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 primary 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 error, 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 borrowers.”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 enforceability 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 awareness 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 800%. If held for a full year, repaying the loan would cost more than $1,500. That consumer challenges the loan’s enforceability under unconscionability, arguing that its price (interest rate) is too high. The substantive prong of the unconscionability standard asks whether the terms are fundamentally unfair or imbalanced in favor of one party. In making that determination, should it matter why the particular borrower sought the loan? On its face alone, an 800% APR seems shockingly high (if not atypical for that type of loan), especially when compared to more familiar loans. For many consumers, at least, it may represent an irrational choice— potentially one induced by misunderstanding, cognitive bias, overoptimism, or misleading information. But for some consumers, specific circumstances could render such a loan rational under a simple cost-benefit analysis: if the borrower faces a bill they can’t pay, will incur high late fees by not paying the bill, has no access to credit other than the loan, and expects sufficient cash inflows subsequent to the loan to repay it quickly—such that the loan fees and interest payments will be lower than the late penalty fees avoided. If a court tailors its analysis, it will consider detailed evidence about the circumstances of the loan, including the idiosyncrasies of the uses for which a consumer may be borrowing—and, closely related, the lender’s knowledge of

debate about (1) whether there is a “sliding scale” of weight, where extreme substantive unconscionability makes procedural unconscionability less important, and vice versa; and (2) whether the procedural prong is largely ignored by courts, who will always find procedural unconscionability in undickered contracts of adhesion. 9. These facts are based on a pair of contrasting cases which are discussed in detail in Part III.A, infra. 5 how rapidly the borrower is likely to repay. In an untailored analysis, it will consider only the objective characteristics of an 800% APR, relative to a typical consumer in the loan marketplace, in deciding whether the product price is unconscionable. A similar question can arise in applying the procedural prong, which considers the balance of bargaining power and the circumstances surrounding the formation of the contract. Much ink has been wrung over the “no- reading” problem in contract law and the degree to which consumers ignore, don’t understand, or are misled by boilerplate. Should evidence of a particular consumer’s failure to read or understand a contract have relevance in the procedural prong of an unconscionability analysis? Or should a court focus on the broader market conditions that would lead it to believe that most consumers would have had, or not have, a “meaningful choice” in entering into a particular contract? If the latter, it would focus largely on the level of competitive forces acting in a particular market, rather than on the experience of the particular consumer. Courts have inconsistently and alternately adopted tailored and untailored approaches, and are rarely particularly clear or explicit about which they have chosen—or even that such a trade-off exists. Scholarship likewise ignores the question, focusing instead on criticisms of unconscionability’s un- predictableness as an ex post remedy and of the institutional competence of courts to undertake such an analysis.10 But tailoring has important implications for the remedial aspects of the unconscionability doctrine. Consumer protection policy runs up against a thorny problem: the heterogeneity of consumers. One consumer’s mistake is another consumer’s preference.11 A tailored unconscionability analysis has the promise of helping match consumer

10. For an influential example, see Richard Epstein, Unconscionability: A Critical Reappraisal, 18 J.L. Econ. 293 (1975); for a deeply contrasting argument, but one that is nevertheless skeptical of the judicial role, see Lewis A. Kornhauser, Unconscionability in Standard Forms, 64 Cal. L. Rev. 1151 (1976); for a defense of unconscionability, see Eric Posner, Contract Law in the Welfare State: A Defence of the Unconscionability Doctrine, Usury Laws, and Related Limitations on the Freedom of Contract, 24 J. L. Stud. 283 (1995). 11. See Jacob Hale Russell, Misbehavioral Law and Economics, __ Mich. J. L. Ref. __ (2018). 6 protection doctrine to consumer heterogeneity, because courts are accustomed to such individualized fact-finding. But tailoring unconscionability also imposes costs, including a costly inquiry by a court, the possibility of judicial error, 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 in Part II, and ultimately argues that courts ought to tailor the substantive inquiry, but leave the procedural inquiry largely untailored. These questions about unconscionability have important current significance. First, unconscionability is still used to strike down what courts per- ceive to be bad bargains. Second, the unconscionability analysis is incorporated into other common-law doctrines—such as “public policy” defenses to formation—and to statutory doctrines from the UCC to other uniform acts. Finally, unconscionability is at the center of an ongoing, and controversial, American Law Institute restatement project focusing on consumer contracting. Some have criticized the draft ALI for encouraging wider use of unconscionability than is commonly believed to exist, but this may be misplaced given this Article’s claim that unconscionability is in widespread usage— though possibly not in exactly the form its drafters hope. In Part I, I discuss the conventional wisdom of unconscionability’s decline and limitation to the field of mandatory arbitration and class action waivers. I then give examples of recent cases that suggest unconscionability remains robustly used outside those contexts, and particularly in challenging core price terms. In Part II, I examine whether courts should tailor the analysis.

7 II. Unconscionability in Modern Practice

(A) Eulogies for Unconscionability

The conventional wisdom holds that unconscionability, although orig- inating in much earlier theories about the type of assent needed to form a contract,12 drew mass attention from the marketplace of legal ideas with the 1965 Williams v. Walker Thomas decision—and its breakaway was its peak, as it faded from focus quickly. As no less a luminary on contracts than Allan Farnsworth puts it in his discussion of the “trend disfavoring the unconscionability defense,” including a swath of cases in the 1980s where courts declined to strike down due-on-sale clauses in mortgages challenged under unconscionability: “Another arrested development in contract law concerned unconscionability and related doctrines. The 1970s were undeniably the decade of the consumer in contract law. … During the 1980s, the pendulum swung in the opposite direction…In sum, continued expansion of unconscionability and related doctrines did not occur in the 1980s as expected. Furthermore, the major push for expansion came in connection with commercial, rather than consumer, transactions. Regardless, the push was, on the whole, note- worthy mainly for its lack of success.”13 According to such accounts, unconscionability survives primarily as a means of protecting procedural safeguards for consumers, notably striking down some mandatory-arbitration provisions.14 Throughout this paper, I call this “procedural-justice unconscionability,” which I distinguish from “‘rotten-deal’ unconscionability,” challenges that focus primarily on price and

12. For examples as far back as 1750, see the discussion in Colleen McCullough, Unconscionability as a Coherent Legal Concept, 164 U.Pa.L.Rev. 779, 787–794 (2016). 13. E. Allan Farnsworth, Developments in Contract Law During the 1980s, 41 Case W. Res. L. Rev. 203 (1990). 14. “In recent years, the greatest volume of litigation raising issues of unconscionability has concerned enforceability of arbitration clauses.” Macaulay’s Contracts casebook at 686. 8 other terms that do not primarily relate to the consumers’ post-contract litigation remedies. In an empirical study by Knapp, the number of unconscionability cases rose from 1990 to 2008, but he attributed nearly all the rise to mandatory-arbitration clauses.15 His eulogy for unconscionability is char- acteristic: “By the early 1970s, however, the case law applying the doctrine of unconscionability appeared to have run its course, and a decade or two of relative dormancy for the doctrine lay ahead. … The use of individual lawsuits to develop a generally consumer-protective common law is by itself an inefficient and probably ultimately ineffective strategy.” Although nearly all Contracts casebooks still include Williams vs. Walk- er-Thomas Furniture, many of them—like most scholars—believe that rotten- deal unconscionability has largely faded away. “Subsequent writers [since a prominent 1967 article on the doctrine] have concluded that the courts, in fact, have shown considerable restraint in applying the unconscionability doctrine,” as one popular casebook puts it.16 According to these accounts, the void in consumer protection is instead filled—if it is filled at all—by enforce- ment actions by state and federal agencies, state consumer-protection acts, and specific statutes that restrict particular types of contract terms and abuses. Perhaps most notably, Anne Fleming has ably traced the degree to which state legislatures were influenced by Walker-Thomas and its progeny in passing consumer protection laws. The case itself was featured in congressio- nal testimony, and “catalyzed a process of local legislative reform to put in place new regulations for installment sales.”17 Federal legislation followed, including the Truth in Lending Act, which attempted to use disclosure to limit the ills of lending, and the Equal Credit Opportunity Act, which focused on discrimination in lending. But at the same time, she argues, the doctrine of

