Jacob Hale Russell, Rutgers Law School DATE

TO: UPF Civil Law Seminar Participants FROM: Jacob Hale Russell, Rutgers Law School DATE: 6 December 2017 Thanks for the opportunity to present my work-in-progress on unconscionability later this month. I’m attaching a draft of the project, which is at an early stage and still has many flaws to address. My approach and normative conclusions remain very tentative, so I am eager to hear your views, critiques, and suggestions. In addition, although the piece is not comparative in nature, I would be interested in your thoughts on whether I would benefit from any scrutiny of the distinct approaches to unfair terms in consumer contracts in EU private law and in civil law systems. (It may be that those approaches are too different to be relevant for this particular project and my pri- mary focus — how unconscionability, and more broadly consumer protection law, should deal with the heterogeneity of consumers.) I look forward to talking with you all on 18 December. 1 Unconscionability’s Resurrection Jacob Hale Russell Rutgers Law School DRAFT | December 6, 2017 Abstract Reports of unconscionability’s death are greatly exaggerated. The widespread view among courts and scholars is that the common-law contracts doctrine is rarely used, except in limiting clauses that purport to waive consumers’ procedural rights. As this Article documents, the doctrine appears to be quietly flourishing in state courts over recent years, used to strike down substantive terms, including interest rates, in consumer finance contracts. To name just a few recent examples, courts have rewritten or voided payday loans, signature loans, overdraft fees, and mortgage contracts on the basis of unconscionability. This Article uses the resurrection of classical unconscionability in consumer debt contracts to identify, and answer, a major gap in the doctrine’s contours. How tailored should the unconscionability analysis be to the characteristics of a particular consumer entering into a contract, versus untailored to the typical, median, or “reasonable” consumer? Current cases side-step this question uncomfortably, with no guiding theory. Tailoring has important implications for the remedial aspects of the unconscionability doctrine. All consumer protection efforts run up against a thorny problem: the heterogeneity of consumers. A tailored unconscionability analysis has the promise of helping customize protections to individualized, heterogeneous consumers, and courts are accustomed to such individualized fact-finding. But tailoring unconscionability also imposes costs, including the possibility of judicial er- ror, unpredictability, and diminished ability to use class action remedies because of the diminished commonality and typicality of plaintiffs in a highly tailored inquiry. This Article considers these tradeoffs, and ultimately argues that courts ought to tailor the substantive inquiry, but leave the procedural inquiry largely untailored. 1 Contents I. Introduction 3 II. Unconscionability in Modern Practice 7 A. Eulogies for Unconscionability 7 B. The Bite of Modern Unconscionability 11 1. Modern Unconscionability Cases 12 2. Unconscionability as a Reference Point in Other Statutes 17 3. Unconscionability in the ALI Consumer Restatement 19 III. Tailoring the Unconscionability Regime 20 A. The Problem of Tailoring 20 B. Is this the Subjective vs. Objective Contract Formation Debate? 25 C. An Argument for a Tailored Substantive Prong 29 D. An Argument for an Untailored Procedural Prong 33 IV. Conclusion 37 2 I. Introduction Most first-year Contracts students read Williams v. Walker-Thomas Fur- niture,1 the seminal 1965 case on unconscionability. The case typically serves both as the doctrine’s explanation, and its eulogy. “Looking back, it is clear that the doctrine reached the height of its influence within the decade following Williams,” writes Anne Fleming in an influential piece on unconscionability’s history. “Today, it is rarely invoked to protect low-income bor- rowers.”2 To most contracts scholars, the idea that a relatively conventional but high-interest loan might be unconscionable elicits the same sort of eye- roll reserved for arguments that students who fail to find employment after graduation will successfully sue their alma maters under a promissory estoppel theory.3 With one narrow exception where the doctrine survives—when courts strike down clauses that limit procedural remedies, such as mandatory arbitration provisions and class action waivers—unconscionability’s role in protecting consumers is seen as marginal. But reports of unconscionability’s death are greatly exaggerated. Rather, the doctrine appears to be quietly flourishing in state courts over recent years.4 To name a few representative examples, unconscionability has been used by New Mexico’s Supreme Court in invalidating a short-term lender’s high interest rates; by a Michigan appeals court dealing with overdraft fees in checking accounts; a California court considering the high costs 1. 