beyond existing obligations created under the UCC 11 and reflects the Magnuson−Moss Warranty Act, 15 U.S.C. § 2301, which contemplates 12 enforceable warranty obligations by remote “suppliers” to consumers, and establishes the format 13 that such warranty statements, when made, must have. REPORTERS’ NOTES 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 Consumer contracts are often preceded by various affirmations of fact and promises that are intended to arouse consumer interest in the subject matter of the contract, to create expectations about specific attributes of the transaction, to increase consumers’ willingness to pay the quoted price, and ultimately to encourage consumers to enter into a contract. Those communications can be done through advertising, front-of-the-box claims, demonstrations, samples, and various other salient ways that can be reasonably understood by consumers as supplying concrete information about the transaction. They are also done after the consumer manifests assent to the transaction, through manuals, warranty statements, and other channels that inform consumers about the subject matter of the contract. This Section is intended to hold the business, and potentially other third parties, to the truth of those affirmations and promises. It thus serves several purposes. First, it affords protection to consumers’ reasonable expectations. Second, it enables businesses to make credible representations and to be taken seriously by their target customers. Lastly, it reduces consumers’ need to rely on more expensive search and verification tools, and thus improves the efficiency of the marketplace. In many markets, the parties that make such affirmations and promises are ones who participate in earlier links of the chain of distribution and who benefit directly from an increased volume of purchases by consumers, but who do not deal directly with the consumers and thus do not have contractual privity. For example, original manufacturers or importers of the products make various representations through ads and labels directed at the consumer, but they are not a party to the subsequent retail contract, which is concluded between a consumer and the retail outlet. Similarly, trade associations might make similar representations also intended to affect demand. 112 © 2019 by The American Law Institute Tentative draft – not approved Tentative Draft 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 §7 In some cases, there is a post-purchase formation of a separate contract with the manufacturer (as, for example, when a consumer installs a computer or software purchased from a retailer, and is asked to adopt additional terms provided by the computer manufacturer or the software transferor). But often there is only one contract, with the direct retailer. Nevertheless, consumers’ interest in that transaction may have been triggered, in significant part, by representations made by such third parties, and those representations are as much a part of the contract, in the mind of consumers, as if the retailer made them. That is also the case when a warranty statement by a third party is sealed in the box. While consumers rarely see the warranties before entering the contract with the business, the expectation that a warranty attached to a product will create a binding obligation often drives the consumers’ willingness to enter the contract. This Section is intended to provide consumers with a level of protection that is not diminished by the separation between the representing party and the transacting party (the retailer). Consumers often do not know if they have a contract with the representing party, and the burden to become aware of such matters would be expensive and inefficient. To secure that level of protection for consumers who received precontractual affirmations and promises from third parties, subsection (b)(1) makes the business liable for representations made by third parties provided that the business knew or had reason to know of the representations and the consumer could have reasonably believed that the business intended to stand behind the representations. Since the business benefits from such representations in terms of consumers’ willingness to transact, it should also be liable for their breach. This rule is consistent with Uniform Commercial Code § 2-313 (AM. LAW INST. & UNIF. LAW COMM’N), which states, inter alia, that “[a]ny description of the goods which is made part of the basis of the bargain creates an express warranty that the goods shall conform to the description.” A store that displays goods in their boxes thus provides an express warranty that the goods in the boxes will conform to the labels on the boxes. This principle is consistent with the rulings in Keith v. Buchanan, 220 Cal. Rptr. 392 (Cal. Ct. App. 1985) (determining that representations made in the sales brochure amounted to express warranties); Beckett v. F. W. Woolworth Co., 28 N.E.2d 804 (Ill. App. Ct. 1940) (holding that a retailer permitting the sale of mascara with an express warranty on the container and a card assumed responsibility that it was harmless for the use for which it was intended); Postell v. Boykin Tool & Supply Co., 71 S.E.2d 783 (Ga. Ct. App. 1952) (deciding that a retailer, in stating that he would stand behind what turned out to be defective paint, knew that the purchaser would look to him rather than to the manufacturer to make good any defect, and he sold the paint subject to that condition); Dorfman v. Nutramax Labs., Inc., No. 13cv0873 WQH (RBB), 2013 WL 5353043 (S.D. Cal. Sept. 23, 2013) (ruling in favor of a plaintiff alleging that claims on the label of a joint health supplement were false and misleading insofar as the label stated that the product would protect cartilage and reduce joint pain). But see In re Hydroxycut Mktg. & Sales Practices Litig., 299 F.R.D. 648, 657 (S.D. Cal. 2014) (dismissing class-action express-warranty claims because plaintiffs had not specified who made the representations that they were exposed to prior to purchasing the products). 113 © 2019 by The American Law Institute Tentative draft – not approved §7 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 Consumer Contracts Further, to preserve the integrity of precontractual affirmations and promises, the party who makes them in expectation that they would be part of the contract with the consumer should be held responsible for the truth of its representations, even if it does not deal directly with the consumer. Thus, subsection (b)(2) allows the consumer to recover not only from the party to the transaction (the retailer), but also from the party originally making the affirmations of facts or promises. This is the case even though the consumer does not have contractual privity with that third party. This rule is consistent with the Magnuson−Moss Warranty Act, 15 U.S.C. § 2301, which contemplates liability by a supplier making a warranty to a remote purchaser. The Act applies to a party who is “engaged in the business of making a consumer product directly or indirectly available to consumers.” 