15. Knapp, Blowing the Whistle, 46 San Diego L. Rev. 609 (2009) (empirical study of 750 cases, finding an increase but not an “explosion” of cases, from 16 in 1990 to 155 in 2008, of which the “lion’s share of the overall increase,” or 115 cases in 2008, related to arbitration clauses) 16. Knapp, Crystal, Prince, Problems in Contract Law, 7th Ed., 600-601; 17. Fleming, supra note __, at 1422, 1424 9 unconscionability itself became increasingly unmoored from its origins—concern about the poor, which were central to, among others, the author of the Walker-Thomas opinion.18 Most other scholars agree with Fleming that unconscionability is largely dead for the “rotten deal” sort of case I am interested in—the kind where a court, as in Walker-Thomas, actually says that the services or goods delivered weren’t fair relative to the price paid by the consumer. Some scholars doubt it ever lived much outside Walker-Thomas, suggesting that even the alleged 1960s spate of cases itself was an illusion, and that there was never much traction to rotten-deal cases.19 A modern rise in unconscionability, since the 2000s, appears to be largely due to the increased focus by the plaintiffs’ bar on—and increased receptivity by the courts to challenges against— procedural-justice clauses that purport to limit procedural justice.20 Some have attributed this putative decline in rotten-deal unconscionability, without substantial evidence, to the two basic concerns raised time and again by legal scholars: first, that unconscionability went beyond the competence of most courts, and second, that it was hopelessly vague. That concern about institutional competence permeated even the original dis- sent in Walker-Thomas: Judge Danaher didn’t express love for the cross-collateralization clause that had ensnared Williams, but rather echoed the lower court’s view that the solution to Mrs. Williams’ plight was legislative rather than judicial.21 To the extent courts do continue employing rotten-deal unconscionability, most commentators agree on another tenet: they don’t use it to

18. Id. at 1437. 19. DiMatteo & Rich, supra note __ at 1100-01 20. This is well documented by McCullough’s recent note, supra note __, at 786, n. 40. (updating statistics to include new cases that document a rise in unconscionability, but see list in footnote 40: nearly all her cases are about class action waivers and arbitration). 21. Walker-Thomas, 350 F.2d at ___, (Danaher, J. dissenting) (agreeing with the lower court in quotation: “We think Congress should consider corrective legislation to protect the public from such exploitive contracts as were utilized in the case at bar”). 10 strike down high prices.22 This would seem to comport with general theories of contract formation: courts don’t inquire into the adequacy of consideration—one peppercorn, as the saying goes, could be adequate consideration.23 Bargains are in the eye of the beholder, and under the dominant common law approach, second-guessing bargains because one side has sour grapes does nothing to further freedom of contract. Thus, it’s no surprise that many courts state that a contract can’t be unconscionable simply because of its high price. “Though the residency fees were substantial, when a buyer is free to engage in comparative shopping, price alone will not render a contract substantively unconscionable,” one court says, characteristically.24 Other courts have held similarly and noted that “the general rule’ was that an excessive price was not, by itself, sufficient to support a claim of unconscionability.”25 But, as Part II.B will show, courts do, in fact, find contracts unconscionable simply because they find the prices—including in many cases, interest rates on loans—unreasonably high.

22. Williston discusses price as a possible reason, though there is some debate: “The mere assertion that the price was excessive has thus been deemed conclusory and insufficient to establish the defense of unconscionability.” Williston on Contracts, §18:15. (Strangely, as quoted elsewhere, in Bagley, Williston supposedly says: “unconscionability was meant to counteract two generic forms of abuses…the second of which relates to the substantive contract terms themselves…such as … unreasonable and unexpectedly harsh terms having nothing [a word added by Bagley that is not in Williston] to do with price or other central aspects of the transaction.” 23. “A peppercorn does not cease to be good consideration if it is established that the promisee does not like pepper and will throw away the corn.” 24. 103 NM 506. Ironically, the same court—New Mexico’s Supreme Court—wrote the payday loan decision, voiding signature loans on the basis that their APRs were too high, that originally inspired this paper. 25. 2011 WL 3879486. “Whirlpool argues that excessive price alone may render a contract unconscionable. The parties have not provided any Michigan or Sixth Circuit cases on this direct proposition of law, and the Court has not been unable to locate any. Plaintiff Whirlpool cites four cases arising in the 1960s which support the conclusion that an excessive price may render a contract unconscionable.” The court went on to distinguish all four. “…The Court does not find these consumer cases apt for guidance in this case involving mutually sophisticated business parties.” It then noted cases standing for the opposite proposition, that “excessive price, standing alone, will not render a contract unconscionable” including In re Pyramid Energy, Ltd., 160 B.R. 586 (Bankr.S.D.Ill.1993); Bennett v. Behring Corp., 466 F.Supp. 689 (S.D.Fla.1979); Contract Buyers League v. F & F Inv., 300 F.Supp. 210 (N.D.Ill.1969). 11 (B) The Bite of Modern Unconscionability

Unconscionability maintains its bite in three ways in modern consumer protection practice, beyond its well documented use in “procedural justice” cases. First, traditional unconscionability is still used by courts to fix “rotten deals,” by striking down or rewriting terms, including price terms in consumer loan contracts. Second, unconscionability’s contours have been incorporated into the interpretation of codified consumer-protection statutes; these in turn reference, either explicitly or implicitly, common-law reasoning and doctrine: those statutes often use fairly general language that tracks that of unconscionability, and results in courts simply replicating common-law unconscionability analysis when applying the statutes. Third, unconscionability is treated with unusual vigor in the American Law Institute’s draft restatement on consumer contracts—and is at the heart of controversies that beset the restatement project—which, if the project eventually passes, may buttress the doctrine further. This section reviews each in turn, but overall, demonstrates that unconscionability retains its teeth. This contradicts the conventional wisdom, which proclaims unconscionability’s death in no uncertain terms.

