Chapter 6

Policing Contracts

If you have read this book from the beginning, you now understand the principal ground for enforcing a promise, namely the existence of an agreement supported by consideration (a bargained-for exchange).¹ In this chapter, we assume that the parties have made an agreement and that each promise is supported by consideration. What’s left to talk about, you say? The agreement may be unenforceable even though it satisfies the requirements of a bargained-for exchange because the promisor may have defenses based on one or more of the following “policing” doctrines that we are about to study: duress, fraudulent misrepresentation, fraudulent concealment, innocent misrepresentation, tortious breach of contract, public policy, and unconscionability. Further, we will see that misrepresentation, concealment, and other tort claims often entitle the injured party to affirmative recoveries. In this chapter, we also investigate the special problems of enforcement presented by standard-form contracts.²

Additional rules sometimes associated with policing doctrines involve the lack of capacity to contract. These include infancy and mental incapacity.³ The law in these areas is now largely statutory, so we will not cover them in detail here. But I can’t resist mentioning that “infancy” in most states means younger than twenty-one, not a crying baby. And for those who want at least a little more information here, one court nicely laid out the infancy doctrine and its purposes as follows:

The law governing agreements made during infancy reaches back over many centuries. The general rule is that ‘* * * the contract of a minor, other than for necessaries, is either void or voidable at his option.’ The only other exceptions to the rule permitting disaffirmance are statutory or involve contracts which deal with duties imposed by law such as a contract of marriage or an agreement to support an illegitimate child. The general rule is not affected by the minor’s status as emancipated or unemancipated.

The underpinnings of the general rule allowing the minor to disaffirm his contracts were undoubtedly the protection of the minor. It was thought that the minor was immature in both mind and experience and that, therefore, he should be protected from his own bad judgments as well as from adults who would take advantage of him. The doctrine of the voidability of minors’ contracts often seems commendable and just. * * * However, in today’s modern and sophisticated society the ‘infancy doctrine’ seems to lose some of its gloss.⁴

Minors cannot disaffirm contracts for “necessaries” because contract law does not want to discourage people from contracting with minors for goods and services constituting essential needs of the minor.⁵ Policing doctrines generally deny enforcement of agreements when something is wrong with the process of forming the agreement or when the discrepancy between what each party receives is too large, or both.⁶ For example, contract law declines to enforce an “agreement” between you and your neighbor, Alice, made while you are holding a gun to her head. In addition, contract law balks at enforcing an agreement in which you promise to pay $1 for Alice’s $1000 watch, even if you didn’t use your assault weapon to procure the contract. Of course, overturning the watch contract may be controversial because, motivated by the principle of freedom of contract, people are wary of the government impinging on private arrangements.⁷ If your neighbor decided to sell her watch for $1 without being coerced, why shouldn’t the contract be enforced?

One can see that contract law’s challenge is drawing a coherent line between contracts that should not be enforced because they are procured unfairly or contain unfair terms and contracts that should be enforced on the basis of freedom of contract. This requires some thought about distinguishing “fair” bargaining and reasonable terms from overreaching and unconscionable ones. Moreover, we must draw these lines over a wide range of transactions, from important business deals, to standard-form contracts, to simple contracts between neighbors.

We will proceed systematically (would I do otherwise?) by looking at each of the policing doctrines. Does each doctrine draw the appropriate line between freedom of contract and wrongful overreaching?

A. DURESS

Various courts and writers have tried to define duress, but with limited success. Consider the following definitions: “[T]here must be * * * some threatened exercise of power or authority over [a person’s] person or property which can be avoided only by making the payment.”⁸ “[T]he plaintiff [must] show that the other party by wrongful acts or threats, intentionally caused [the plaintiff] to involuntarily enter into a particular transaction.”⁹ “[H]as the person complaining been constrained to do what he otherwise would not have done?”¹⁰ Each of these definitions gropes towards a principle for defining when contract law should decline to enforce a promise because the promisor did not make the promise of her own free will,¹¹ but are the definitions successful in guiding courts in particular cases? For example, the last definition surely is too broad. You decided to attend law school, something you would not have done if you didn’t need a job to put food on the table.¹² But contract law hardly allows you to claim that you made your decision under duress.¹³ So the real question is to determine what kinds of constraints on free will should bar enforcement of promises and what kinds should contract law ignore.¹⁴

First, an easy case. If someone beats you into signing a contract, or even threatens to pummel you if you don’t sign, contract law treats your signing as void, meaning that you have no contract at all.¹⁵ Such cases are not only easy, they are also rare.¹⁶

The best way to understand what courts are doing in harder cases, namely those involving economic duress, is to consider some examples. Suppose Standard Box, a company that manufactures (you guessed it) boxes, suddenly finds itself in the enviable position of supplying a commodity in very short supply.¹⁷ The shortage is due to the famous earthquake that shook San Francisco in 1906. (I guess the ground opened up and swallowed all of San Francisco’s boxes.) Mutual Biscuit Company needs boxes to package its products and will go out of business without them. Standard Box, aware of Mutual Biscuit’s plight, offers to sell boxes at their market value and Mutual Biscuit purchases some boxes.¹⁸ Later, Mutual Biscuit seeks a return of a portion of the purchase price on the theory that Standard Box charged more than it had under previous contracts with Mutual Biscuit and that Mutual Biscuit had paid under duress.¹⁹ The court entertaining comparable facts made short shrift of Mutual Biscuit’s argument (does anybody ever make long shrift of an argument?) because Standard Box simply charged market value for the boxes.²⁰

Easy case, you say. But we can investigate the doctrine of economic duress further by posing some hypos based on these facts. Suppose Standard Box, aware of Mutual Biscuit’s need, charges ten times the market value for the boxes. Mutual Biscuit, unable to secure an alternative source of supply in time, pays the inflated price, but then claims duress. In thinking about this example, consider one writer’s more helpful (albeit somewhat tentative) description of duress: “[I]t might be argued that deliberate exploitation by one party of another party’s lack of choices to exact returns that exceed those normally realizable in a more competitive environment should be viewed as suspect.”²¹ In the example, Standard Box exploited Mutual Biscuit’s lack of an alternative source of boxes by setting the price far above those “realizable” even under the exigent circumstances. Mutual Biscuit’s claim of duress arguably should prevail.²²

For another example of exploitation, suppose a hotel broker enters an agreement with a travel agent to supply rooms for the travel agent’s customers. The travel agent makes air and hotel arrangements for a group of fans who are attending the World Cup and the hotel broker reserves a block of rooms for these fans. The broker then threatens to release the rooms reserved for these fans if the travel agent does not pay the broker a sum above their original agreement. It is too late for the travel agent to find other rooms (as you know, the World Cup is very popular). The travel agent pays the broker, but then claims duress. Again, this looks like exploitation to me.²³

Let’s think more about the Standard Box problem. What if boxes became plentiful again before Mutual Biscuit purchased them for ten times their market value? No duress because Mutual Biscuit had other choices.²⁴ But what if Mutual Biscuit negligently failed to learn about the market alternatives and buys from Standard Box at the inflated price? This raises the question of whether Mutual Biscuit’s lack of choice argument should be based on what a reasonable company would have known about the alternatives (an objective test) or on what Mutual Biscuit actually knew (a subjective test). Courts disagree on this issue.²⁵ On the one hand, why should contract law protect Mutual Biscuit when it unreasonably failed to avail itself of market alternatives? On the other hand, especially if Standard Box was aware of Mutual Biscuit’s ineptitude, perhaps courts should ignore how Mutual Biscuit got itself into its precarious position.²⁶ Contract law should not condone Standard Box’s unsavory conduct of taking advantage of Mutual Biscuit’s plight to achieve gains it could not otherwise have made just because Mutual Biscuit negligently forewent other opportunities.²⁷ Likewise, if Ethan Entrepreneur charges $100 for a glass of water to a person dying of thirst (literally) in the desert, when Ethan charges one dollar to everyone else, the victim should be able to claim duress regardless of how she came to be in this precarious state.