15 U.S.C. § 2301(4) (emphasis added). FTC regulations confirm that such remote suppliers are creating an enforceable obligation. For example, “The supplier of the refrigerator [to be installed in a boat or RV] relies on the boat or vehicle assembler to convey the written agreement to the consumer. In this case, the supplier’s written warranty is to a consumer, and is covered by the Act.” (16 C.F.R. § 700.3(c)). While such warranty arises in the absence of privity, it only operates between the party making the warranty and the specific persons to whom that party directed its warranty statement, namely the customer. Many cases find that an express warranty arises despite the absence of privity. See, e.g., Kinlaw v. Long Manufacturing N.C., Inc., 259 S.E.2d 552, 557 (N.C. 1979) (finding absence of privity not fatal to remote buyer’s claim for breach of an express warranty against manufacturer when plaintiff purchased a new tractor from dealer and the tractor came with an owner’s manual from manufacturer); Stepp v. Takeuchi Mfg. Co. (U.S.), No. C07-5446RJB, 2008 WL 4460268, at *10 (W.D. Wash. Oct. 2, 2008) (“The privity requirement is ‘relaxed,’ however, if the manufacturer makes express representations to the plaintiff and the plaintiff knows of such representation.”); Cardinal Health 301, Inc. v. Tyco Electronics Corp., 87 Cal. Rptr. 3d 5, 27 (Cal. Ct. App. 2008) (finding sufficient privity between a buyer and its manufacturer’s successor, because although the successor did not itself engage in negotiations with the purchaser as to the initial purchase agreement, it accepted and benefited from those negotiations in taking the place of the original product supplier); Prairie Prod., Inc. v. Agchem Div.-Pennwalt Corp., 514 N.E.2d 1299, 1302 (Ind. Ct. App. 1987) (ruling that written affirmations created an express warranty from defendant corporation to plaintiff despite the corporation being a remote manufacturer with no contractual privity). But see Sanders v. City of Fresno, 65 Fed. R. Serv. 3d 960 (E.D. Cal. 2006) (holding a victim’s breach-of-warranty claims against a Taser manufacturing company did not fit into the exception to the privity requirement for reliance on the manufacturer’s written representations in labels or advertising materials). See generally James J. White, Warranty in the Box, 46 SAN DIEGO L. REV. 733, 749-751 (2009) (“thousands of claims are made against these [third-party] warranties each year, but we find no case in which a remote seller of new goods who has made an express warranty packaged with the product has denied the legal effectiveness of that warranty.”) Under subsection (c), the obligations arising under this Section cannot be derogated from through less-noticeable standard contract terms. There is a concern that businesses would draft 114 © 2019 by The American Law Institute Tentative draft – not approved Tentative Draft §8 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 express limitations in the standard contract terms intended to undo the effect of precontractual representations. While the stipulation of conditions and limitations is often necessary and permissible, especially when those do not conflict with the precontractual affirmations of fact or promises, they have the potential of reducing or completely eliminating the value to consumers of liability for precontractual representations. Such limitations are inoperable if deceptive (under § 6) or if they negate the reasonably expected effect of the precontractual affirmations and promises (under this Section). A business seeking to limit the liability arising from its precontractual representations must do so as part of the representation itself. If a business is held liable for representations made by another party in an earlier link along the distribution chain or in the marketing process, it may be entitled to indemnification. That is so even if the business is deemed to have made the same representations (for example, by displaying the product in its store, along with the labels on the box). The business should not bear the ultimate liability for any nonconformity when the business does not have a reasonable opportunity to inspect and discover the existence of the nonconformity. For example, when the business is a retailer that acquires the goods in sealed packages, it might be liable to consumers but it then has the right to be indemnified by its upstream suppliers. See, e.g., Ruping v. Great Atlantic & Pacific Tea Co., 126 N.Y.S.2d 687 (N.Y. App. Div. 1953) (deciding, in regard to a ginger ale explosion, that if the store was found passively negligent it would have been entitled to recover against the glass company); Borchard v. Wefco, Inc., 733 P.2d 776 (Idaho 1987) (holding that a wholesaler was bound to indemnify the retailer because the retailer did not make any warranties outside those made by the wholesaler on the package). This Section does not take a position on the question of whether the business’s right to indemnification covers all or only part of its cost of liability. 23 § 8. Standard Contract Terms and the Parol Evidence Rule 24 A standard contract term that contradicts, unreasonably limits, or fails to give the 25 reasonably intended effect to a prior affirmation of fact or promise by the business does not 26 constitute a final expression of the agreement regarding the subject matter of that term and 27 does not have the effect under the parol evidence rule of discharging obligations that would 28 otherwise arise as a result of the prior affirmation of fact or promise. 29 Comment: 30 1. Balancing two interests. Consumer contracts, like all contracts, are subject to the parol 31 evidence rule (Restatement of the Law Second, Contracts §§ 209-218). As that rule is stated in 32 § 213 of the Restatement of the Law Second, Contracts, a conclusion that an agreement is partially 33 or completely integrated—that is, that the agreement consists of a writing (including in electronic 34 form) that constitutes a final expression of one or more terms of an agreement—has the effect of 115 © 2019 by The American Law Institute Tentative draft – not approved §8 Consumer Contracts 1 discharging prior agreements. In consumer contracts, the finality provided by the parol evidence 2 rule protects an important interest of the business in certainty and security. But such finality might 3 undermine the interest of consumers in enforcing their reasonable expectations, as formed by 4 affirmations of fact or promises made outside the standard contract terms. Since the standard 5 contract terms do not result from a combined effort by both parties to draft a negotiated agreement, 6 there is less justification to view them as a joint affirmative memorialization of a mutually designed 7 agreement, and thus less reason to allow them to override affirmations of fact or promises made to 8 the consumer. Accordingly, when standard contract terms are inconsistent with prior affirmations 9 of fact or promises, this Section denies those terms the preclusive effect of the parol evidence rule. 10 It accomplishes this by negating the prerequisite for finding an integrated agreement—the 11 conclusion that the standard contract terms constitute a final expression of those terms. This is 12 consistent with § 7, which holds that such affirmations of fact or promises are part of the contract 13 and cannot be undone by standard contract terms (see § 7(c)). Indeed, an attempt to use standard 14 contract terms to contradict or unreasonably limit an affirmation or promise is deceptive under 15 § 6. The result stated in this Section is, therefore, a logical corollary of §§ 6 and 7. 16 Illustrations: 17 1. A consumer who lives in an area with frequent, heavy snowfalls enters into a 18 contract with a snow-removal business to shovel her sidewalk the day following snowfalls 19 of two inches or more. During the negotiations, the business’s representative assures the 20 consumer that all snow removal will be completed by 10 a.m. on the day of removal. This 21 is important to the consumer because a local ordinance requires sidewalks to be shoveled 22 by that time. The written agreement signed by the consumer and the business, however, 23 contains a standard contract term stating that the business promises only to complete snow 24 removal by sunset on the day of removal. That standard contract term contradicts the prior 25 promise that snow