(1) Modern Unconscionability Cases Brief descriptions of nine interesting, recent examples will serve to illustrate the contemporary robustness of rotten-deal unconscionability: • In Quicken Loans v. Brown26 (2012), the Supreme Court of Appeals of West Virginia upheld a lower court's decision that a mortgage loan made by Quicken was unenforceable because it was "induced by Quicken's unconscionable conduct, that the loan included several unconscionable terms, and that the loan product, in and of itself, was unconscionable."27

26. Quicken Loans v. Brown, 230 W.Va. 306 (2012) 27. Id. at 323. 12 • In New Mexico v. B&B Investment (2014),28 a unanimous New Mexico Supreme Court found that the interests rates of certain signature loans were substantively and procedurally unconscionable. Signature loans are similar to payday loans but not collateralized by a paycheck and typically for a higher interest rate and longer term. The interest rates, which ranged from 1,147.14% to 1,500% were allowable under the state’s usury statute, and the district court found only procedural but not substantive unconscionability. The Supreme Court reversed, finding that it was “contrary to our public policy, and therefore unconscionable as a matter of law, for these historically anomalous interest rates to be charged in our state.” • In James v. Nat’l Financial (2015),29 Delaware’s Vice Chancellor Laster invalidated a one-year, non-amortizing, unsecured loan for $200, which the plaintiff took out at a “Loan Till Payday” storefront to pay for food and rent. The terms of the loan, if held for the full year, would have required total repayments of $1,620 at an APR of 838.45%. The lender argued that since most borrowers paid off the loans long before a one year period, those potential re- payment rates “mean[t] nothing,” but the plaintiff ran into difficulties following an accident at work and was unable to repay the loans on her intended schedule. Although the court rejected plaintiff’s efforts to turn the case into a class action, the court found that the loan to James was both substantively and procedurally unconscionable, invalidating the loan and awarding additional damages under another statute (the Truth in Lending Act). • In Green v. 119 W. 138th St LLC (2016),30 plaintiff signed a quitclaim deed for an unimproved lot over to a developer for $5,000, partly because of his (likely) mistaken view that he no longer owned the lot. The lot was worth over $1 million, and plaintiff subsequently sued to have the quitclaim deed discharged on grounds of unconscionability. The New York appellate divi- sion reversed summary judgment for defendant, finding that there were ma-

28. State of N.M., ex rel King v. B&B Inv. Group, Inc. et al., 329 P.3d 658 (N.M. 2014) 29. James v. Nat’l Financial, 132 A.3d 799 (Ch. Del. 2015) 30. Green v. 119 W. 138th St, 142 A.D.3d 805 (2016) 13 terial issues of fact. Again contradicting the conventional wisdom that courts don’t apply unconscionability to central price terms, the court wrote: “It is clear that plaintiff’s quitclaim of its interest in a $1 million property for $5,000 may be viewed as ‘unreasonably favorable’ to [defendant developer], meeting the substantive element of unconscionability.” • In Citibank v. DeCristoforo (2011),31 the trial court used unconscionability to throw obstacle after obstacle on Citibank’s way to collect more than $25,000 of credit card debt held by DeCristoforo. The court denied Citi from collecting at the summary judgment stage, forcing additional hearings on damages, and ultimately the judgment to amounts that would have been collected an interest rate of 18%, rather than the actual interest rates which ranged as high as 55%. Credit card issuers have long been able to skirt state- by-state usury caps by situating themselves in states like South Dakota, which have no (or high) usury cap.32 However, the lower court—relying in large part on a Frontline documentary on the credit card industry that the judge had seen33—decided that Massachusetts unconscionability law still applied, and barred high interest rates: “With interest rates as high as forty and fifty percent, a significant portion of the debtor’s monthly payment goes to- ward paying interest without touching the underlying debt…Interest rates at these rates drain needed resources and slow economic growth. Citibank’s charges, in excess of eighteen percent, drives too hard a bargain for a court of conscience to assist.”34 The decision was ultimately vacated by an appellate court in an unpublished decision, but not on subtantive grounds relating to unconscionability’s applicability—instead, it noted that neither party had alleged or briefed unconscionability and thus the lower court was precluded from undertaking such an analysis.35

31. Citibank N.A. v. DeCristoforo, 28 Mass.L.Rptr. 139 (Superior Ct. Mass.). 32. This has been clearly permissible since Marquette vs. First Omaha Serv. Corp., 439 U.S. 299 (1978). 33. Secret History of the Credit Card, Frontline (PBS), Nov. 2004 34. 28 Mass.L.Rptr. 139, *5 (internal quotations omitted). 35. Citibank v. DeCristoforo, 83 Mass.App.Ct. 1131 (2013), *3 (reminding the lower court that failure to plead a defense usually waives it, and that the record contains no facts—such as 14 • In O’Donovan v. Cashcall, the court certified a class to argue that interest rates on unsecured personal loans were unconscionable based on how high they were. It certified a class consisting of anyone who had borrowed a $2,600 loan product at interest rates of 90% or higher, finding that plaintiffs had sufficiently shown that this issue could be decided based on “common evidence of substantive unconscionability,” such as evidence about the availability of other, comparable loans.36 • In Gulfco of Louisana v. Brantley (2013), the Arkansas Supreme Court affirmed a lower court’s refusal to foreclose the Brantley’s home on unconscionability grounds. The court drew particular attention to the Brantley’s educational and occupation background, to the feeling that they had “the choice of either accepting more loans or losing their home,” to the fact that the borrowers had not read many of the loan documents in detail, and to the fact that many of the loans were issued to pay off prior loans, which should have shown the lender the borrowers were unlikely to repay the loans. The court lower court had found that the repeated pattern of high risk loans rep- resented an “intolerable pattern of reprehensible and unconscionable conduct on the part of Gulfco that offended its sense of decency and justice.”37 • In Drakopoulos v. U.S. Bank, the Massachusetts Supreme Judicial Court agreed with the lower court that there were sufficient factual issues to preclude a lender that had foreclosed on a mortgage from tossing out an unconscionability challenge at the summary judgment stage.38 The court noted plaintiffs’ employment and medical history (including a diagnosis of bipolar disorder for one plaintiff, and cognitive issues in the other). It found a triable issue on substantive grounds because the mortgage required payments higher than plaintiffs’ total monthly income.

the underlying contract—that would be necessary to an unconscionability analysis) 36. O’Donovan v. Cashcall, 278 F.R.D. 479 (N.D. Cal, 2011). 37. Gulfco of Louisana v. Brantley, 2013 Ark. 367 (2013), **10, **14. 38. Drakopoulos v. U.S. Bank, 465 Mass. 75 (2013). 15 • In Hanjy v. Arvest Bank,39 the court permitted plaintiffs to use unconscionability as an affirmative claim in seeking a declaratory judgment (as op- posed to simply a defense, which was the traditional use of unconscionability), and allowed plaintiffs to go forward with their claim after bank filed a motion to dismiss. Plaintiffs had challenged Arvest’s overdraft fees on debit cards, arguing that the bank resequenced the posting of transactions in a way that maximized the likelihood customers would pay fees, failed to provide accurate balance information, and didn’t adequately explain its practices. Notably, the court rejected Arvest’s argument that the fact that its practices were routine and permitted by federal regulators cleansed the practice of unconscionability. The court also noted that the adequacy of disclosure was a fact-sensitive matter that relied on how the information had been presented and the manner in which plaintiffs had read or received the contracts. The list is representative, but non-exhaustive. Rotten-deal unconscionability has found recent relevance in everything from striking down negligence waivers at ski resorts40 to stalling a bank’s attempts to foreclose on a mortgage41 to weighing rights of first refusal on sales of land42.

