Shortly after posting Free Marketer Supports Consumer Financial Protection Bureau I came across this report of a new Supreme Court decision. This case involved a class action against ATT regarding their practice of charging customers taxes on cell phones that were advertised as being free. In this case the conservative majority of the court ruled that a class action suit could not be pursued because ATT’s agreement with the customers specified that the customers had to utilize arbitration individually to pursue their claims. Judge Breyer observed in his dissent, "What rational lawyer would have signed on to represent the Concepcions in litigation for the possibility of fees stemming from a $30.22 claim? . . . ‘The realistic alternative to a class action is not 17 million individual suits, but zero individual suits, as only a lunatic or a fanatic sues for $30.’"
Now that the Supreme Court has barred even class action suits, individuals who lose relatively small amounts of money have no recourse against corporations who write impenetrable agreements that are designed to prevent consumers from recouping their losses. There is a need for government to intervene on behalf of consumers by law or regulation to make sure that consumers at least understand the risks and have a reasonable opportunity for redress.
It is a market failure when the costs of understanding a contract and seeking redress for breach are vastly larger than the amounts at issue, so that consumers have no reasonable action to take. In such cases it is reasonable for the government to represent the consumers as a group ensuring that the agreement terms be clear and that there is an opportunity to pursue reasonable redress if the agreement is breached (for example, by means of a class action suit).
I am afraid that this blog entry is long on so-called "common sense", but very short on "evidence". You seem to think that class action lawsuits are needed to protect consumers against companies that write impenetrable contracts and that the government needs to intervene to help consumers understand the risks of a contract. You further state that consumer contracts are an instance of market failure since the costs to redress for breach are much greater than the amounts at issue.ReplyDelete
First of all, there is a large incentive for corporations to have reasonable contracts and to deal fairly with the public. This incentive is that it is very difficult and expensive to collect from a consumer who refuses to pay. To collect from a consumer, a corporation has to go to small claims court (a la Judge Judy) and make its case. It is simply not worth the corporation's time to sue for anything less than a few hundred dollars. In my experience, small claims courts are very pro-consumer, so unless the consumer is clearly in the wrong, the corporation will lose. I do not know the facts of the Concepcion case, but if it went to small claims court, ATT would have probably lost (if ATT would have even pursued the case to begin with). Moreover, I think every state has a department of consumer protection and an office of the attorney general that is well staffed with very eager attorneys who intervene to protect the consumer. Most corporations do not want to get on the wrong side of an attorney general. It is far more efficient to have an attorney general get involved to correct a wrong than to unleash a horde of lawyers in a class action lawsuit.
Furthermore, the reason most contracts are impenetrable is that state and federal laws require much of the boilerplate that actually serves to confuse consumers. Are we now going to have the government bless every contract before it is issued? What will be the cost of the additional bureaucracy and slow down in commerce? It would surely outweigh the benefits of increased oversight.
Finally, judging from the very small checks I occaisionally receive from class action stockholder lawsuits, the primary beneficiary of class action lawsuits are the lawyers. You seem to believe that class action lawsuits are economically beneficial because they address a market failure. This is completely wrong - class action lawsuits are very harmful to the economy. Greedy lawyers will find minor issues in consumer contracts and then use the threat of a class action lawsuit to extort payments from corporations. The costs of these lawsuits for society is far greater than the benefit that would be gained from correcting any minor market failure.
This comment is in response to Small Businessman Trying To Make An Honest Living. Thank you for your comment.ReplyDelete
I would classify my remarks in this post as being in the class of “hypothesis formation”, and certainly would be in favor of prospectively testing and monitoring the impact of any changes in policy in this area – as well as in any other area.
I agree with you that there is a risk of excessive government involvement and that it would not be desirable for government to review every contract. However, I think it is reasonable to establish standards so that consumers can clearly understand what agreements they are entering into. I think it is also reasonable that there should be some accessible mechanism for redress for contract violations. Small claims court of course would be one mechanism for cases involving small amounts of money. However, in the ATT case, the Supreme Court ruled that the consumer could not go to any court because the agreement specified arbitration. My experience with state attorney general’s offices is that they are not of much help unless a state law has been violated. Offices of consumer protection at the state or federal level may be a reasonable mechanism. Class action suits, whatever one thinks of attorneys pursuing their own free enterprise agenda, I would think can serve as a deterrent to bad corporate behavior. I am open to exploring what the best implementation mechanisms might be – but support the principle that consumers ought to be able to understand agreements that they are entering into and ought to have some mechanism for redress if the agreement is violated.