will be removed by 10 a.m. Accordingly, the “snow removal by sunset” 26 term in the written agreement does not constitute the parties’ final expression of the timing 27 term. 28 2. A consumer enters a dealership to buy a vehicle and, after identifying a 29 satisfactory model for purchase, the dealer promises that delivery will occur within 10 30 weeks. The time of delivery is important for the consumer because he will be borrowing a 116 © 2019 by The American Law Institute Tentative draft – not approved Tentative Draft §8 1 vehicle until delivery, but such option is available only for a short amount of time. The 2 consumer manifests assent to the transaction by signing the dealership’s Contract for Sale. 3 That document makes no reference to delivery obligations by the seller. It contains a 4 merger clause. The absence of a statement or any reference to the promised delivery does 5 not discharge the obligation of the business that arose from the promise to deliver within 6 10 weeks. 7 3. A consumer visits a health club with an interest in becoming a member. After an 8 agent for the club gives the consumer a tour of the facilities and explains membership fees 9 and costs of said membership, the consumer expresses interest in joining, but requests an 10 additional period to make a final decision. The agent presents the consumer with a 11 Membership Contract to sign, but assures the consumer that it will not go into effect upon 12 signing, promising that the consumer may take additional time to make a final decision and 13 give express approval. The standard contract terms contain an initiation term that 14 contradicts the agent’s assurance that the agreement will not be effective immediately. The 15 initiation term in the written agreement does not constitute the parties’ final expression of 16 agreement regarding the effective date when the membership and resulting obligations will 17 begin. 18 2. Demonstrating prior affirmations of fact or promises. A consumer may demonstrate that 19 a standard contract term contradicts, unreasonably limits, or fails to give the reasonably intended 20 effect to a prior affirmation of fact or promise by the business even when the standard contract 21 term is unambiguous. Accordingly, in consumer contracts, the “four corners test” does not apply, 22 and a determination of integration must be informed by the alleged prior affirmations of fact or 23 promises. (See Restatement of the Law Second, Contracts § 209, Comment c.) 24 3. Merger clauses. Consumer contracts often contain “merger clauses” stating that there 25 are no affirmations of fact, promises, or agreements between the parties except those found in the 26 writing. Because consumers are not likely to notice, read, or understand the effect of such merger 27 clauses, they do not control the conclusion of whether the standard contract terms constitute a 28 partially or completely integrated agreement, and thus do not preclude a finding that the standard 29 contract terms do not constitute the parties’ final expression of a particular matter. 30 4. Relation to the Restatement of the Law Second, Contracts, and the Uniform Commercial 31 Code. The rule of this Section supplements the approach taken by Restatement of the Law Second, 117 © 2019 by The American Law Institute Tentative draft – not approved §8 Consumer Contracts 1 Contracts § 213. Uniform Commercial Code (UCC) §§ 2-202 and 2A-202, which are similar in 2 effect to § 213 (although they employ a different structure and different terminology), are also 3 triggered by a “final expression.” As a result, this Section can be used to supplement those UCC 4 provisions. REPORTERS’ NOTES 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 The Parol Evidence Rule (Restatement of the Law Second, Contracts §§ 209-218 (Am. Law Inst. 1981)) applies to consumer contracts. Indeed, given the reality of consumer contracts, there is a general understanding that the business can set the standard terms of the transaction within reason (see §§ 2, 5). See, e.g., Gregorio v. Geico General Insurance Co., 815 F. Supp. 2d 1097 (D. Ariz. 2011) (refusing to use the reasonable-expectations doctrine to add coverage that was not in the policy because the insurer had an objectively reasonable basis for denying coverage). Accordingly, standard contract terms will often be considered a partially or fully integrated agreement under § 213 of the Restatement of the Law Second, Contracts (Am. Law Inst. 1981). That result applies unless the standard contract terms contradict, unreasonably limit, or fail to give the reasonably intended effect (from the perspective of a reasonable consumer) to a prior affirmation of fact or promise by the business. The existence of such a prior affirmation of fact or promise, which is inconsistent with the standard contract terms, undermines the prerequisite for finding an integrated agreement—the conclusion that the standard contract terms constitute a final expression of the parties’ intent with respect to those terms (see Restatement of the Law Second, Contracts § 213 (Am. Law Inst. 1981)). The standard terms, which consumers rarely read, cannot override affirmations of fact or promises that either become part of the basis of the bargain or otherwise inform the consumer’s reasonable expectations. See § 7(c). (This Section does not take a position on the question, on which different jurisdictions might differ, as to what conditions must be satisfied for a precontractual affirmation of fact or promise to create an enforceable obligation.) Indeed, it is deceptive for the business to induce the consumer to contract by making certain affirmations of fact or promises and then to contradict, unreasonably limit, or fail to give effect to those affirmations or promises in the standard contract terms. See § 6(b)(1). Illustration 2 is based on Bob Robertson, Inc. v. Webster, 679 S.W.2d 683 (Tex. App. 1984). Illustration 3 is based on Our Fair Lady Health Resort v. Miller, 564 S.W.2d 410 (Tex. Civ. App. 1978)). In the standard contract terms, businesses often include an express, complete integration clause (or “merger clause”) that presents the standard terms as the complete and exclusive expression of the parties’ intent regarding any and all issues relating to the transaction. In consumer contracts, there is no persuasive reason why such a clause, which like other standard terms goes unread by most consumers, could change the legal consequences. Thus, its inclusion does not preclude a finding that the standard contract terms do not constitute the parties’ final expression of a particular matter. While a few courts consider a merger clause as conclusive on the question 118 © 2019 by The American Law Institute Tentative draft – not approved Tentative Draft 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 §8 of complete integration, most courts allow consumers to demonstrate that an affirmation of fact or promise made to them did not receive its reasonably intended effect in the standard contract terms. The rules in this Section pertaining to the application of the parol evidence rule in consumer-contracts cases derive from existing case law. Starting with the traditional analysis, this Restatement focuses on the most recent published decisions by the highest courts. There are 16 states in which the state supreme court, a state appellate