39. Hanjy v. Arvest Bank, 94 F.Supp.3d. 1012 (E.D.Ark., 2015). 40. Bagley v. Mt. Bachelor, 356 Or. 543 at 570–1 (2014) (finding an anticipatory release from negligence unconscionable, because the plaintiff had no opportunity to negotiate the terms and because “a harsh and inequitable result would follow if dependent were immunized from negligence liability in light of dependent’s superior ability to guard against…its own negligence…and superior ability to absorb and spread the costs,” as well as “broad societal concern” about safety of skiiers. 41. Bank of America N.A. v. Aubut, 167 Conn. App. 347 (2016) (reversing summary judgment in favor of a bank, finding a that the defendants’ defense of “predatory lending” could be read broadly as a pleading defense of unconscionability; the court particularly focused on an affidavit by defendant about the struggles they made to make their mortgage payments, their financial difficulties that existed at the time the loan was issued, and the defendant’s claim that the mortgage broker had told him the payments were feasible: “We were told by the lender’s representative that the loan was affordable based on our household income and expenses. I believed the lender’s representative had my best interest in mind but now know better.”) 42. Christ Holdings v. Schleappi, 67 N.E.3d. 47 (Ohio Ct. App. 2016) (appeals court ultimately did not find unconscionability, although the lower court had found it; appeals court reversed the lower court’s directed verdict of substantive unconscionability for a right of first refusal, where the lower court found that certain terms of the right of first refusal—for instance, that it did not explictly indicate that the right only became available when sellers planned to accept another offer, not if sellers were offered a price by a third party that they had no 16 This Article does not make a statistical claim or otherwise attempt to count or quantify the number of unconscionability cases or the change over time.43 Doing so is difficult—to the point that most such efforts wind up being misleading—because of selection issues in the types of cases brought, the likelihood of settlements in cases that tend to be low dollar amount, and general difficulties with counting dockets. It also is not necessary to my point, which is simply to overcome the low hurdle the conventional wisdom— which states unconscionability’s death in no uncertain terms—has set. Instead, my goal is merely to suggest the breadth and reach of unconscionability in major recent state decisions invalidating core-deal terms of contracts. None of these cases hinge on the types of procedural-justice issues typically noted in unconscionability; instead all of them strike down—or allow further fact-finding with the potential of striking down—a central term on the basis of unconscionability. In many cases, the central term that offends the court is price (often in the form of high interest rates). In addition, these cases may serve an even stronger channeling effect on lenders than their numbers and scope suggest. Lenders are not just concerned about losing unconscionability cases: they are concerned about having them brought and surviving preliminary motions. Lenders want certainty, predictability, and speed in the collections process. Even if they could ultimately prevail in a trial on an unconscionability issue, lenders prefer—in- deed, their business model relies on—the stable ability to obtain fast entries of judgment. Significantly, because most of the courts above note that unconscionability relies on the court examining the “totality of the circumstances,”44 including the details of the negotiation process, unconscionability is often a fact-sensitive issue that is not well suited to summary judgment.

intention to accept). 43. For other reasons not to do this, see Hoffman et al., Docketology. 44. See, e.g., Hanjy, 94 F.Supp.3d at 1032 (courts must “review the totality of the circumstances surrounding the negotiation and execution of the contract”). 17 This fact will generally work to consumers’ favor in that it drags out proceed- ings and inhibits collection of loans.

(2) Unconscionability as a Reference Point Even when courts are not directly applying the common-law defense of unconscionability, consumer protection statutes that use the term “unconscionability” without much further elucidation will generally result in courts referring to the doctrinal background of common-law unconscionability. Most notably, of course, unconscionability is codified for all contracts covered by the UCC. UCC § 2-302 essentially restates the common law test: “(1) If the court as a matter of law finds the contractor any clause of the contract to have been unconscionable at the time it was made the court may refuse to enforce the contract, or it may enforce the remainder of the contract without the unconscionable clause, or it may so limit the application of any unconscionable clause as to avoid any unconscionable result.” The vagueness of this provision gave rise to Leff’s famous criticism about the “amorphous unintelligibility” of the UCC’s unconscionability provision: “if reading this section makes anything clear it is that reading this section alone makes nothing clear about the meaning of ‘unconscionable’ except perhaps that it is pejorative.”45 But unconscionability’s use in statutes does not stop there. It is cited in the Uniform Consumer Credit Code (1974), as applicable to all consumer credit contexts: a consumer credit contract may be unenforceable if “the agreement or transaction to have been unconscionable at the time it was made, or to have been induced by unconscionable conduct”. In applying Sec- tion 5-108, courts are offered a non-exclusive list of factors to consider, including whether the seller knew the consumer was unlikely to be able to repay the loan,46 that the consumer would be unable to “receive substantial

45. Leff, Unconscionability and the Code, supra note __, at 488. 46. The drafter’s comments notes, as an example, a situation where the lender expected to “reposess[] the goods sold and resell[] them at a profit”. 18 benefits from the property or services sold or leased,” had overpaid relative to “like consumers” or took advantage of the consumer’s “ignorance”.47 The drafters’ comments give examples of potentially unconscionable sales: selling an item the lender expects to repossess and resell; “selling to a Spanish speaking laborer-bachelor of an English language encyclopedia set” (raising the question of whether a married laborer could buy such a set?); selling “two expensive vacuum cleaners to two poor families sharing the same apartment and one rug” or “a home solicitation sale of a set of cookware or flatware to a housewife for $375 in an area where a set of comparable quality is readily available on credit in stores for $125 or less”. Courts are given further specific factors to consider in the unconscionability analysis for debt collection practices48 and for insurance contracts.49 Other provisions treat practices that might, if not directly statutorily restricted, be restricted by unconscionability—including the cross-collateralization clauses at issue in Walker-Thomas.50 [Additional discussion of state law statutes to be added.]

(3) The ALI Restatement The ALI is currently engaged in a draft restatement on consumer contracts, although the project may be stuck because of controversy as to whether the restatement “restates” law or instead tries to push it in a new normative direction. My interest here is the degree to which the ALI focuses on unconscionability. In some respects, the ALI does track the conventional wisdom about unconscionability: it has a particular carveout for terms that limit procedural justice, which are given a presumption of substantive unconscionability. Beyond that, the draft Restatement does not discuss the issue I take up in the next Part, as to whether courts should tailor the substantive

47. UCCC 5-108. 48. UCCC 6-111. 49. In analyzing unconscionability in an insurance contract, a court should consider “(a) potential benefits to the consumer including the satisfaction of his obligations; (b) the creditor's need for the protection provided by the insurance; and (c) the relation between the amount and terms of credit granted and the insurance benefits provided.” UCCC 4-106 50. UCCC 3-302. 19 prong, using only the most general terms to suggest that scrutiny of individual terms should be balanced against benefits to the consumer from the contract taken as a whole: “A term is substantively unconscionable only to the extent that its harsh effect is not matched by countervailing benefits to consumers. The presence of a competitive market environment does not preclude a finding that a term is substantively unconscionable.” On the procedural side, the Restatement leans heavily towards an untailored “salience” test for unconscionability—terms that are not salient to most consumers are likely procedurally unconscionable, and vice versa, regardless of the particular consumer at issue’s awareness of the term: “The essence of the procedural-unconscionability test is consumer awareness in a market context. The question is whether an ordinary consumer would be aware of the term. When consumers are aware of a term, it affects their contracting decisions. In these situations, the reasons for intervention in the substance of the deal are diminished. The question, then, in applying the procedural unconscionability test, is whether a term affects the contracting decisions of a large enough number of consumers. (If the market is segmented, the question is whether a term affects the contracting decisions of consumers in the relevant segment.) A term that does not affect the contracting decisions of a substantial number of consumers is presumed to be procedurally unconscionable. .… Subjective knowledge of an individual consumer would not cure the market failure caused when a term does not affect the contracting decisions of a substantial number of consumers (although it would allow this particular consumer to make an informed choice between purchasing the product with the pro-business term and forgoing the pur- chase altogether). Subjective knowledge does not preclude a finding of procedural unconscionability.” Although logical, this position does not find much support in caselaw. Courts have largely sidestepped economic analyses in applying unconscionability, which is part of why the Restatement has come under criticism