What if Standard Box is not aware of Mutual Biscuit’s situation when Standard Box decides to charge ten times the market price for the boxes? No duress because Standard Box’s motive is not to take advantage of Mutual Biscuit’s unenviable position.²⁸

Does the opportunity to go to court to adjudicate your contract rights negate a claim of lack of choice and hence duress? Many courts have abandoned the reasoning that access to a court is a reasonable alternative for a party under duress.²⁹ For example, if you agree to mow Alice’s lawn for $50 per week and later, realizing that she cannot find another person to do the job, you refuse to mow unless she pays you $100, you cannot negate Alice’s claim of duress because she has the right to sue you for breach of contract. Although we saw in Chapter 5 that contract law, in computing a party’s lost expectancy damages, largely ignores the costs in time and resources of pursuing litigation,³⁰ contract law assesses these concerns (as it should) in the duress inquiry. Going to court simply may not be a viable alternative for Alice.

Putting all of this together, if you are investigating whether your client has a good economic duress claim, consider first the actions of the party accused of duress. Was her motive to take advantage of your client?³¹ Second, did your client have other reasonable choices or was he stuck dealing with the party accused of duress? Third, did the accused party enjoy gains she otherwise wouldn’t have made? If the answer to all of these questions is yes, your client has a good claim of economic duress. Don’t be overconfident, however. At least in some jurisdictions, courts recognize the defense only in “extreme and extraordinary cases.”³² So the nastier the motive, the clearer the lack of choices, and the greater the gains by the party accused of duress, the more likely you will prevail on the duress claim.

Before we leave duress, two additional points. First, what about duress induced by someone who is not a party to the contract? For example, suppose Alice wants to purchase a car on credit, but she needs someone to sign a contract with the dealer guaranteeing her performance. Alice threatens to fire an employee in Alice’s music business if the employee doesn’t agree to guarantee the car purchase. If Alice’s threat constitutes duress (it looks like duress to me), the employee is not bound as a guarantor unless the car seller “gives value or relies materially” on the contract “in good faith and without reason to know of the duress.”³³

Second, I want to return to a subject discussed in Chapter 2, namely the preexisting duty doctrine.³⁴ Recall that if you agree to sell your piano to Alice for $400, then Alice agrees to pay $450, contract law originally declined to enforce the modification based on the preexisting duty rule.³⁵ You already promised to sell the piano for $400, so you had the “preexisting duty” to deliver at that price.³⁶ Alice’s promise to pay $50 more therefore was not supported by consideration and was a mere gift promise.³⁷

Recall that courts felt uncomfortable with this result when they believed that the parties freely and fairly entered their modification agreement.³⁸ Courts therefore devised methods of avoiding the preexisting duty rule, such as by finding a mutual rescission of the original contract, so that neither party had a preexisting duty to perform.³⁹ Of course, courts would not find a mutual rescission when they believed that one party was coerced into a modification, so the preexisting duty rule was highly manipulated by courts.⁴⁰

We said that if courts manipulate the preexisting duty rule to reach decisions based on whether the modification agreement appeared voluntary, contract law should move to a rule that focuses on that question.⁴¹ And contract law has done just that, at least in cases involving the sale of goods. Article 2 of the UCC provides that “[a]n agreement modifying a contract within this Article needs no consideration to be binding.”⁴² An “official comment” to the section imposes a test of good faith on the party benefitting from the modification in order to deny enforcement of modifications achieved by “extortion.”⁴³ Not surprisingly, in light of this language, courts have utilized a duress-like analysis in applying the good faith test.⁴⁴

According to the UCC approach, Alice’s promise to pay an additional $50 would be enforceable only if you negotiated this additional compensation in good faith. If you demanded an extra $50 after learning that Alice was a concert pianist who needed the piano to practice for a major concert and could not obtain another one in time, her promise to pay the $50 would not be enforceable under the UCC. You would be in bad faith. Notice that the elements of duress all would be satisfied. You deliberately exploited Alice’s lack of alternatives to obtain $50 more than you would have realized in a “competitive environment.”⁴⁵

B. FRAUDULENT AND OTHER MISREPRESENTATIONS, FRAUDULENT CONCEALMENT, AND TORTIOUS BREACH OF CONTRACT

Fraud and misrepresentation are torts.⁴⁶ So is (obviously) tortious breach of contract.⁴⁷ You might ask, “what are torts doing in a book about contracts principles?” You’re right. Please purchase a book on “Principles of Tort Law” if you want to know all about tort law. However, this book does explore torts that arise in a contract setting, that provide defenses to contractual obligations, and that lead to damages recoveries. So we need to think about some of the basics of tort law for this limited purpose.

A tort consists of one of many “miscellaneous civil wrongs,”⁴⁸ such as assault and battery, negligence, and trespass. Liability is based upon “socially unreasonable” conduct that interferes with the rights of others.⁴⁹ The duty to act reasonably under tort law arises by operation of law,⁵⁰ meaning that lawmakers, either legislators or judges, create duties to act reasonably. Recall that the duty to pay for a benefit received under unjust enrichment law does not arise because of the parties’ agreement, but because justice (as interpreted by lawmakers) demands it.⁵¹ Similarly, lawmakers create the social duty to act reasonably and to avoid interfering with others’ rights.⁵² The duties we are about to discuss in this subsection arise, not because of the parties’ agreement, but because society recognizes certain non-consensual duties in the contract setting. But please remember, we will only discuss torts that arise in a contract setting. So, for example, if a chatroom Internet partner misrepresents his identity and the other party relies to her detriment on the misrepresentation this may be a tort, but not the kind of tort we discuss here. (But a court failed to find a tort in this context.⁵³)

1.Innocent, Negligent, and Fraudulent Misrepresentation

a.Innocent Misrepresentation

Suppose Alice offers to sell her home to you for $250,000. She tells you that her property consists of 5.5 acres of land. She actually believes this based on a survey made at the time she purchased the house, but the survey was incorrect and the land consists of only 3.5 acres. Alice has misrepresented the size of her land,⁵⁴ albeit innocently. You rely on her misrepresentation and purchase the house. Do you have a remedy when you learn your new property’s actual acreage? Assuming that Alice’s misrepresentation is “material” (meaning, basically, that it is important to you in deciding to purchase the property),⁵⁵ Alice made the representation to induce you to purchase the land, and you reasonably relied on it, you do have a remedy.⁵⁶ You may rescind the purchase, convey the property back to Alice, and recover the purchase price, plus any damages necessary to restore you to your position prior to the contract.⁵⁷ In the alternative, you can keep the property and recover damages (the difference between the contract price and the actual value of what you got, plus any consequential damages).⁵⁸