court, or a federal appellate court applying state law have weighed in on the application of the parol evidence rule to consumer contracts. Those courts have allowed evidence from prior communications to qualify the enforcement of subsequent standard-form terms. In seven cases, the contract included a merger clause. In only one of those did the court explicitly reject the possibility of admitting prior evidence, stating that the merger clause conclusively prevents the admission of parol evidence. See Yocca v. Pittsburgh Steelers Sports, Inc., 854 A.2d 425 (Pa. 2004) (indicating that the integration clause was a “clear sign that the writing is meant to be just that and thereby expresses all of the parties’ negotiations, conversations, and agreements made prior to its execution”). In another case, the court concluded that a clear and unambiguous merger clause precluded the admission of parol evidence. See Tangren Family Tr. v. Tangren, 154 P.3d 180 (Utah Ct. App. 2006) (determining that the plaintiff had not overcome the presumption that a writing that on its face appears to be an integrated agreement is what it appears to be). In the remaining five cases, courts enumerated the various circumstances under which parol evidence could potentially be admissible, including holding that previous conflicting terms could be a sign that the parties did not intend the standard terms to be the final expression of agreement. See Lopez v. Reynoso, 118 P.3d 398 (Wash. Ct. App. 2005); Colafrancesco v. Crown Pontiac-GMC, Inc., 485 So. 2d 1131 (Ala. 1986); Korff v. Hilton Resorts Corp., 506 F. App’x 473 (6th Cir. 2012) (acknowledging a specific merger clause disclaims reliance on specific prior oral representation); Olah v. Ganley Chevrolet, Inc., 946 N.E.2d 771 (Ohio Ct. App. 2010) (interpreting the rule to be that absent fraud, mistake, or other invalidating cause, the parties’ final written integration of their agreement may not be varied, contradicted, or supplemented by evidence of prior or contemporaneous oral agreements, or prior written agreements), and Posey v. Ford Motor Credit Co., 111 P.3d 162 (Idaho Ct. App. 2005) (siding with the UCC parol evidence provision that was intended to liberalize the common-law rule). In the absence of a merger clause, courts have admitted parol evidence. In one case, the court explicitly ruled that parol evidence could potentially be admitted even though the writing would presumptively create an integrated agreement. See Sims v. Honda Motor Co., 623 A.2d 995 (Conn. 1993). In the remaining cases, courts did not explicitly rule on that issue, but some allowed parol evidence in particular circumstances, such as when the court determined that the written agreement did not include all the terms that the parties apparently had agreed to, including terms in prior negotiations See Kaufman v. Audubon Ford/Audubon Imps., Inc., 916 So. 2d 1060 (La. 2005); George v. Auto. Club of S. Cal., 135 Cal. Rptr. 3d 480 (Cal. Ct. App. 2011) (siding with partial integration, saying “the trial court must provisionally consider parol evidence allegations, but unless those allegations would support an interpretation to which the contract is reasonably susceptible, a demurrer is properly sustained”); Life Care Ponte Vedra, Inc. v. Wu, 162 So. 3d 188 119 © 2019 by The American Law Institute Tentative draft – not approved §8 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 Consumer Contracts (Fla. Dist. Ct. App. 2015) (subscribing to a partial-integration approach in finding that the trial court erred in failing to consider extrinsic evidence); CIT Grp./Sales Fin., Inc. v. E-Z Pay Used Cars, Inc., 32 P.3d 1197 (Kan. Ct. App. 2001) (commenting that considering evidence that is not inconsistent with the final articulation of the parties’ contractual intent does not violate the parol evidence rule); Stanley v. Huntington Nat’l Bank, 492 F. App’x 456 (4th Cir. 2012) (supporting a presumption of complete integration such that the parol evidence rule bars the admission of oral statements made prior to or contemporaneously with the execution of a clear and unambiguous contract); Portfolio Acquisitions, L.L.C. v. Feltman, 909 N.E.2d 876 (Ill. App. Ct. 2009) (including parol evidence because the parties failed to identify that all the essential terms are in writing and ascertainable from the instrument itself); and William P. Terrell, Inc. v. Miller, 697 S.W.2d 454 (Tex. App. 1985) (allowing parol evidence because there was no integrated agreement covering the entirety of the transactions). The rules in this Section gain further support from a comprehensive, empirical examination of all cases in federal and state courts available on LexisNexis® and Westlaw® (excluding employment cases) that address the admission of previous or contemporaneous agreements in light of a final standard-form contract. The cases considered start with Our Fair Lady Health Resort v. Miller, 564 S.W.2d 410 (Tex. Civ. App. 1978) and end with Life Care Ponte Vedra, Inc. v. Wu, 162 So. 3d 188 (Fla. Dist. Ct. App. 2015). The analysis includes 32 cases, including five unpublished cases. The cases span 21 states and eight federal circuits, including the District of Columbia, and include cases from four state supreme courts, nine state appellate courts, and three federal circuit courts. In most cases, whether the contract had a merger clause or not, courts have found that, under certain circumstances, prior statements could be admitted in light of a subsequent, standard written agreement. Specifically, the courts adopted that position in all but one of the 14 cases in which the contract lacked a merger clause or the court did not discuss one. Among the 18 cases in which the contracts had merger clauses, courts stated that extrinsic evidence could potentially be admitted despite a subsequent, integrated agreement in 15 cases and denied that possibility in three cases. Two of those three cases are unpublished, state-appellate-court cases from Michigan and Ohio, and the third is a state-supreme-court case from Pennsylvania. To this date, this is the only published high-court case taking such a position. In 17 cases, a prior affirmation of fact or promise conflicted with a standard contract. In six of those cases, there was no merger clause. The courts admitted extrinsic evidence in all six cases. In 11 cases, there were merger clauses. Parol evidence was allowed in five of those cases. And of the remaining six cases, in which parol evidence was ultimately not allowed, the courts ruled that parol evidence was presumptively admissible. Finally, an analysis of the most influential cases in this area, measured by out-of-state and out-of-circuit court citations, reveals results consistent with the approach of this Section. The analysis is restricted to only those cases that have an average of at least two out-of-state citations per year. Cases in which the court ruled or articulated that evidence of prior agreements could be admissible in light of subsequent integrated consumer standard-form contracts are more likely to 120 © 2019 by The American Law Institute Tentative draft – not approved Tentative Draft §9 1 2 3 4 5 be cited than cases in which the court ruled that the presumption is conclusive. The first category is headed by George, with 23 total out-of-state citations and over four citations per year, followed by Force v. ITT Hartford Life & Annuity Ins. Co., 4 F. Supp. 2d 843 (D. Minn. 1998), with 67 total out-of-state citations and almost four such citations per year. The only case in the second category is Yocca, with 23 total out-of-state citations and over two such citations per year. 6 § 9. Effects of Derogation from Mandatory Rules 7 8 (a) If a court finds that a contract or any term excludes, limits, or violates any mandatory rule, the court should do one of the following: 9 (1) refuse to enforce the contract, 10 (2) enforce the remainder of the contract without the derogating term, or 11 (3) limit the application of the derogating term. 12 13 (b) If the court enforces the remainder of the contract without the derogating term, the court may replace the derogating term with: 14 (1) a term that is reasonable in the circumstances, 15 (2) a term that effects the minimal correction necessary to bring the contract 16 into compliance with the mandatory rule, or 17 (3) if the contravening term was placed by the business in bad faith, a term 18 that is calculated to give the business an incentive to avoid placing such terms in 19 consumer contracts. 20 Comment: 21 1. General. This Restatement contains several mandatory rules—rules that cannot be 22 derogated from by agreement of the parties. See, in particular, § 3(c) (modifications must be made 23 in good faith);