20 as failing to restate the law. But it is consistent with the basic economic idea that salient terms in a competitive market will be adequately policed without court help.51 It is also consistent with the extent to which the growing behavioral economics literature has shown the difficulties that real-world consumers, when compared to their hypothetically rational counterparts, have in evaluating contract terms.52

III. Tailoring the Unconscionability Regime

(A) The Problem of Tailoring

There is a gap in unconscionability doctrine: How particularized should a court be in examining a consumer contract for unconscionability? Should the analysis hinge on the particularities of the relationship between consumer and merchant—the circumstances in which the contract was signed, and the details of the sophistication and financial situation of the particular consumer in front of the court? Or should it be relatively untailored, such that certain provisions are essentially per se unconscionable and others capable of surviving scrutiny regardless of the specific consumer–merchant dyad? This question takes on increasing significance given Part II’s claim that

51. Restatement at ___. (arguing that “as a normative matter, salience is a suitable underlying test because competition can be counted on to police salient terms, but not nonsalient ones. If competition scrutinizes salient terms, courts need not provide additional discipline.”). See also David Gilo and Ariel Porat, Viewing Unconscionability Through a Market Lens, 52 Wm. & Mary. L. Rev. 133 (2010). 52. See, e.g., Russell Korobkin, Bounded Rationality, Standard Form Contracts, and Unconscionability. 21 unconscionability retains an important role in modern consumer protection practice. There is little doctrinal clarity, or even focus on this important question. To recap the general law of unconscionability, most courts apply two prongs in analyzing unconscionability—procedural and substantive—although there is some disagreement about the exact balance.53 (The terms are perhaps regrettable not only for their vagueness, but also for the early availability of a more rhetorically satisfying alternative: in the article coining the terms, Arthur Leff defined the former as “bargaining naughtiness” and the latter as “evils in the resulting contract.”)54 On the procedural prong, the court is supposed to focus on the consumer’s bargaining process, and whether the consumer experienced “unfair surprise” or an the absence of “meaningful choice.” On the substantive prong, the court is supposed to focus on whether the contract is “fundamentally unfair or unreasonably one- sided.”55 Regardless of how it is formulated, the unconscionability analysis require some evaluation of the contract from the standpoint of the “consumer.” To answer either the procedural or substantive prong, the court cannot help but have some consumer in mind by which to evaluate its relative fairness or surprisingness. But which consumer? Is it the specific, subjective individual sitting in front of the court, in all of their factual complexity? Or is it a “typical” consumer—a more objective test as to what a reasonable consumer would experience in striking the same hypothetical bargain? In this Article’s

53. There are two primary doctrinal disagreements in the law of unconscionability, neither of which is significant to this Article. The first is the extent to which the procedural and substantive prongs are independent, and the relative weight to be accorded each. The second is whether unconscionability is only a defense to the enforceability of a contract, or whether it can be used “offensively” by a party seeking to invalidate a contract. 54. Leff, Unconscionability and the Code, supra note __ at 487 (“Hereafter, to distinguish the two interests, I shall often refer to bargaining naughtiness as “procedural unconscionability,” and to evils in the resulting contract as “substantive unconscionability.””) 55. Section 5 of the draft ALI Restatement of Consumer Contracts 22 terminology, the former approach would be “tailored,” the latter “untailored.” An example will illustrate the tension. Two courts recently struck down high-interest, short-term loans—but their conception of the contours of substantive unconscionability seem strikingly different. They speak past each other, and that clash sets the stage for my analysis: • In New Mexico v. B&B, the court declines to consider how a borrower might use a loan to evaluate its price. “Under an objective, not a subjective, reading…, Defendants’ signature loans are low-value products. First, these loans are extremely expensive… Second, Defendants do not report positive repayments to credit reporting agencies… Third, there [are a variety of fees], each of which potentially increase the cost of these loans. Fourth, there is an acceleration-upon-default clause which provides that if a borrower falls be- hind on his or her payments over the year, then the full amount of the debt— principal and interest—comes due immediately. All of these loan features…make it a low-value product regardless of how the borrower uses the principal.”56 • In James v. National Financial, the court suggests that, in principle, a lender could show a “rational” use of a high-cost loan, but failed to do so, only putting on testimony about “hypothetically rational use[s]” that did not closely meet the loan terms. In other words, such a defense was possible— that a borrower might use a high-cost loan to pay down a higher-cost loan or fee elsewhere—but the lender’s expert botched it, perhaps in part because this particular loan structure was not tailored to this particular borrower. “[T]here’s the rub,” the court notes. “The Disputed Loan was not structured as a short-term loan. It was a twelve month, interest-only installment loan… It may be that a consumer with the wherewithal to repay a high-cost loan period after one period could rationally use some high-cost products in a wealth-enhancing way,” but this loan was not structured appropriately for

56. 329 P.3d at __ (emphasis added). 23 this use.57 The court repeatedly referred to the failure of the experts to look at the local Wilmington market where the loan was written, the specific lender, and the specific terms of this loan. The lender also attempted to argue that no price was too excessive for a loan, which irritated the court, and the lender’s expert noted that the price “look[ed] kind of shocking” and was higher than what he expected. But, in principle, if the cost had been related to the value of the loan for the borrower, the court would have evaluated the claim—contra the New Mexico court’s view that the interest rates and terms alone made the loan objectively indefensible. As these examples show, courts can’t easily avoid the issue, but that doesn’t mean they confront it head on—resulting in both inconsistency and muddiness. This confusion pervades academic literature as well, where commentators seem largely to have missed this question. Williston is typically vague, implying both that unconscionability is a fact rather than a law decision (suggesting tailoring to circumstances may not be appropriate), but also that the circumstances in which the contract negotiated are relevant to the “fact-specific” inquiry. “The determination of whether a given clause or contract is in fact unconscionable is to be made at the time of its making rather than at some subsequent point in time (e.g., at the time for performance) and is a question of law for the court, rather than a question of fact for the jury, to decide.”58 The Restatement (Second) of the Law of Contracts is similarly unhelpful: “The determination that a contract or term is or is not unconscionable is made in the light of its setting, purpose and effect”59 and should be made “in the light of all the material facts.”60 There is some suggestion that, if tailoring is to happen, it is in the form of the procedural aspects of negotiation affecting the interpretation of substantive unconscionability.61

57. James, 132 A.3d at 819-820 (emphasis added) 58. Williston on Contracts, 18:12. 59. Restatement (Second) of the Law of Contracts, §208, comment a. 60. Id. at comment f. 61. “Other terms may be unconscionable in some contexts but not in others. Overall imbalance and weaknesses in the bargaining process are then important.” Id. at comment e. 24 The state of scholarship on this question is no better. The most relevant answers typically come from articles examining the difficulties posed to contract doctrine by standardized, rather than dickered, contracts. Holmes and Thurmann draw on German law in suggesting a new mode of analysis for form contracts. Because the drafters of standard form contracts want predictability, a detailed, case-by-case adjudication system for unconscionability doesn’t make sense. The earliest versions of unconscionability assumed highly dickered contracts and thus focused on the particular bargaining circumstances. “Consideration of the formative circumstances makes the adjudication process complicated and time consuming, causing a certain unavoidable unpredictability of the result. … The use of a standard form does not justify setting in motion such a costly and time consuming analysis.” As a result, the pair argues, the focus should be on how standard and reasonably expected the terms are—for instance, consent might be defective because a deviation from standard, expected terms is particularly “inconspicuous.”62 Most articles that treat issues of whether unconscionability is “subjective” conflate the term. Rather than its typical use in common-law doctrine, which refers to whether the inquiry is from the standpoint of the party in question versus from a “reasonable” party in similar shues, these scholars use “subjective” to mean, typically in a critical tone, that judges are arbitrary, inconsistent, and simply fulfilling personal judicial preferences.63 Paul Bennett Marrow criticizes the unconscionability analysis as problematically subjective, because it is focused “on the impact of a given term solely on the immediate parties to the agreement,” thus giving unconscionability findings