Innocent misrepresentation is closely related to the concept of express warranty, and, indeed, courts sometimes turn misrepresentation cases into warranty cases.⁵⁹ The primary ramification is that when the court characterizes the case as involving an express warranty, the injured party can recover expectancy damages.⁶⁰

Consider, for example, Johnson v. Healy,⁶¹ where a builder, Healy, sold a new home to Johnson, after Healy said that the “house was made of the best material * * * and that there was nothing wrong with it.”⁶² However, the house was defective because of improper fill placed on the land before Healy bought the house. Healy claimed that he should not be responsible for the defects because he did not know of the improper fill.⁶³ The court referred to sale-of-goods law, where statements about the quality of the goods constitute express warranties regardless of the seller’s belief about the statements, and extended the concept to the sale of new homes.⁶⁴ Further, the court awarded expectancy damages, based on “the difference in value between the property had it been as represented and the property as it actually was.”⁶⁵

b.Negligent Misrepresentation

Suppose Alice’s misrepresentation as to the acreage was negligent in that she failed to exercise reasonable care in ascertaining the size of her property. When a party such as Alice has a “pecuniary interest” in a transaction, “supplies false information for the guidance of others in their business transactions,” and fails “to exercise reasonable care or competence in obtaining or communicating the information” that party has committed a negligent misrepresentation.⁶⁶ In order for you to recover for Alice’s negligent misrepresentation, you must reasonably rely on it.⁶⁷ The remedy is the same as for innocent misrepresentation: You may rescind the purchase, convey the property back to Alice, and recover the purchase price, plus any damages necessary to restore you to your position prior to the contract;⁶⁸ or you can keep the property and recover the difference between the contract price and the actual value of what you received, plus any consequential damages.⁶⁹ Further, there is little reason why a court should not turn a negligent misrepresentation case into a warranty case, as it may do with innocent misrepresentation, and grant expectancy damages.⁷⁰ So, regardless of whether Alice was innocent or careless in reporting that she had 5.5 acres of land, the result should be the same.

c.Fraudulent Misrepresentation

Fraudulent misrepresentation constitutes a material, but false, factual representation that the maker either knows is false or asserts recklessly without knowing the truth.⁷¹ The maker must intend for the other party to rely on the misrepresentation and the other party must reasonably rely and suffer damages.⁷² To illustrate, Alice must be more despicable than in the above examples. She knows that she doesn’t have 5.5 acres of land or has no idea of how many acres she has, but makes the assertion of 5.5 acres to induce you to make the purchase. As a consequence of Alice’s misdeeds, you may have more remedial options than if your complaint was an innocent or negligent misrepresentation, at least if your purchase is a “business transaction.”⁷³ In such a case, not only can you rescind and recover reliance and consequential damages, but you can also recover the benefit of the bargain (the difference between the value of what you received and what your neighbor promised).⁷⁴ Additionally, because fraudulent misrepresentation is a serious tort, we cannot rule out the possibility of punitive damages.⁷⁵

Notice that all three versions of misrepresentation require the victim’s reliance to be reasonable.⁷⁶ If you knew or should have known that Alice’s assertion of 5.5 acres was false or unreliable, you cannot recover regardless of whether her misrepresentation was innocent, negligent, or fraudulent.⁷⁷ For example, suppose you hired your own surveyor who reported that Alice’s land consisted of only 3.5 acres and you had no reason to doubt your surveyor. Alternatively, suppose you knew that Alice was intoxicated when she told you the size of her land. Finally, suppose you knew that Alice merely stated her opinion about the size of her land. You should not have a claim against Alice in any of these scenarios, even if you relied on Alice’s statement.⁷⁸ Your reliance was not reasonable. For a “real life” example, consider whether a bed manufacturer’s representation that its bed will give you a “perfect night’s sleep” is fraudulent. Of course not, and a court held such language “mere puffery.”⁷⁹

Back to Alice. Harder cases involve the reasonableness of your conduct when you don’t hire a surveyor but Alice claims you should have, or you don’t know that Alice was drunk or merely gave her opinion, but Alice claims you should have known. Reasonableness in these instances is a question of fact and will depend on the circumstances.

2.Fraudulent Concealment

Insects, especially roaches and termites, have played a large role in the development of fraudulent concealment law. You can envision the scenario. Alice sells you her house, but she doesn’t tell you that the house is infested with termites (or roaches). The gravamen of your complaint is not that Alice misrepresented anything, but that she did not disclose the true condition of her house.⁸⁰

In one leading case involving termite infestation, the court decided that in a deal made “at arms length,” the seller does not have to disclose, notwithstanding the “appeal to the moral sense” of a decision otherwise.⁸¹ The court worried about the ramifications of a decision requiring disclosure: “If this defendant is liable * * * every seller is liable who fails to disclose any nonapparent defect known to him in the subject of the sale which materially reduces its value and which the buyer fails to discover.”⁸²

However, courts have narrowed the idea of caveat emptor (let the buyer beware).⁸³ Some courts now would find that Alice has fraudulently concealed her home’s condition if she had knowledge of and purposefully concealed the condition, the infestation was “not within [your] reasonably diligent attention,”⁸⁴ and you were actually misled and damaged.⁸⁵ Perhaps the most difficult element of this test is whether a fact was within a party’s “reasonably diligent attention.” For example, should you have known about the infestation of Alice’s house by inspecting the property? Of course, Alice will claim that you should have hired your own housing inspector to investigate the house’s condition. Courts must determine in each case whether the party claiming concealment acted reasonably in not learning the facts.⁸⁶ Of course, a person claiming fraudulent concealment has an easier time showing that she acted reasonably when the defects are latent (not readily observable)⁸⁷ or when the practice in the relevant community is not to hire inspectors.⁸⁸ In addition, some courts appear to have largely relaxed the “reasonably diligent attention” requirement.⁸⁹

One thing is very clear in the cases. Partial disclosures that are themselves misleading may constitute fraud.⁹⁰ For example, if a seller advertises property as investment property, but the seller knows that the property violates building and zoning regulations, the seller’s misrepresentation is fraudulent.⁹¹ In fact, fraudulent concealment may occur any time a party has a duty to disclose and intentionally fails to do so.⁹² We take up the duty to disclose in more detail in Chapter 9.⁹³

3.Tortious Breach of Contract

Suppose, pursuant to a contract, Engineer furnishes plans to Architect for the heating, plumbing and electrical portions of improvements to several school buildings.⁹⁴ Architect incorporates Engineer’s work into the plans he furnishes the school district. Unfortunately, Engineer is lazy, incompetent, or reckless because (Dave Barry would say here, “I’m not making this up”) Engineer reuses plans drawn for entirely different projects and, with regard to the school projects, the plans violate “the fundamental laws of physics.”⁹⁵ Architect incurs large costs in redoing the plans and loses several other jobs as a result of Engineer’s actions.

Needless to say, Architect sues, with one of his theories being that Engineer’s conduct constitutes a tort. Engineer tests the sufficiency of the theory by moving to dismiss the complaint. Determining whether Architect can sue in tort is crucial because, if so, among other things,⁹⁶ Architect can recover punitive damages, which are not available in contract actions.⁹⁷

In situations involving a “professional” such as a doctor, architect, lawyer, or engineer, courts have found that a duty exists, apart from the contract, to “exercise a reasonable degree of care, skill and ability, such as is ordinarily exercised under similar conditions.”⁹⁸ The duty arises only when the professional actually performs her contract unreasonably, which courts call “misfeasance.”⁹⁹ If Engineer had simply failed to furnish plans at all (nonfeasance), Architect could not have sued in tort.¹⁰⁰ Reckless or negligent performance of a contract by a professional, such as Engineer’s performance in our example, would therefore give rise to a tort claim.