§ 4(b) (consumer contracts may not include a term purporting to grant the business 24 the unbridled discretion to determine its contractual rights; obligations unrestrained by any good- 25 faith obligation unenforceable); § 5 (unconscionable terms or contracts are
unenforceable); § 6 26 (prohibition against engaging in deceptive acts or practices); § 7 (contract terms limiting or 27 negating affirmations of fact or promises that have become part of the consumer contract are 28 unenforceable). Consumer contracts are also governed by additional mandatory rules—statutory 29 or otherwise—beyond those in this Restatement. See Comment 5. This Section describes the legal 30 implications of an attempt by the business to derogate from those mandatory rules. It restates 121 © 2019 by The American Law Institute Tentative draft – not approved §9 Consumer Contracts 1 general principles of reformation of contracts and severability and applies them to consumer 2 contracts. 3 2. Severability. When a term in a consumer contract violates a mandatory rule, the court 4 may either: (i) refuse to enforce the entire contract, (ii) sever the offending term and enforce the 5 remainder of the contract without it, or (iii) limit the application of the offending term. If the court 6 enforces the contract without the offending term, it may fill the resultant gap as explained below. 7 The quality and magnitude of reformation of the contract that the court exercises should be 8 proportional to the severity and willfulness of the violation by the business. When the offending 9 term is immaterial, it should be sufficient to sever the term and enforce the remainder of the 10 contract. When the offending term is material, the court is more likely to refuse to enforce the 11 entire contract. The presence of a severability clause in the contract is relevant but not conclusive 12 for severability and enforceability questions. 13 In certain cases, when the offending term is material, the court may give the consumer a 14 choice between: (i) severing the offending term and enforcing the remainder of the contract, and 15 (ii) treating the entire contract as unenforceable. In deception cases, when the term constitutes a 16 deceptive act or practice under § 6, the consumer may be given that choice even if the term is 17 immaterial. 18 Illustration: 19 1. A contract contains a provision that allows the business to amend any of the 20 standard terms at its discretion, explicitly disavowing any good-faith or other constraint on 21 the business’s discretion. The provision is material and its effect is to render the contract 22 illusory. The court should give deference to the consumer’s choice whether to sever the 23 provision and enforce the remainder of the contract or to treat the entire contract as 24 unenforceable. 25 3. Gap-filling. When the court decides to enforce the contract without the offending term, 26 it may be required to fill a gap left by the unenforceable term. For example, if a price term is 27 excessive and unconscionable, or if a period of limitations is too short and unconscionable, the 28 term will not be enforced—but what price or limitations period would fill the gap created by their 29 severance? The rule in this Section treats this question as a gap-filling problem. It offers three 30 criteria of gap-filling. The first and principal criterion, stated in subsection (b)(1), requires the gap 122 © 2019 by The American Law Institute Tentative draft – not approved Tentative Draft §9 1 in the contract to be filled with a reasonable term—the term that reasonable parties would choose 2 in the circumstances. This is the approach to gap-filling found in the Uniform Commercial Code, 3 Article 2, Part 3. In deception cases, when the term violates § 6, and the consumer elects to avoid 4 only the specific terms that are inconsistent with an affirmation of fact or a promise, the gap created 5 by the removal of the inconsistent term is filled by terms that reflect the affirmation of fact or the 6 promise or by terms that are reasonable in the circumstances. This form of redress protects the 7 consumer’s reasonable expectations under the contract and allows the consumer to recover the 8 benefit of the bargain. 9 Often, however, there is a range of reasonable terms, and it is within the court’s discretion 10 to choose a reasonable term along that range. If the offending term was placed in the contract by 11 the business without bad faith and in an attempt to protect a material interest of the business, 12 subsection (b)(2) enables the court to fill the gap while preserving as much of the original 13 agreement as may properly survive the severance of the offending portion. Once the offending 14 feature of the term is removed, the protection to which the consumer is entitled ends, and there are 15 no additional grounds for intervention and for further severance. 16 If, instead, the offending term was placed in the contract by the business in bad faith, for 17 example, when the business knew that the term was unenforceable, subsection (b)(3) enables the 18 court to fill the gap with a term calculated to give the business an incentive to avoid such bad-faith 19 drafting. In that case, the invalidated term is replaced with a term that operates against the business, 20 to an extent proportionate to the degree of bad faith. (Compare the interpretation principle of contra 21 proferentem in Restatement of the Law Second, Contracts § 206.) 22 Illustrations: 23 2. A contract contains an arbitration clause that requires consumers to arbitrate 24 under the auspices of a specified arbitration forum. The clause is unconscionable under 25 § 5 because the named arbitration forum has admitted to using pro-business biased 26 arbitrators. If the business did not know about this bias and chose the arbitration forum 27 innocently, subsection (b)(1) allows the court to replace the contractually specified 28 arbitration forum with another arbitration forum that the court considers most reasonable 29 in the circumstances, reflecting the most common market practices in similar transactions. 