62. Eric Mills Holmes and Dagmar Thurmann, A New and Old Theory for Adjudicating Standardized Contracts, 17 Ga. J. Int’l & Comp. L. 323, 415 (1987). 63. See, e.g., Mark Klock, 69 Tenn. L. Rev. 317 (2002 (expressing concerns about unconscionablity “if the law permits a judge to utilize her own subjective judgment about the reasonableness of the price”); Paul Bennet Marrow, 22 Pace L. Rev. 27 (2001); Charles Bruch, 69 U. Cin. L. Rev. 1257; Edith Warkentine, 31 Seattle U.L.Rev. 469 (2008). Not all uses of subjectivity as referring to judicial subjectivity are critical. Amy J. Schmitz, 58 Ala. L. Rev. 73 (2006) (arguing that the subjectivity of judges is less of a problem than critics charge, because the doctrine’s flexibility promotes fairness); Melissa Lonegrass, 44 Loy. U. Chi. L.J. 1 (2012). 25 a sui generis quality with little precedential value. But his definition of “subjective” is different from the typical one, for he defines subjective as “looking at the impact [of the contract] on the parties.” Instead, he believes unconscionability should be reserved for terms that “undermine[] the integrity of the contracting system itself” or a statutory regime. Thus, both a tailored and untailored analysis would be excluded by his proposed regime64, which would radically limit the scope of the unconscionability doctrine. In this Part, I will weigh the merits of each approach—for both have merits—but ultimately argue that the answer differs for the procedural and substantive analysis. The procedural analysis works best when it is not in its easily-caricatured form of insisting that all contracts be dickered, an idealized view of negotiation which flies against the tides of modern consumer contracting and is not really desirable from either the merchant’s or consumer’s standpoint. Rather, I argue, procedural unconscionability really ought to focus on the broader characteristics of the particular market in which the contract is reached—i.e., the median consumer in a particular market. By contrast, the substantive analysis can and should take into advantage the idiosyncratic tastes and heterogeneity of particular consumers.

(B) Is this the Subjective vs. Objective Contract Formation Debate?

Before proceeding, I must explain why this question is not easily dis- pensed with by what might seem like a simple doctrinal point. This argument would go something like this: because contract law more generally has moved to an “objective theory of assent,” a particular consumer’s subjective mindset should play no role in evaluating unconscionability. After all, unconscionability is a defect in formation: the doctrine, like the defense of duress, has its genesis in the idea that there is a defect in the assent that

64. Paul Bennett Marrow, Squeezing Subjectvity from the Doctrine of Unconscionabilty, 53 Clev. St. L. Rev. 187 (2005). 26 formed the contract. Thus, if our theory of contract formation is objective and has moved away from the subjective “meeting of the minds,” as the standard casebook law now has it, should not unconscionability be the same? (Uncon- scionability typically remains a defense available to a consumer against whom a merchant tries to enforce a contract, although courts are split on whether it can be raised as an affirmative theory to strike down a bargain.) But that is neither a completely adequate statement of contract law’s theory of assent, nor the same question being asked by this paper. First, to say that contract formation is now an “objective” standard is an oversimplification of the law.65 I do not wish to recite the complicated move from a subjective to an objective standard and the scholarly debate this turn engendered, much less to engage the debate.66 It will suffice to acknowl- edge two things: first, it is true that most courts—and most black-letter law restatements—will focus on “manifestations of mutual assent,” and infer the existence and content of a contract from how a reasonable party would inter- pret the parties’ observable actions—an objective standard. But, secondly, the whole idea of contract law remains, for most, an underlying desire to enforce “meetings of the minds,” a subjective standard, and the objective test is better seen as a way of operationalizing a subjective standard—in a way that makes the inquiry practical for a court. Hence, a court remains interested in each party’s subjective situation to the extent it may show that the manifestations of mutual assent are not an actual guide to the parties’ subjective intentions. For instance, if both parties enter into a contract as a joke, but the documented evidence does not make the joke nature of the contract clear, a court will be reluctant to enforce it.67 It is not so much that courts reject a subjective concept of contract interpretation, but rather that, in most cases, the objective evidence viewed in light of reasonable interpretation will be the most reliable, consistent, and available guide to interpreting the parties’ subjective intent.

65. Cites to contract theory; see also Richard L. Barnes, 66 La. L. Rev. 123 (2005) 66. See, e.g., Larry A. DiMatteo, “The Counterpoise of Contracts: The Reasonable Person Standard and the Subjectivity of Judgment” 48 S. Carolina L. Rev 293 (1997) 67. See, e.g., the casebook staples of Lucy v. Zehner and Leonard v. Pepsico. 27 (In addition, an objective standard serves a channeling function by encouraging parties to memorialize their agreements.) Second, an an objective standard in turn requires a view of “reasonableness.” Reasonableness typically refers to reasonable from the standpoint of a similarly situated party—which can be defined either so narrowly or so broadly that the objective inquiry can easily collapse into a subjective one. How close is the “similarly situated party” to the actual party? At some level of narrowness, the objective test becomes indistinguishable from a subjective test. In other words, tailoring and not tailoring are a spectrum, not binaries— and any court that engages in a “reasonableness” analysis is taking some view, whether or not it acknowledges or coherently expresses it, on how narrow or broad its view of “similarly situated” is. In other words, pointing to an objective test begs the question. Third, unconscionability goes to the core of the bargaining process— and the bargaining process itself is much more complicated than many styl- ized portrayals make it out to be. Much ink has been spilled and hands wrung over how to reconcile contract theories of assent to the fact that most consumers do not read contracts.68 Since modern consumers don’t read contracts or dicker them, and since all (or many) consumers in a particular type of transaction receive the same contract, one might assume that all identical consumer contracts should treated identically. In other words, an untailored analysis makes sense, because the contracts are not tailored. But this is a mis- reading of the real world. As Triantis and Choi note in their work on whether a monopolist will ever exploit buyers on non-price terms, sellers can offer multiple contracts: a “market may offer more tailored products that cater to differing preferences” because a “monopolist can increase its profits by dis- criminating among its buyers, on the basis of price, quality, and contract terms.”69

68. See, e.g., No-Reading Problem; [additional cites]. 69. Albert Choi and George Triantis, The Effect of Bargaining Power on Contract Design, 98 Va. L. Rev. 1665, 1698. 28 Put differently, to assume that “boilerplate” contracts are uniform across consumers in a particular product-market ignores too much about how firms actually write contracts. Even if a contract is not dickered, in the modern world of commerce, it is often highly tailored—in other words, it is dickered on behalf of the consumer by the firm (whether to the consumers’ best interest or not). Companies employ sophisticated algorithms to target and segment customers. Consider, for example, how different consumers searching for the same keywords will receive all kinds of different offers from the same company—at different price levels or featuring different terms. (And price, after all, is not only a term, but a term that the unconscionability analysis focuses on.) “Boilerplate,” in other words, is an oversimplification in modern commerce: merchants divide customers into segments, which can be quite narrow and tailored. Customers may choose not to dicker those contracts not simply because of transaction costs or lack of market power, but rather, because firms have already offered them a nearly-dickered contract. Without knowing more about how a particular customer came to be offered a particular contract, it is impossible to say that a contract is truly untailored. Finally, one other point is worth raising. When I refer to an untailored analysis, exactly what sort of consumer should a court imagine and consider, if not the consumer in front of it? The most immediately apparent approach would be to consider a typical consumer—what might elsewhere be called the “reasonable” consumer, or in more economics-focused terminology could be the median or marginal consumer. But, it is worth noting, that is not the only possible untailored approach. For example, a particularly interventionist approach could consider the “most vulnerable” or “least sophisticated” consumer on the theory that the law should be designed to protect such a consumer. The eggshell plaintiff rule in torts may have an effect along these lines. Although it is technically a damages rule, not a negligence rule, rational potential defendants designing precautions to avoid damages will take into account the extraordinary potential damages they would incur if their unreasonable conduct harms an eggshell plaintiff. However, as that is not typi- 29 cally the approach of the law, I assume tailoring would refer to a typical, reasonable consumer (recognizing that this brings to the fore all the same dilemmas typically found in evaluating “reasonableness” under the law).