As we have said, the most significant effect of allowing a tort claim to arise out of a breach of contract is that the plaintiff can recover punitive damages.¹⁰¹ Other remedial ramifications of recognizing a tort include the potential award of emotional distress damages and a relaxation of contract law’s foreseeability-of-damages requirement,¹⁰² the latter subject taken up in Chapter 5.¹⁰³ Although the award of punitive damages in a contract setting is a major development, courts seem more willing than ever to recognize torts arising in this context.¹⁰⁴ In fact, the requirement that the tort-feasor must be a “professional” seems to be disappearing: “The American courts have extended the tort liability for misfeasance to virtually every type of contract where defective performance may injure the promisee.”¹⁰⁵

Clearly, the conduct of the party accused of a tort in a contract setting must be egregious so that it is worthy of punishment through punitive damages.¹⁰⁶ Perhaps instead of analyzing the cases through the lens of contract and tort, courts should simply ask whether punitive damages are appropriate for a particular breach. Such an approach would consider the policies behind contract law’s general rule against punitive damages in contracts cases and would consider whether exceptions should apply. Was a party’s conduct sufficiently outrageous to warrant punishment, either to deter such conduct or for retributive purposes? Courts would also have to consider whether granting punitive damages in a particular case would discourage people from entering contracts because of the fear of potential punitive damages liability.¹⁰⁷

At any rate, although most courts stress that the wrongdoer’s duty arises apart from the contract and in tort, sometimes referring to the distinction as the “source of duty rule,”¹⁰⁸ the bottom line is that the law establishes behavioral guidelines based on the conduct of the parties in negotiating and performing their contract. Labels aside, if contractual performance is bad enough, such as an engineer using plans from another construction project that have no relation to his current contract obligations, courts can punish the wrongdoer by granting punitive damages.¹⁰⁹ In fact, some states also allow punitive damages under a contract theory if the breacher’s conduct was “malicious, fraudulent, oppressive or reckless.”¹¹⁰

In short, tort is a safety valve that relieves the pressure on contract to punish bad behavior. As such, the absence in most jurisdictions of punitive damages for contract breach should not be a mystery or alarming.

Before leaving tortious breach, I want to mention a related topic, namely bad faith breach of contract. We will have occasion to study the concept of good faith performance in more detail in Chapter 7 of this book.¹¹¹ For now, recall that in Chapter 2, we discussed cases involving satisfaction clauses.¹¹² For example, you promise to purchase a water-color picture of your house “if you are satisfied with the picture.” We saw that many courts interpret such satisfaction clauses to require you to determine whether you are satisfied in good faith, meaning, in this context, that your decision must be honest.¹¹³ Courts sometimes imply the good-faith obligation based on the parties’ intentions as revealed by the circumstances (the circumstances show that you actually promised to decide whether you are satisfied based on the merits of the picture).¹¹⁴ In other cases, courts establish the good-faith obligation based simply on the principle of fair dealing (fairness requires you to decide whether you are satisfied based on the picture’s merits).¹¹⁵ Regardless of why the court finds a good faith obligation, if you dishonestly reject the picture, say because you dislike the painter and not on the basis of the merits of the picture, you would commit a bad faith breach of contract.¹¹⁶

Your bad faith breach of contract ordinarily would trigger only contract remedies.¹¹⁷ After all, your bad faith constituted a breach of contract. However, some bad-faith breaches are serious enough to merit even more severe treatment, including punitive damages.¹¹⁸ A leading category of such bad faith cases arise when an insurance company breaches its contract with its insured by looking out for its own interests above the insured’s.¹¹⁹ Suppose you have an automobile insurance policy with a liability limit of $25,000. (Yikes, that’s not enough these days. You should get more!) Suppose you are in an accident and you are sued for $2 million. The plaintiff is willing to settle for $10,000, well within your $25,000 limit. Your interests and the insurance company’s may diverge because your potential liability is $2 million and its potential liability is only $25,000. It would be in your best interest to settle, for example, if the facts suggest you are liable and the plaintiff’s damages are $50,000. If the insurance company refuses to settle because it is in its best interest not to settle, many courts would find the insurance company to be in bad faith.¹²⁰ These courts would find that an implied term of the insurance contract requires the company to conduct settlement negotiations based on your interests as well as its own.¹²¹ Courts so finding may award insureds punitive damages and damages for mental distress on the theory that the bad-faith breach was a tort.¹²²

Some employees have sought to extend the reasoning of the insurance cases to their situations. For example, in one case, an employee claimed he was fired because he had revealed negative information about a prospective supervisor.¹²³ The employee sought to recover damages from his employer based in part on “tortious breach of the implied covenant of good faith and fair dealing.”¹²⁴ The court dismissed the action, finding important distinctions between insurance company and employer bad faith.¹²⁵ The court reasoned that, unlike employers, insurance companies supply services of a “quasi public nature,” namely protecting people from harm.¹²⁶ Further, because of the availability of alternative employment, “a breach in the employment context does not place the employee in the same economic dilemma that an insured faces when an insurer in bad faith refuses to pay a claim to accept a settlement offer within policy limits.”¹²⁷ The court’s conclusions about the availability of substitute employment and the greater importance of insurance are surely highly debatable, and for a time some courts extended the bad-faith tort to the employment arena.¹²⁸ However, most recent decisions have maintained the distinction between insurance and employment contracts and have refused to grant tort remedies for bad faith breach of the latter.¹²⁹

C. PUBLIC POLICY

There are lots of public policies. Freedom of contract is itself a public policy.¹³⁰ It calls for the enforcement of freely-made contracts in order to facilitate private exchange, which is good for the parties and society.¹³¹ The task for a party seeking to avoid a contract or term based on public policy is to convince the court that the public policy the party urges is more important than freedom of contract.¹³² Because of the importance of freedom of contract, this argument has been successful only in limited circumstances.¹³³ We will now set forth some examples.

1.Exculpatory Clauses

An exculpatory clause absolves a contracting party from liability to the other party for any number of acts or omissions or, for that matter, from any liability at all.¹³⁴ For example, a lease may include a clause stating that the landlord is not liable to anyone for injuries suffered on the premises. The owner of a ski resort may disclaim liability for injuries suffered by skiers. The UCC allows sellers to disclaim implied warranties.¹³⁵ Without hesitation, however, courts strike terms that attempt to absolve a party from liability for intentional or reckless conduct.¹³⁶ Contract law, along with other instrumentalities of the law, seeks to deter such anti-social conduct. The more challenging issue here is whether public policy disfavors the enforcement of exculpatory clauses that insulate a party, such as a landlord, seller, or property owner, from negligent behavior.