30 Subsection (b)(2) allows the court to replace the contractually specified forum with 31 arbitration that most resembles the proceedings in the named forum, but one that is free 123 © 2019 by The American Law Institute Tentative draft – not approved §9 Consumer Contracts 1 from bias. This solution preserves, as much as possible, the original agreement, and should 2 apply only if the business was not aware of the scam when it named the arbitration forum 3 in its contract. Additionally, subsection (b)(3) allows the court to replace the biased 4 arbitration forum with a dispute-resolution forum that is most favorable, within reason, to 5 the consumer. For example, the court may let the consumer choose a forum, including 6 litigation in court. This solution should apply if the business knew about the arbitrators’ 7 bias. 8 3. A contract contains an arbitration clause that requires consumers to arbitrate at a 9 forum that charges a filing fee that is held to be excessive and thus unconscionable under 10 § 5. If the business knew that this element of the arbitration clause would likely be deemed 11 unconscionable, the entire arbitration clause may be severed under subsection (b)(3) and 12 the consumer may then be entitled to bring an action in court. If, instead, the inclusion of 13 the unconscionable element was not done in bad faith, the court may decide to sever only 14 the offending element (say, by allowing the business to reimburse the consumer for the 15 filing fee, or by switching to arbitration at a different forum that does not charge the high 16 filing fee). 17 4. A consumer borrows $5,000 under a three-year, unsecured loan contract carrying 18 an interest rate of 135%. The interest rate is unconscionable under § 5. The court may 19 adjust the interest rate to reflect the rate prevailing for similar loans (under subsection 20 (b)(1)). Or, the court may adjust the interest rate to the highest level that, in the 21 circumstances, is not substantively unconscionable (under subsection (b)(2)). If the court 22 concludes that the violation was deliberate and in bad faith, it may, under subsection (b)(3), 23 further reduce the interest rate (and levy other sanctions stipulated by law). 24 5. A contract contains a service-warranty provision, but grants the business the 25 power to modify the terms of the warranty and apply the new terms to past transactions, 26 entered into prior to the modification. The warranty-service agreement explicitly conflicts 27 with the good-faith requirement of § 4. The court may substitute a reasonable warranty 28 clause (under subsection (b)(1)), or merely remove the retroactivity element (under 29 subsection (b)(2)). If the court concludes that the violation was deliberate, it may substitute 30 a warranty-service agreement that is especially protective of consumers (under subsection 31 (b)(3)). 124 © 2019 by The American Law Institute Tentative draft – not approved Tentative Draft §9 1 4. Enforcement by the consumer. While an offending contract or term cannot be enforced 2 by the business against the consumer, the consumer has no obligation to assert that the contract or 3 term are not enforceable, and may choose to obtain the benefit of the agreement. If the consumer 4 so chooses, the business may not assert that the contract or term are not enforceable. 5 5. Other invalidating causes. The methodology laid out in this Section also applies to 6 situations in which a contract or term is found to violate mandatory rules that are not restated here. 7 For example, when a term is unenforceable because it is against public policy, or when it violates 8 a statute, courts may need to supply an alternative term, and the three gap-filling approaches in 9 subsection (b) of this Section provide guidance. 10 Illustration: 11 6. A contract contains an early-termination fee that the court holds to be excessive 12 and thus unenforceable under the doctrine that requires liquidated damages to be 13 reasonable (but the court does not determine it to be unconscionable). Under subsection 14 (b)(1), the court would replace the fee with a reasonable fee. Under subsection (b)(2), the 15 court would merely reduce the fee to the highest level that it determines is permissible 16 under the penalty doctrine as applied to liquidated damages. Under subsection (b)(3), if the 17 court determines that the excessive fee was included in bad faith, the court may reduce it 18 to zero. 19 6. Relation to Restatement of the Law Second, Contracts; the Uniform Commercial Code; 20 and other law. The rules of this Section are consistent with the approaches taken by courts when 21 a term is deemed unconscionable under the provisions of the Uniform Commercial Code and the 22 Restatement of the Law Second, Contracts (as explained in the preceding Comments). This Section 23 goes further, however, restating the criteria courts deploy in adjusting the gap-filler to the 24 circumstances that led to the inclusion of the offending term. It allows courts to choose a 25 reasonable term more favorable to the consumer to discourage businesses from overreaching, or 26 more favorable to the business if the violation was innocent. Nothing in this Restatement is 27 intended to replace causes of action or defenses arising under the common law not expressly 28 addressed herein. 125 © 2019 by The American Law Institute Tentative draft – not approved §9 Consumer Contracts REPORTERS’ NOTES 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 The legal consequences of a term that attempts to derogate from a mandatory rule are restated in this Section. This Section begins by following the language of the Uniform Commercial Code § 2-302 (Am. Law Inst. & Unif. Law Comm’n) and Restatement of the Law Second, Contracts § 208 (Am. Law Inst. 1981). While that language was originally developed to govern the consequences of an unconscionability finding, it applies more broadly to any contract or term that violates a mandatory rule. When a term attempts to derogate from a mandatory rule, the court can choose to not enforce the contract at all, to sever the offending term and enforce the remainder of the contract, or to limit the application of the offending term. That decision is influenced by the materiality of the offending term. An immaterial term is more likely to be severed, allowing for the enforcement of the remainder of the contract. If the offending term is material, the court is more likely to deem the entire contract unenforceable. When the court decides to sever the offending term and enforce the remainder of the contract, it may need to fill a gap left by the severed term. The latter part of this Section addresses this gap-filling problem. It identifies three criteria that have been followed in the case law. See generally Omri Ben-Shahar, Fixing Unfair Contracts, 63 STANFORD L. REV. 869 (2011); Bailey Kuklin, On the Knowing Inclusion of Unenforceable Contract and Lease Terms, 56 U. CIN. L. REV. 845 (1988). The first and most widely used criterion for filling gaps left by unenforceable terms, stated in subsection (b)(1), is the reasonableness criterion: replace the offending term with the most reasonable alternative. For example, when the court strikes an arbitration term that picked a forum too inconvenient to the consumer, it would replace it with the arbitration forum that the court deems most reasonable. Or, if a court invalidates a liquidated-damages clause or early-termination fee that is over-compensatory, it would replace it with standard expectation damages. But the range of reasonable terms is often broad, and circumstances might justify choosing a gap-filler at either end of this range. One such circumstance is when the offending term was placed innocently, without intent by the business to overreach. Under that circumstance, a court is more likely to follow the second criterion for gap-filling, stated in subsection (b)(2), which is minimal intervention: adjust the contract minimally—only to the extent necessary to bring it across the enforceability threshold. Stated by Corbin, in the unconscionability context, “a contract that requires a payment of a very high interest will be enforced, up to the point at which unconscionability becomes an operative factor.” 