I argue that the justification for tailoring differs depending on which prong of the unconscionability test the court is applying. On the substantive prong, this section argues that courts can and should take into advantage the idiosyncratic tastes and heterogeneity of particular consumers. My rationale is simple: sellers do, so why shouldn’t courts? Put differently, tailoring the analysis is more consistent with the general idea of bargains—contract law exists to enforce bargains where both parties ex ante anticipate gains from trade. Consider the first payday loan case described in Part III.A, New Mexico v. B&B, where the court expressly adopts an “objective,” untailored reading and finds the loans “low-value” because they are “extremely expensive” and have an acceleration-upon-default clause.70 It rejects the lower court’s tailored reasoning, which “follow[ed] a subjective theory of value, under which the more desperate a person is for money, the more ‘value’ that person receives from a loan.” The court suggests that loan terms do not in any way incorporate or implicate a borrowers’ intended use, and thus are not relevant: “It is not the use to which the loan is put that makes its value low or high, but the terms of the loan itself.” But is this reading correct? Loan terms, after all, are highly customized based on what the lender knows about a borrowers’ risk of default—which includes, among other things, the use they are likely to put it to. A mortgage

70. Confusingly, despite suggesting that it is “objectively” reading the contract and thus not focused on how the borrowers use the loan, the court then uses language that suggests how borrowers use the loan would matter: “All of these loan features…make it a low-value product regardless of how the borrower uses the principal.” (emphasis added) 30 for a second, vacation home carries a higher interest rate than a primary home; mortgages carry lower interest rates than auto loans even though both are secured; etc. Market forces, moreover, may not be sufficient to police the substance of terms, an argument that renders the substantive prong quite different from the procedural prong. In a heterogeneous pool of consumers, different consumers may be differentially harmed by particular terms. If heterogeneous consumers are pooled into homogenous contract terms, unsophisticated consumers may be cross-subsidizing sophisticated ones; these cross subsidies may have particularly negative distributional impacts if consumer naïvité is correlated with other dimensions.71 It is thus hard to know how the B&B court could claim to “objectively” evaluate the acceleration-upon-default clause without more, and a different sort, of evidence—evidence as to how those particular clauses functioned in the context of the loans that were being issued. An acceleration-upon-default clause, when applied to a borrower who is able to repay, is likely to serve as a deterrent against default—and thus lower the overall interest rate of the loan for the borrower. (Pawn shops are said to serve as a commitment mechanism for repaying loans quite effectively, and using a salient device—collateral the borrower commits to—that is perhaps more easily understood by consumers than interest rates.) By contrast, an acceleration-upon-default clause, when applied to a borrower who is unable to repay, is likely to serve as simply a means to trap a borrower into a lending spiral of repeated refinances and es- calating fees. The lender may well know that the borrower will never ultimately repay the loan, but will have reaped so much in service charges that are actually the basis of its business model. It is clear that how the borrower

71. For a broader discussion of this, see Russell, Misbehavioral Law and Economics, Part I.B. For examples of the literature on cross-subsidization, see especially Xavier Gabaix and David Laibson, Shrouded Attributes, Consumer Myopia, and Information Suppression in Competitive Markets, 121 Q. J. Econ. 505 (2006); Spiegler, Bounded Rationality; Mark Armstrong and John Vickers, Consumer Protection and Contingent Charges, 50 J. Econ. Lit. 477 (2012); Botond Koszegi, Behavioral Contract Theory, 52 J. Econ. Lit. 1075 (2014); Mark Armstrong, Search Externalities and Ripoff Externalities. 31 will use the loan may impact ability to repay—in the favorite example of many who oppose payday loan regulation, repairing a car to get to work—as do other characteristics of the borrower that the lender likely investigates (source and stability of income, other debts, etc.). Tailoring unconscionability, in other words, is not inherently pro-consumer; it can also serve an insulating function for appropriately designed consumer contracts. I have argued elsewhere that one unheralded function of law is to help create, where appropriate, separating equilibria. Many problems with modern consumer markets can be traced to mismatched consumers: lenders who say they cannot differentiate between borrowers who are likely to repay and those who are not, and thus must charge excessively high interest rates to those who are likely to repay. To the extent law can be used to induce separating, consumers will be better matched to their preferences, which for the most part is the goal of markets.72 Unconscionability is an intriguing tool for enhancing the separating functions of markets because, although it is an ex post remedy, it affects ex ante incentives of lenders and others offering consumer contracts. Unconscionability can be likened to a form of judicially-enforced performance-based regulation.73 Consider another example where a tailored unconscionability regime could change the market for the better: private student loans.74 Part of the “deal” in a private loan is the educational package for which the loan is being applied. Schools can have very divergent employment outcomes. As a result, interest rates should, perhaps, vary based on the quality of the specific school that a graduate is attending. For the most part, private loans currently do not incorporate such an analysis. In a tailored unconscionability regime, that could open the door to challenging mispriced loans that do not consider the

72. Russell, Misbehavioral Law and Economics, supra note __ at __. 73. See Lauren Willis, Performance-Based Consumer Law, 82 U. Chi. L. Rev. 1309 (2015). 74. These are offered both by lenders who issue supplemental loans to federally-backed public loans to matriculated students (typically at higher interest rates or less favorable terms than federal loans, and thus used only once a borrower has exhausted their ability to borrow federal loans), and by lenders like Sofi who specialize in refinancing public loans to lower interest rate private loans. 32 likely outcomes of graduates of a particular program—which in turn would encourage lenders to charge differential rates based on the expected educational outcomes. (There is a similar potential issue in the recent trend of “cod- ing boot camps,” which help people make career switches into computer eng- ineering without a degree background. These camps sell themselves based on promises about the supposed availability of jobs for their students, which thus could be deemed a product term that should bear some relationship to the price changed for those camps.) Tailoring the substantive prong has a few potential downsides. First, it is a hard analysis to do, and as such, inserts not only judicial expense, but un- certainty that may affect sellers’ willingness to engage in bargains. Second, tailoring may limit one remedial use of the unconscionability doctrine—its use in class actions. If the analysis is highly particularized, will courts ever be able to find commonality and typicality, as required to certify a class? Unconscionability should be considered as part of a portfolio of consumer protection techniques, alongside regulation. A key problem of consumer protection law is the heterogeneity of consumers. Policymakers and scholars often fail to grapple with the harm that any regulatory approach that helps one group of consumers can cause to a different group. A payday loan may send one consumer into a debt spiral and eventual bankruptcy, and be a needed emergency bridge that avoids foreclosure or eviction or job loss for another. An averaging approach might look at the distribution of such results across the market, but this will always leave hurt some consumers (for instance, if 90% of loans are bad, and courts use that as evidence to find them substantively unconscionable, that holding will harm the other 10%). By tailoring unconscionability, consumer protection law will reap the benefits of a crucial advantage of the judicial process over regulation: courts specialize in fact-specific determinations, while regulations are, by nature, not particularized. It may be is hard for policymakers regulating payday loans ex ante to create rules that would separate out “good” from “bad” pay-

33 day loans.75 But it is easier to imagine a court ex post inquiring as to why the borrower entered into the loan—which, if done consistently, would impose ex ante discipline on the lenders. As a result, a tailored analysis has the possibility of improving markets’ ability to match consumers to the types of products that cause them value while avoiding those that cause them harm.