350 F.2d 445 (D.C. Cir. 1965); see infra note __ (showing that nearly all Contracts casebooks include the case). 2. Anne Fleming, The Rise and Fall of Unconscionability as the ‘Law of the Poor,” 102 Geo. L.J. 1383, 1386 (2014). 3. Online message boards are awash with suggestions that that disgruntled graduates might sue their schools for detrimental reliance. But courts do not share the typical 1L’s enthusiasm about the breadth of promissory estoppel. As one court memorably put it in such a case: “Plaintiff’s promissory estoppel claim…brings to mind Carl Spackler’s analysis from the movie Caddyshack: ‘He’s on his final hole. He’s about 455 yards away, he’s gonna hit about a 2 iron, I think.’” Giuliani v. Duke University (2009). 4. See II.B.i, infra. 3 of out-of-pocket medical bills; and by a Delaware court testing the enforce- ability of payday loans. These cases undermine the conventional wisdom in two important respects. First, unconscionability remains a vibrant doctrine for eliminating consumers’ liability for certain contracts. Second, these courts are doing precisely what many claims the doctrine doesn’t allow—invalidating central price terms, not ancillary or procedural terms. That undermines a widely held belief, repeated in numerous judicial opinions, that “price alone is insufficient to establish unconscionability.”5 This Article uses the resurrection of “rotten-deal” unconscionability6 as on occasion to identify, and answer, a major gap in the doctrine’s contours. How tailored should the unconscionability analysis be to the characteristics of a particular consumer entering into a contract, versus untailored to the typical, median, or “reasonable” consumer?7 As a basic reminder of the doctrine, unconscionability consists of two elements: procedural unconscionability (referring to flaws in the bargaining process, inequalities of bargaining power, or unfair surprise) and substantive unconscionability (referring to terms that are unreasonably unfavorable or fundamentally unfair).8 To evaluate either bar- 5. Whirlpool Corp. v. Grigoleit Co, 2011 WL 3879486 (citing a series of cases where courts held that unconscionability could not be based solely on price, and holding that Michigan law would not allow for unconscionability based on price alone). 6. I use the phrase “rotten deal unconscionability” to refer to the type of unconscionability I am concerned with—i.e., unconscionability that goes to a core contract term, such as price. This is distinguished from what I call “procedural justice unconscionability”—the doctrine’s better known contemporary use, in terms that limit subsequent procedural access for aggrieved consumers, most notably mandatory arbitration and class action waivers. 7. I call this “tailored” and “untailored”; some readers may prefer “particularized” and “average”; and others may wish to substitute “subjective” and “objective”. I avoid “subjective” and “objective” because of the risk of conflating a separate debate, as I discuss in Part III.A.2 infra. (In brief, although it is clear that the doctrine of contract formation has moved strong towards an “objective” view of formation, with some exceptions, that does not answer the question at issue in this paper. Even under an “objective” approach, courts often incorporate some degree of tailoring: they must decide how to draw lines around the category of similarly situated consumers against whom to measure whether behavior is objectively reasonable. In other words, the idea of “objective from the standpoint of a reasonable consumer in a similar situation” can be narrowed to an essentially subjective, highly tailored standard if a court decides that fairly few consumers are “similarly situated”; by contrast, it can be extremely untailored if a court decides that nearly all consumers are “similarly situated”.) 8. While almost all courts and commentators agree that both prongs exist, there is some 4 gaining or substantive unfairness, clearly a court must have some conception of a “consumer” in mind. Is it the specific consumer before the court in all their factual particularity, or a more average or reasonable consumer? Courts have tried to side-step a direct answer to the issue of particularization. Cur- rent cases are contradictory, both internally and when set against each other, and reveal not only a lack of consensus as to the answer, but a lack of aware- ness as to the significance of the question. Consider the following example.9 A consumer takes out a $200 short- term loan, with an APR of over

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