1 ARTHUR LINTON CORBIN, CORBIN ON CONTRACTS § 129, at 556 (1963) (emphasis added). Corbin recognizes this rationale: “[T]he line [representing the enforceable term] must be drawn somewhere, and it is drawn at the point where the protection to which the buyer is justly entitled ends.” Arthur L. Corbin, A Comment on Beit v. Beit, 23 CONN. B.J. 43, 46 (1949). “Partial enforcement [of a contract term] involves much less of a variation from the effects intended by the parties than total non-enforcement would.” Corbin, supra at 50. This criterion is consistent with the language of severability clauses that appear in many standard-form contracts, which stipulate that if any provision of the agreement shall be held 126 © 2019 by The American Law Institute Tentative draft – not approved Tentative Draft 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 §9 illegal or unenforceable, that provision shall be limited or eliminated to the minimum extent necessary so that the agreement shall otherwise remain in full effect. It is also consistent with the doctrine of partial enforcement and the way it is applied when noncompetition clauses are found to be unenforceable. As stated by one court, the restraint is “not enforceable beyond a time or area considered reasonable by the [c]ourt.” Justin Belt Co. v. Yost, 502 S.W.2d 681, 685 (Tex. 1973). This criterion may effectively apply when the defendant is proposing to replace the unenforceable element with one that the court deems acceptable. For example, if the court regards a particular arbitration tribunal as too inconvenient and unreasonable, the court may replace the tribunal with another forum proposed by the business, as long as it is tolerable. The third criterion for filling gaps left by unenforceable terms, stated in subsection (b)(3), is replacing the offending term with the term least favorable to the business. It is justified as a mode of deterrence against deliberate overreaching, calculated to give the business an incentive not to overreach. It should be applied only when the court determines that the business included the term knowing that it was unenforceable. This added deterrence is needed, because, if the drafting party expects that the court would only strike the excessive increment, what incentive does it have to avoid overreaching? Such stronger intervention has been implemented in employment cases in which employers insert restraints knowing them to be unenforceable: for example, in Central Adjustment Bureau, Inc. v. Ingram, 678 S.W.2d 28, 37 (Tenn. 1984), the court notes: “We recognize the force of the objection that judicial modification could permit an employer to insert oppressive and unnecessary restrictions into a contract knowing that the courts can modify and enforce the covenant on reasonable terms. . . . [T]he employer may have nothing to lose by going to court, thereby provoking needless litigation. If there is credible evidence to sustain a finding that a contract is deliberately unreasonable and oppressive, then the covenant is invalid.” See also Jenkins v. Jenkins Irrigation, Inc., 259 S.E.2d 47, 51 (Ga. 1979) (holding that when unreasonably broad territorial restrictions were found in noncompete covenants related to the sale of a business, the court would enjoin the seller from competing in only that area shown by clear and convincing evidence to be essential to protect the buyer); Walker v. Sheldon, 179 N.E.2d 497 (N.Y. 1961) (holding that punitive damages would be justified in a case in which fraudulent transactions were not part of an isolated incident on the part of an otherwise legitimate business, but were the very basis of the business). It is also consistent with punitive provisions in statutes addressing violations of permissible contracting, e.g., Fair Labor Standards Act of 1938, 29 U.S.C. § 216(b) (2006) (awarding an aggrieved employee who was paid less than minimum wage double the unpaid wages); Alabama Small Loan Act, Code of Ala. Tit. 5, Ch. 18, Sec. 5-18-15(l) (reducing the finance charge in a loan that violated the maximum permissible finance charge to zero dollars, in addition to levying fines on the lender, if the excess charge was deliberate or in reckless disregard of the permitted limits). 127 © 2019 by The American Law Institute Tentative draft – not approved 2019 by The American Law Institute Tentative draft not approved APPENDIX BLACK LETTER OF TENTATIVE DRAFT § 1. Definitions and Scope (a) Definitions: (1) “Consumer” – An individual acting primarily for personal, family, or household purposes. (2) “Business” – An individual or entity other than a consumer that regularly participates in or solicits, directly or indirectly, transactions with consumers. (3) “Contract” – A promise or set of promises for the breach of which the law gives a remedy, or the performance of which the law in some way recognizes as a duty. (4) “Consumer contract” – A contract between a business and a consumer other than an employment contract. (5) “Standard contract term” – A term, relating to a consumer contract, that has been drafted prior to the transaction for use in multiple transactions between the business and consumer parties. (6) “Affirmation of fact or promise” – Any statement about the transaction, including but not limited to statements about quantity, quality, characteristics, utility, price, discount, comparative cost, service, and remedy, intended to reach consumers, including in negotiations, advertising, brochures, or labels, or in any record accompanying the transaction, but excluding statements that would be reasonably understood by consumers as “puffing” or statements of belief not founded on fact. (7) “Good faith” – Honesty in fact and the observance of reasonable commercial standards of fair dealing. (b) Scope: This Restatement applies to consumer contracts, except to the extent that a matter is governed by statute or regulation. It restates contract-law principles under state law and takes no position on the proper relationship between statutory or regulatory requirements and these principles. 129 © 2019 by The American Law Institute Tentative draft – not approved Consumer Contracts § 2. Adoption of Standard Contract Terms (a) A standard contract term is adopted as part of a consumer contract if the consumer manifests assent to the transaction after receiving: (1) a reasonable notice of the standard contract term and of the intent to include the term as part of the consumer contract, and (2) a reasonable opportunity to review the standard contract term. (b) When a standard contract term is available for review only after the consumer manifests assent to the transaction, the standard contract term is adopted as part of the consumer contract if: (1) before manifesting assent to the transaction, the consumer receives a reasonable notice regarding the existence of the standard contract term intended to be provided later and to be part of the consumer contract, informing the consumer about the opportunity to review and terminate the contract, and explaining that the failure to terminate would result in the adoption of the standard contract term; (2) after manifesting assent to the transaction, the consumer receives a reasonable opportunity to review the standard contract term; and (3) after the standard contract term is made available for review, the consumer has a reasonable opportunity to terminate the transaction without unreasonable