(D) An Argument for an Untailored Procedural Prong

The procedural prong raises a different dilemma. Should the circumstances of the individual bargaining process matter, or should the focus be on the broader market in which the contract was signed (for instance, was it signed in the context of a competitive market?)? Unconscionability was ini- tially framed as a flaw that vitiated the “meeting of the minds” that is essen- tial to contract formation, suggesting that the individualized bargaining circumstances surrounding the particular consumer should matter.76 Howev- er, competitive markets should mitigate such risks, and scholars have con- vincingly argued that unconscionability should primarily focus on market forces.77 Although courts (again) seem to lack a guiding theory, most use language that suggests they tailor—or at least claim to tailor—the procedural analysis. First, in nearly every unconscionablity case implicating a consumer contract, courts begin with some pablum about how the contract was one of

75. CFPB’s most recent payday loan rulemaking does this to some extent, by focusing in particular on loans that repeatedly roll over—attempting to reduce the most pernicious sign of a loan gone bad or used for predatory purposes. 76. Alternatively, procedural unconscionability might consider the average consumer on the grounds that the marginal consumer has a key role in preventing market failure, and thus might be an indicia of a failed market in need of judicial intervention. In other words, if the average consumer isn’t processing information correctly, a market is less likely to be competitive and thus may fail to self-correct. Aside from the fact that no courts, to my knowledge, have adopted such a market-failure view of unconscionability, this raises a host of other issues about when markets will self-correct. (I have a fairly long discussion of the limits to the self-correction of markets in my last piece, Misbehavioral Law and Economics, supra note __.) 77. See, e.g., Porat, supra note __. 34 adhesion, offered to the consumer without room to bargain or negotiate. The recitation seems as obligatory to courts as it is irrelevant to the analysis. To paraphrase the old joke, “Nothing matters, and what if it did?”: Nobody reads boilerplate, and what if they did? As scholars have pointed out, the market serves the function of bargaining the terms of the contract, and in a way that is likely far more effective and efficient than having consumers dicker each term individually. But by including a dutiful recitation of the contract-of-adhesion formulation in cases, courts suggest that if an individual did successfully dicker a contract term, it would limit their ability to bring an unconscionability claim. Second, unconscionability decisions are replete with references to consumers’ individual background—generally to suggest that these consumers couldn’t fend for themselves against merchants. The National Financial court lists the many jobs held by plaintiff and hours worked per day to show that she is hard working, refers to her as “undereducated and financially unsophisticated”, and references the GED she earned ten years after dropping out of high school.78 The Cash Store case tells us that plaintiff is a “single mother working as a manager for Jack in the Box” who owed an unusual vet bill for her daughter’s cat. The Green case has a plaintiff who was “80 years old at the time of his deposition [and] testified that he was retired and had a ninth grade education.” The Drakopoulos case tells us that “the plaintiffs apparently have graduated from high school and can read and understand English,” but that the wife “has suffered since the age of two from a seizure disorder and related temporal lobe damage, has an intelligence quotient of sixty-six, third- to fourth-grade equivalent reading and word recognition, and long-term memory and nonverbal reasoning abilities in the borderline range” while the husband “appears to suffer from bipolar disorder.” What is supposed to be done with such facts remains unclear. Need- less to say, courts use them as a rhetorical technique to suggest deep inequal-

78. [Case descriptions and citations for all cases cited in this paragraph are in Section II.B.1 supra.] 35 ity of bargaining power, as required for the procedural prong. But it’s hard to imagine a consumer contract where courts could not find inequality of bargaining power based on such reasoning. The inquiry seems unproductive, because it is facile and always produces the same outcome. It also may smack some readers as needlessly or unhelpfully paternalistic.79 Instead, in analyzing the procedural prong, courts should focus on the market in which the contract is signed—an untailored analysis that considers market context. The ALI’s proposed salience test does exactly this, an the re- porters’ justification is convincing: “A term that affects the contracting decisions of a substantial number of consumers is subject to forces of market competition, even if it is not negotiated and even if it appears in the contracts of all businesses in the relevant market. Such a term is policed by market forces, and so policing by courts—through the unconscionability doctrine—is both unnecessary and leads to undesirable results, including a reduction in consumer choice.” In addition, by not tailoring the procedural prong, it opens the path to class action lawsuits that do not need to focus on individual consumers’ demographics or education levels. One risk of the market-based approach is that courts will increasingly—and sloppily—use arguments superficially drawn from the growing psy- chology and economics literature about consumer behavior. The New Mexico court that struck down signature loans relied heavily, if superficially, on testimony about the financial literacy and behavioral biases of underbanked in- dividuals: “Behaviorally and cognitively, unbanked and underbanked New Mexicans exhibit heuristic biases that work to their detriment.… They exhibit unrealistic optimism, or fundamental attribution error, meaning that they overestimate their ability to control future circumstances and underestimate their exposure to risk. Thus, these borrowers have unrealistic expectations about their ability to repay these loans.” (It’s unclear why the court needed to

79. For a discussion of the complex intersection of stereotypes and paternalism, see Muriel Morisey Spence, Teaching Williams vs. Walker Thomas Furniture Co., 3 Temple Pol. & Civ. Rights L. Rev. 89 (1993). 36 do any of this, when there was more damning evidence available—for instance, that the lender told borrowers that interest fees were about “$1 per day,” which—aside from being confusing, was far off from the $1000 per year in actual fees.) If plaintiffs continue to raise such arguments, defendants may increasingly seek to focus on evidence about the heterogeneity of such biases—a quasi-scientific debate that courts may not be well suited to adjudicate.

IV. Conclusion Tailoring’s significance to the unconscionability doctrine is clear: a decision as to how much weight to put on the individual consumer lurks be- hind any claim that a particular consumer deal is either substantively or procedurally unconscionable. And unconsionability’s significance appears greater than widely assumed, as it is still used by courts in striking down “rotten deals” and is incorporated into the analysis of the statutory regime that has grown up around consumer protection in the years since Walker- Thomas Furniture. But the problem of tailoring likely goes deeper: it is hard to imagine any standard that uses the “reasonable person” fiction avoiding it. Although few scholars seem to have addressed it directly, it can be disguised in state- ments that require a court to counterfactually imagine a “reasonable person in a similar situation”—begging the question of how wide or narrow the “similar situation” is to be defined. And, in many ways, the problem has echoes of other issues of indeterminacy in the common law, such as the ways in which criminal law is highly sensitive to the breadth of the time frame in which a defendants’ acts are placed.80

80. Mark Kelman, Interpretive Construction in the Substantive Criminal Law, 33 Stan.L.Rev. 591 (1980). 37