Generally, the following factors interest courts deciding whether to overturn an exculpatory clause on the grounds of public policy: The exculpatory clause must “contravene[ ] long established common law rules” of liability, such as a landlord’s duty to maintain common areas; the clause must absolve a party in total (meaning that the clause precludes liability in any context for any type of conduct); and the state must have an interest in protecting a large class of citizens who cannot protect themselves (for example, tenants in substandard housing, but not fans of white-water rafting).¹³⁷ Many courts also consider whether the party seeking relief had little bargaining power and whether the contract was a standard form.¹³⁸

A common response to public policy concerns by proponents of the enforceability of exculpatory clauses is to focus on the negative incentives created by striking such clauses. Critics of the public-policy defense argue that, instead of protecting people, decisions striking terms based on public policy will increase costs and reduce choices for the class of parties supposedly being protected.¹³⁹ For example, landlords will increase rents to cover their additional liability or decide to go out of business, thereby diminishing housing. Manufacturers will stop making products, such as small airplanes or vaccines, that could lead to potentially large liability claims. These are serious concerns, but whether the net benefit of enforcing exculpatory clauses exceeds the net benefit of striking them challenges courts, and, for that matter, legislators.¹⁴⁰ Now is not the time to get into all of the hurdles that make empirical studies of the effects of laws so difficult for lawmakers and analysts or to opine on the ramifications of this uncertainty.¹⁴¹ (You can do so at your next law school party.) Suffice it to say that the clash between the public policy of striking clauses that insulate parties from their own negligence and the public policy of freedom of contract remains unresolved. Judicial decisions mirror this uncertainty, with some courts enforcing such exculpatory clauses and some courts striking them.¹⁴²

2.Covenants Not to Compete

Employers often include a covenant not to compete in their employment contracts. Such a term protects an employer, who may have revealed to its employee its private methods of doing business or other secrets, from the employee’s direct competition when the employment ends.¹⁴³ Courts enforce reasonable restriction on competition on the grounds of freedom of contract¹⁴⁴ and the employer’s right to earn a livelihood.¹⁴⁵

On the other hand, lots of case reports make clear that employers sometimes become greedy in defining the duration, geographical area, and subject matter of the covenant not to compete.¹⁴⁶ Courts police such activity by striking overbroad covenants that unfairly inhibit an employee from earning a living and that diminish competition.¹⁴⁷ For example, in one case, Ingrasci, an oral surgeon fresh out of dental school, took a job with Karpinski, an oral surgeon practicing in five counties in central New York.¹⁴⁸ In the three-year employment contract, Ingrasci promised never to practice oral surgery or dentistry in the five counties except as Karpinski’s employee. The contract ended and Ingrasci began practicing oral surgery in the restricted area. The court reported that “about 90% of [Ingrasci’s] present practice comes from referrals from dentists in the counties specified in the restrictive covenant, the very same dentists who had been referring patients to [Karpinski’s] Ithaca office when [Ingrasci] was working there.”¹⁴⁹

Karpinski sought an injunction to enforce the covenant not to compete. The court held that the clause was reasonable as to area and time, but narrowed its subject matter to allow Ingrasci to practice dentistry in the restricted area.¹⁵⁰ By focusing on the situations in which Ingrasci actually would be competing with Karpinski, the court attempted to find a reasonable middle-ground between the contradictory policies at work in the cases. It is somewhat curious, however, why the court enforced the time duration (the contract literally says “forever”).¹⁵¹ What happens if Karpinski retires or dies? Perhaps, the court interpreted “forever” to mean for as long as Ingrasci remains a competitor of Karpiniski. On the other hand, if Ingrasci could practice oral surgery upon Karpinski’s retirement or death, perhaps the value of the latter’s practice would be unfairly diminished and Karpinski or his estate would receive less value for selling his practice.

A nefarious employer may attempt to achieve the effect of a covenant not to compete by drafting a bonus provision that requires the employee to pay back any paid bonus if the employee does not work for a minimum period, regardless of the reason for the termination of the employment. Needless to say, if the paid bonus is large, such a term creates a strong incentive for an employee not to quit and work elsewhere. One court emphasized the relationship between a covenant not to compete and such a bonus term by observing that the standards of reasonableness of a covenant not to compete “apply not only to provisions that expressly limit a former employee’s professional mobility, but also to damages provisions that impose a severe economic penalty on a departing employee.”¹⁵² The court making this insightful statement struck the bonus provision because it applied even if the employee quit and worked for another company that did not compete with the original employer or worked for another company in a different geographical area. The court also noted the unfairness of the bonus term because it allowed the employer to terminate the employee “through no fault of her own on the last day of the period she is ‘required to work,’ ” thus triggering the duty to pay back the bonus (here over $66,000).¹⁵³

3.Illegal Contracts

Not surprisingly, contracts to perform illegal acts under a state’s criminal law, such as prostitution or embezzlement, are not enforceable.¹⁵⁴ This principle sometimes makes courts uncomfortable because defendants, who have willingly engaged in an illegal scheme and gained from it, can then use the illegality as a shield against contractual liability.¹⁵⁵ Nonetheless, most courts follow the admonition to “leave the parties where it finds them,” meaning that courts will not enforce illegal contracts even if defendants have already gained from them.¹⁵⁶

D. UNCONSCIONABILITY

For you to get a good handle on the doctrine of unconscionability, think first of our earlier historical discussion of specific performance.¹⁵⁷ Recall that the English courts of equity stood side-by-side with the English law courts.¹⁵⁸ The two courts differed in many ways, including the substantive rules they applied.¹⁵⁹ In fact, courts of equity arose in part because of the inflexibility of the substantive legal rules, and the Chancellor and deputies developed various equitable doctrines to alleviate the harsh results in the law courts.¹⁶⁰ One of these doctrines was unconscionability.

Now, in lightning speed, let’s complete the history of unconscionability.¹⁶¹ English equity courts often employed unconscionability as a defense to specific performance of land-sale contracts, for example, when a party procured the contract unfairly.¹⁶² Courts in the United States followed this practice and began to expand the use of the principle to other cases involving unfair bargaining or the substantive unfairness of terms.¹⁶³ UCC section 2–302 codified unconscionability as a defense in sale-of-goods cases, and the Restatement (Second) of Contracts promotes its use in other kinds of cases as well.¹⁶⁴

Section 2–302 provides in part:

If the court as a matter of law finds the contract or 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.¹⁶⁵

The section is clear on a couple of things. Courts are supposed to determine whether a contract or term is unconscionable “as a matter of law,” and they are supposed to do so “at the time” the parties make the contract.¹⁶⁶ Section 2–302 is no help, however, in determining which contracts or terms are unconscionable. The section’s official comments add little: The goal of the section is to prevent “oppression and unfair surprise.”¹⁶⁷ Actual decisions offer more guidance. Generally, courts look at whether the bargaining process is deficient (called “procedural unconscionability”) and whether the substantive terms are oppressive (“substantive unconscionability”).¹⁶⁸ Further, courts are most willing to strike a contract or provision when the case involves both procedural and substantive unconscionability.¹⁶⁹ For example, if a contract contains confusing language, or hidden terms (procedural unconscionability) that undermine a party’s reasons for agreeing to the contract and the other party cannot justify the terms because of its own needs (substantive unconscionability), the contract or term is ripe for a finding of unconscionability.¹⁷⁰ A few courts have also found that either substantive or procedural unconscionability alone are sufficient to strike a contract or term.¹⁷¹ Let’s investigate further the meaning of procedural and substantive unconscionability.