cost, loss of value, or personal burden, and does not exercise that power. (c) If the consumer manifests assent to the transaction, a contract exists even if some of the standard contract terms are not adopted. In such case, the terms of the contract are those adopted under subsections (a) and (b), and, if the consumer elects, the unadopted standard terms, along with any terms supplied by law. § 3. Modification of Standard Contract Terms (a) A standard contract term in a consumer contract governing an ongoing relationship is modified if: (1) the consumer receives a reasonable notice of the proposed modified term and a reasonable opportunity to review it; 130 © 2019 by The American Law Institute Tentative draft – not approved Appendix (2) the consumer receives a reasonable opportunity to reject the proposed modified term and continue the contractual relationship under the existing term, and a reasonable notice of this opportunity; and (3) the consumer either: (A) manifests assent to the modified term or (B) does not reject the proposed modified term and continues the contractual relationship after the expiration of the rejection period provided in the proposal. (b) A consumer contract governing an ongoing relationship may provide for a reasonable procedure under which the business may propose a modification of the standard contract terms, but may not, to the detriment of the consumer, exclude the application of subsection (a), except that the established procedure may replace the reasonable opportunity to reject the proposed modified term with a reasonable opportunity to terminate the transaction without unreasonable cost, loss of value, or personal burden. (c) A modification of a standard contract term in a consumer contract is enforceable only if it is proposed in good faith and if it does not have the effect of undermining an affirmation or promise made by the business that was made part of the basis of the original bargain between the business and the consumer. § 4. Discretionary Obligations (a) A contract or any term that grants the business discretion to determine its rights and obligations must be interpreted, when reasonably susceptible to such interpretation, to provide that such discretion will be exercised in good faith. (b) A term in a contract that purports to grant the business absolute and unlimited discretion to determine its contractual rights and obligations unconstrained by the good-faith obligation is unenforceable by the business. § 5. Unconscionability (a) An unconscionable contract or term is unenforceable, to the extent stated in § 9. 131 © 2019 by The American Law Institute Tentative draft – not approved Consumer Contracts (b) A contract or a term is unconscionable if at the time the contract is made it is: (1) substantively unconscionable, namely fundamentally unfair or unreasonably one-sided, and (2) procedurally unconscionable, because it results in unfair surprise or results from the absence of meaningful choice on the part of the consumer. In determining that a contract or a term is unconscionable, a greater degree of one of the elements in this subsection means that a lesser degree of the other element is sufficient to establish unconscionability. (c) Without limiting the scope of subsection (b)(1), a contract term is substantively unconscionable if its effect is to: (1) unreasonably exclude or limit the business’s liability or the consumer’s remedies that would otherwise be applicable for: (A) death or personal injury for which, in the absence of a contractual provision in the consumer contract, the business would be liable, or (B) any loss to the consumer caused by an intentional or negligent act or omission of the business; (2) unreasonably expand the consumer’s liability, the business’s remedies, or the business’s enforcement powers that would otherwise be applicable in the event of breach of contract by the consumer; or (3) unreasonably limit the consumer’s ability to pursue or express a complaint or seek reasonable redress for a violation of a legal right. (d) In determining whether a contract or a term is unconscionable, the court should afford the parties a reasonable opportunity to present evidence as to its commercial setting, purpose, and effect. § 6. Deception (a) A contract or a term adopted as a result of a deceptive act or practice by the business is unenforceable by the business to the extent stated in § 9. 132 © 2019 by The American Law Institute Tentative draft – not approved Appendix (b) Without limiting the scope of subsection (a), an act or practice is deceptive if it has the effect of: (1) contradicting or unreasonably limiting in the standard contract terms a material affirmation of fact or promise made by the business before the consumer assented to the transaction; or (2) obscuring a charge to be paid by the consumer or the overall cost to the consumer. § 7. Affirmations of Fact and Promises That Are Part of the Consumer Contract (a) An affirmation of fact or promise made by the business that creates a reasonable expectation by a reasonable consumer who is its intended audience that the subject matter of the contract will have the described attribute becomes part of the consumer contract. (b) An affirmation of fact or promise made by a third party that creates a reasonable expectation by a reasonable consumer who is its intended audience that the subject matter of the contract will have the described attribute: (1) becomes part of the contract between the business and the consumer if: (A) the business knew or reasonably should have known of it, and (B) the consumer could have reasonably believed that the business intended to stand behind the affirmation or promise; and (2) creates a contractual obligation of the third party to the consumer, even if the third party did not transact directly with the consumer, so long as the third party has an appreciable financial interest in the contract between the business and the consumer. (c) Standard contract terms that purport to negate or limit affirmations of fact or promises that become part of the consumer contract under subsections (a) and (b) are not enforceable. 133 © 2019 by The American Law Institute Tentative draft – not approved Consumer Contracts § 8. Standard Contract Terms and the Parol Evidence Rule A standard contract term that contradicts, unreasonably limits, or fails to give the reasonably intended effect to a prior affirmation of fact or promise by the business does not constitute a final expression of the agreement regarding the subject matter of that term and does not have the effect under the parol evidence rule of discharging obligations that would otherwise arise as a result of the prior affirmation of fact or promise. § 9. Effects of Derogation from Mandatory Rules (a) If a court finds that a contract or any term excludes, limits, or violates any mandatory rule, the court should do one of the following: (1) refuse to enforce the contract, (2) enforce the remainder of the contract without the derogating term, or (3) limit the application of the derogating term. (b) If the court enforces the remainder of the contract without the derogating term, the court may replace the derogating term with: (1) a term that is reasonable in the circumstances, (2) a term that effects the minimal correction necessary to bring the contract into compliance with the mandatory rule, or (3) if the contravening term was placed by the business in bad faith, a term that is calculated to give the business an incentive to avoid placing such terms in consumer contracts. 134 © 2019 by The American Law Institute Tentative draft – not approved