1.Procedural Unconscionability

Cases in this category involve bargaining unfairness (although most also contain a sprinkling of substantive unconscionability too).¹⁷² A disparity in bargaining power alone, if not excessive, is generally insufficient to claim procedural unconscionability. Therefore, courts are reluctant to invalidate contracts between businesses or other sophisticated parties solely on the basis of unequal bargaining power.¹⁷³

Often the kinds of bargaining infirmities that trigger a finding of procedural unconscionability have elements of duress, fraud, undue influence, or another policing doctrine.¹⁷⁴ For example, in one case, the court found unconscionable a timber deed after the purchaser misrepresented both his experience and knowledge of the value of the timber and the seller relied on the purchaser’s inaccurate estimate of the value of the timber.¹⁷⁵ In another case, the court found unconscionable a contract for the sale of carvings after the seller, who knew the purchaser was unfamiliar with them, charged twice their market value.¹⁷⁶ These cases could also have been decided on the basis of fraudulent misrepresentation and duty to disclose, respectively.¹⁷⁷ Further, a definition of unconscionability widely quoted in the cases, “an absence of meaningful choice on the part of one of the parties together with contract terms which are unreasonably favorable to the other party,”¹⁷⁸ sounds similar to a case of duress.

Another set of bargaining problems involves obtuse or hidden terms. Courts finding unconscionability on these grounds often could have decided against the drafter because a reasonable person would not have understood the meaning of the contract. For example, in the well-known case of Williams v. Walker-Thomas Furniture Co.,¹⁷⁹ a “cross collateral clause” in a sales contract, in almost incomprehensible language, authorized the seller, Walker-Thomas, to reclaim all of the goods sold to Williams if she defaulted on only one of the purchases.¹⁸⁰ OK, you want to decide for yourself whether the language was understandable. Here’s the language:

“[T]he amount of each periodical installment payment to be made by [purchaser] to the Company under this present lease shall be inclusive of and not in addition to the amount of each installment payment to be made by [purchaser] under such prior leases, bills or accounts; and all payments now and hereafter made by [purchaser] shall be credited pro rata on all outstanding leases, bills and accounts due the Company by [purchaser] at the time each such payment is made.”¹⁸¹

When Williams defaulted on the purchase of a stereo set in 1962, the seller sought the return of all the items Williams purchased since 1957.¹⁸² The court sent the case back to the trial court for a determination of whether the term was unconscionable.¹⁸³ The court could have declined to enforce the term on the basis that a reasonable person would not have understood the poorly drafted clause. (Right?)

We’ll return to procedural unconscionability during our discussion of standard forms, but you get the idea. A court will be inclined to find procedural unconscionability when defects in the bargaining process cast a shadow on the quality of a party’s assent to a contract.¹⁸⁴ The various contexts in which such a shadow arises are similar to those that deny enforcement on the basis of any of the policing doctrines discussed earlier in this chapter.¹⁸⁵ Since many, if not most cases could be decided applying either unconscionability or another doctrine, you might ask why contract law bothered to introduce the concept of procedural unconscionability. At least in some cases, a policing defense may be more difficult to prove than the somewhat relaxed standard of procedural unconscionability.¹⁸⁶ In others, the contested conduct may not quite measure up to duress, misrepresentation, or the like, but the court may still believe that the sum-total of the conduct should not be condoned.¹⁸⁷ Cases in which a party takes advantage of the age, lack of sophistication or education, or emotional state of the other party may call out for relief, but still not quite constitute a policing defense.¹⁸⁸

2.Substantive Unconscionability

Substantive unconscionability focuses on the nature of a term or contract itself, not on how the parties made the contract.¹⁸⁹ Certainly immoral contracts (such as a contract for the sale of a child) or those that contravene public policy (for example, a contract that allows for corporal punishment for delay) are unconscionable.¹⁹⁰ In addition, a term is substantively unconscionable when it subverts a party’s purpose for contracting and the other party cannot justify use of the term to protect its own needs.¹⁹¹ Courts resolve the question of a party’s purpose for contracting by examining the equivalency of the exchange. If it is too one-sided, the disfavored party cannot achieve its purpose.¹⁹² Courts resolve the question of whether a party can justify a term based on its needs by determining whether a term performs a reasonable function in the context of the transaction.¹⁹³

An excessive price may be enough to constitute substantive unconscionability.¹⁹⁴ For example, finance charges of $1620 for a $200 loan from a company called “Loan Till Payday” fits the bill (this is an actual case, so don’t accuse me of silly hypos).¹⁹⁵ (I should also note here that excessive price alone is sometimes a ground for relief independent of any unconscionability analysis.¹⁹⁶) The price may not be excessive, however, if the party claiming unconscionability is a serious credit risk, the other party’s net profit is reasonable, and similarly situated parties charge a comparable amount.¹⁹⁷ A cross-collateral clause, such as the one in Williams v. Walker-Thomas Furniture Co.,¹⁹⁸ therefore may not be unconscionable if most sellers in comparable contexts use them,¹⁹⁹ at least if the clause is comprehensible (which was not the case in Walker-Thomas) and the purchaser is a large credit risk.

In general, cases finding what amounts to substantive unconscionability are pretty outrageous. For example, in Weaver v. American Oil Co.,²⁰⁰ Weaver leased a gas station from American Oil Co.²⁰¹ The lease required Weaver to indemnify American Oil for its own negligence, so that when an American Oil employee sprayed gasoline on Weaver and he was burned, American Oil sought a declaratory judgment finding the amount of Weaver’s liability.²⁰² Understandably, the court declined to enforce the provision, while indicating that the result might have been different if American Oil had explained the clause to Weaver.²⁰³

Perhaps a little less outrageous, but still slimy enough for a court to find substantive unconscionability, was a term waiving class actions in a “service agreement” offered by the seller of a wireless card for connecting to the Internet. (The card apparently didn’t work with laptops.) The court in Chalk v. T-Mobile USA, Inc.,²⁰⁴ held that the waiver was substantively unconscionable because it was “unilateral in effect,” meaning that it worked only against purchasers of the card, and because the waiver effectively barred purchasers from vindicating their rights because any individual recovery would be too small to cover the costs of pursuing the remedy.

But a recent U.S. Supreme Court case appears to have overturned or at least placed severe limits on the holding in Chalk and other cases finding unconscionable terms in consumer contracts that waive class-action arbitration. In AT&T Mobility LLC v. Concepcion,²⁰⁵ a 5–4 decision, the Court considered the effect of the Federal Arbitration Act (FAA) on such decisions. The FAA states in part that a written agreement to arbitrate “shall be valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract.”²⁰⁶ You can see that this provision promotes arbitration and, as federal law, it “preempts” (replaces) state law that would contradict it.²⁰⁷ At this point you might think that unconscionability is a ground that “exist[s] at law or in equity for the revocation of any contract.” Therefore you would think that cases finding unconscionable waivers of class-action arbitration would be unaffected by the FAA. But the Supreme Court in Concepcion created confusion by finding that the FAA did preempt the California rule of Discover Bank v. Superior Court,²⁰⁸ which rule barred such class action waivers if (1) they were in a standard-form consumer contract presented on a take-it-or-leave-it basis (an “adhesion” contract), (2) a small sum of money was at stake, and (3) the consumer alleged fraud.²⁰⁹ The Supreme Court reasoned that, contrary to the policies of the FAA, the Discover Bank rule narrows the freedom of parties to construct their own rules of arbitration and adds to the complexity of dispute resolution.²¹⁰ Such law therefore has a “disproportionate impact on arbitration agreements,”²¹¹ contrary to Congress’s intent in enacting the FAA, and is therefore preempted.

The decision casts into doubt whether waivers of class-action arbitration in consumer contracts can ever be unconscionable, although some commentators and courts reason that Concepcion merely “precludes courts from categorically denying effect to waivers of class-wide arbitration in consumer contracts on grounds of unconscionability under state contract law.”²¹² Indeed, the Concepcion case can be read narrowly to preclude a finding of unconscionability only under the factors enumerated in Discover Bank (listed above). However, a consumer often will be challenged to find additional factors that will convince a court to hold a waiver of class-action arbitration unconscionable. Cases involving evidence of strong procedural unconscionability, such as an Internet agreement in which the waiver is difficult to locate on the site, may provide an example of a “ground[ ] * * * at law or in equity for the revocation of any contract.”²¹³ At any rate, one can argue with some conviction that Concepcion simply reveals five justices’ preference for enforcing standard terms, even if presented on a take-it-or-leave-it basis and under the cloud of fraud, and their quite passionate dislike of class actions.

E. SPECIAL PROBLEMS OF STANDARD FORM CONTRACTS

1.Paper Standard Forms

Most exchange transactions today involve paper standard forms.²¹⁴ We have all signed these forms many times and should be familiar with the nature of these transactions.²¹⁵ As a refresher, here’s a typical scenario: You have just flown from Ithaca, New York to Memphis, Tennessee. (If you own a recording of “Memphis” by Chuck Berry, play it in the background while you read this section. Don’t play the inferior version by Johnny Rivers.) In the Memphis airport, somewhat haggard, you wait on a long line at Cheapo Rental Cars. Finally, you reach the sales agent, who presents you with a detailed standard rental agreement in fine print. The agent asks you to initial a few terms and sign at the bottom. Others wait behind you impatiently. You are tired and wish to get to your destination. Bargaining over terms or proceeding to another rental car counter would prove fruitless because the agent has no authority to bargain²¹⁶ and competitors offer similar terms²¹⁷ (not to mention that competitors may have no car for you). In addition, you could not understand most of the language of the form if you decided to read it.²¹⁸ You don’t think that anything will go wrong with your car or the rental anyway²¹⁹ and that Cheapo will help you if something does go awry.²²⁰ You therefore sign and initial the form without reading it. In sum, the car rental agent presented you with a largely incomprehensible form on a take-it-or-leave-it basis and I just mentioned about ten reasons why you did not read the form.²²¹

On the other hand, after spending big bucks perfecting its form, Cheapo understands it and finds it very useful.²²² By using the form for each transaction, Cheapo standardizes its risks, meaning that it will have the same rights and duties in each transaction, and can plan accordingly.²²³ Cheapo also avoids the cost of bargaining over terms.²²⁴ Further, most analysts believe that, because of its expertise and experience, Cheapo can best determine who should bear the risk of each of the various problems that may develop, such as mechanical trouble or accidents.²²⁵ And there is something in all of this for you and me. At least in theory, Cheapo can pass along some of the savings that result from using its form to consumers in the form of lower prices.²²⁶

Standard forms obviously do not constitute typical “bargains,” such as when you and Alice, enjoying equal bargaining power, hammer out the terms of an agreement for the sale of your piano. Remember you have had no say in what appears in Cheapo’s form and you didn’t even read the form. Nevertheless, at least in theory, competition with other car rental companies creates incentives for Cheapo to avoid drafting one-sided terms that place all of the risks and costs only on you. For example, Cheapo wants to establish a good reputation so that it will attract more customers than, say, Budget Rent-a-Car, and drafting unfair clauses in its standard form is obviously not the way to accomplish that.²²⁷

The drawback to this rosy picture, however, is the suspicion that competitors in an industry tend to draft comparable terms, so there may be no threat of competition to curtail Cheapo from overreaching.²²⁸ Moreover, if you have a multitude of reasons not to bother to read your form (enumerated above), you obviously won’t search for terms even if companies offered different terms.²²⁹ Further, few believe that a small, but sufficient, number of “type A” personalities actually read their forms word-for-word, which might create an incentive for Cheapo to write reasonable terms.²³⁰ Cheapo’s reputation may remain largely intact no matter what it puts in its form.

Obviously, then, businesses such as Cheapo have a considerable bargaining advantage over individuals such as you and me, and standard forms present too much of a temptation for some businesses.²³¹ This is an important reason why courts arm themselves with a large arsenal of policing doctrines, such as those discussed in this chapter. Karl Llewellyn, the principal drafter of Article 2 of the UCC, first synthesized the common policing strategy that each of these doctrines reflects.²³² The idea is that a court should presume that you have consented to all of the negotiated terms in your standard form, and that you have given your “blanket assent” to all additional “conscionable” terms, provided that you had a reasonable opportunity to read the standard form.²³³ “Blanket assent” means that you have delegated to Cheapo the duty of drafting the non-negotiated terms of the contract.²³⁴ But don’t worry, you do lots of this kind of delegating. For example, the last time you bought a car or a computer you delegated to the manufacturer the responsibility of selecting appropriate parts.²³⁵ Further, we have already discussed how market forces (to some extent) and the judicial power to strike any “unreasonable or indecent” standard terms protect you from unfair terms.²³⁶

The judicial application in standard-form cases of unconscionability and section 211(3) of the second Restatement both reflect Llewellyn’s approach. For example, a court may find an exception to blanket assent on the basis of procedural unconscionability when a form contains hidden or ambiguous terms or the presenter did not give the other party sufficient time to read the form.²³⁷ A court may find substantive unconscionability when a term “shocks the conscience,”²³⁸ such as a provision that penalizes you $1000 for failing to return the rental car with a full tank of gasoline.²³⁹ In the absence of such findings, a court will enforce the terms of a standard form.²⁴⁰

Section 211(3) of the Restatement (Second) of Contracts, to date most influential in policing insurance contracts,²⁴¹ also reflects Llewellyn’s vision: “Where the other party has reason to believe that the party manifesting * * * assent would not do so if he knew that the writing contained a particular term, the term is not part of the agreement.”²⁴² If Cheapo has reason to believe that you would not have signed the rental contract if you had known about the $1000 penalty term, for example, the provision is unenforceable.²⁴³ According to a comment to the section, a drafter would have reason to believe the other party would not have agreed to a term when it frustrates the purpose of the deal, is “bizarre and oppressive,” or conflicts with bargained-for terms.²⁴⁴ These are exactly the kind of terms that are “unreasonable or indecent” under Llewellyn’s formulation and therefore do not qualify for the presumption of enforcement under his “blanket assent” theory.²⁴⁵

State consumer protection law obviously also plays a role in policing standard forms.²⁴⁶ Most such laws require disclosure of information and bar deceptive practices.²⁴⁷ Some, such as “lemon laws,” also create substantive rights.²⁴⁸ This topic is beyond the scope of this book.

2.Rolling Contracts

You are in Walmart (that’s the only store left in most small cities, so I have to use it in this example), and you agree to purchase a window air conditioner. You give the Walmart agent your credit card and sign the sales receipt. Walmart people load the air conditioner, in a large container, into your car. You cart the container into your home, next to the window where you will install the air conditioner. You open the carton and pull out all sorts of documentation, including written terms disclaiming warranties, limiting remedies, and giving you thirty days to return the air conditioner if you are not satisfied with the terms. You do not return the air conditioner in thirty days. Are the disclaimers and limitations part of your agreement and enforceable against you if anything goes wrong?

Your contract with Walmart has been called by people in the know a “rolling contract.”²⁴⁹ (I discuss the offer and acceptance aspects of rolling contracts in Chapter 2, section B(7)(d). The following treatment should refresh your memory.) Although rolling contracts are common, the answer to whether terms found in the container are part of the contract is controversial.²⁵⁰ On the other hand, the facts of the cases are often straightforward. The leading case, Hill v. Gateway 2000,²⁵¹ decided by a former law professor (therefore a very authoritative opinion), is typical and similar to your air conditioner hypo above.²⁵² Recall that the Hills called Gateway on the telephone and ordered a computer.²⁵³ They gave their credit card information, and Gateway delivered the computer.²⁵⁴ The container contained terms, including an agreement to arbitrate all disputes, and the Hills had thirty days to return the computer.²⁵⁵ After the thirty days had passed, the Hills were disgusted with the performance of the computer, and sued in federal court. Gateway sought arbitration.²⁵⁶

The Hills argued that their credit card payment and Gateway’s shipment constituted an offer and acceptance and that section 2–207(2) of the UCC excluded as “proposals” any “additional” terms that followed contract formation, including the arbitration provision.²⁵⁷ The court did not agree and held that Gateway’s shipment of the computer and terms with the proviso that the Hills could return the computer within thirty days constituted an offer and, by retaining the computer for more than thirty days, the Hills accepted.²⁵⁸ The contract, formed at the end of the thirty days, therefore contained the arbitration provision.²⁵⁹

The court may have erred about the time of formation of the contract. Section 2–206(1)(b) of the UCC states that

Unless otherwise unambiguously indicated by the language or the circumstances * * * an order or other offer to buy goods for prompt or current shipment shall be construed as inviting acceptance either by a prompt promise to ship or by the prompt or current shipment of conforming or non-conforming goods * * *.²⁶⁰

The parties likely gave little thought to when the contract technically was formed.²⁶¹ The “unless” preamble of section 2–206(1)(b) was therefore not applicable to the Hills transaction.²⁶² Therefore, the offer and acceptance (according to the section, the order and shipment) occurred before the Hills received the terms. Therefore, the arbitration clause is only a proposal for an addition to the contract that would not become part of the contract under UCC section 2–207(2).

Unfortunately for the Hills, the court thought otherwise.²⁶³ However, even if the Hills had prevailed on the time of formation, they still could have lost the case. After all, they kept the computer for more than thirty days after receiving the terms.²⁶⁴ Gateway could argue that the Hills impliedly agreed to a new contract with Gateway’s terms by keeping the computer without protest for that time. And recall that section 2–209(1) dispenses with the consideration requirement for modification agreements.²⁶⁵ Alternatively, Gateway could assert that the Hills, who knew that the package containing the computer would include terms (you knew there would be terms in the carton containing your air conditioner, right?), delegated to Gateway the right to ascribe those terms. Neither of these arguments are sure-fire winners for Gateway, but they tend to show the inconclusiveness of determining the rights of parties to rolling contracts based on when the contract was formed.

I guess I owe you an alternative theory for resolving rolling contracts cases, since I am being so critical of the Hill v. Gateway approach. I have already suggested in print (in a fabulous article) that courts should adopt Llewellyn’s general approach to standard-form contracts in the rolling contracts setting.²⁶⁶ We have seen that Llewellyn’s approach entails enforcing any bargained-for terms (but obviously there are none in the carton) and any conscionable standard terms, and throwing out any unfair terms.²⁶⁷ In other words, courts should dispense with the time-of-formation analysis, assume that the Hills gave blanket assent to the terms in the container, and strike any unconscionable terms.

If we apply unconscionability to the Hill-Gateway problem, for example, a court would determine whether the arbitration term was procedurally or substantively unconscionable. As to procedural unconscionability, Gateway’s “rolling contract” approach is very common²⁶⁸ (think about the last time you purchased a major item from Walmart or travel tickets or, for that matter, anything by phone or by the internet). Further, Gateway’s rolling contract reduces the costs of doing business.²⁶⁹ Requiring Gateway to read the terms over the phone or to send a contract ahead to a prospective purchaser would increase costs and would achieve little. Would people like the Hills even listen to or understand the recitation or read the form when it arrived? (The court in Hill v. Gateway thought not.²⁷⁰) In addition, Gateway’s approach may even increase the chance that people will read their forms. Remember, a purchaser has thirty days to peruse the terms in her own home or workplace, free from a badgering sales clerk or other time pressures.²⁷¹ Gateway may hope that few purchasers will take the time and bear the expense of returning a computer based on adverse terms, assuming they discover them.²⁷² But if people who read their terms do not return the computer, they must believe that the costs of doing so, which should be relatively low, still outweigh the costs of living with the adverse terms.²⁷³

All of this suggests that rolling contracts should not be outlawed on the theory that they are procedurally unconscionable. But what about substantive unconscionability? Recall that the Hills were fighting the enforcement of an arbitration provision.²⁷⁴ For a long time arbitration was the darling of lawyers and theorists because of its potential as a money- and time-saving alternative to litigation.²⁷⁵ Further, federal law supports arbitration as a dispute-resolution mechanism, so it would be hard for a court to declare arbitration terms substantively unconscionable.²⁷⁶

Recently, however, analysts have raised serious issues over whether businesses can use arbitration unfairly to their advantage.²⁷⁷ Courts should therefore examine an arbitration clause in context to determine whether the particular facts show that the term is substantively unconscionable as applied. For example, in Brower v. Gateway 2000, Inc.,²⁷⁸ the court held that the arbitration term was substantively unconscionable because it required Brower to pay “excessive costs” that “surely serves to deter the individual consumer from invoking the process.”²⁷⁹ Further,

Barred from resorting to the courts by the arbitration clause in the first instance, the designation of a financially prohibitive forum effectively bars consumers from this forum as well; consumers are thus left with no forum at all in which to resolve a dispute.²⁸⁰

In sum, the main difference between rolling contracts and other standard-form transactions involves when purchasers have an opportunity to read their terms. Although some analysts worry about rolling contracts, ironically the opportunity for purchasers to read the terms at home at their leisure seems a good reason to favor rolling contracts as a method of contract formation.²⁸¹ On the other hand, if people do not read forms no matter when they receive them, contract law should not focus on when the seller makes the forms available.²⁸² Instead, courts should vigorously apply substantive unconscionability.

3.Electronic Standard Forms

If you are a first-year law student or a young attorney (or even someone more advanced in years), you have purchased goods or services, such as a computer, airline tickets, or software, over the internet or while downloading software.²⁸³ As you know, the atmosphere is quite different from the typical paper standard form transaction:

“The harried traveler who faces a complex form after waiting in a long line at the car rental counter has been replaced by the impatient college student buying virus-protection software, delivered via the Internet. She sits comfortably in her dorm room as she searches the Internet for a product. After settling on a product, she might casually browse through some online reviews of the software she wants to purchase, posted by anonymous reviewers to an electronic bulletin board. Once deciding to purchase, she opens an online account with the vendor, using her credit card, and downloads the desired software. She quickly clicks ‘I agree’ to terms and conditions on the website or while installing the software, without scrolling down through several pages to read the boilerplate completely. At the same time, she is listening to a compact disk from her cd-rom drive and playing ‘Minesweeper’ (or she is perhaps sitting in a law school contracts class at a well-wired law school).”²⁸⁴

Lawmakers must decide whether electronic standard forms require a new set of policing (and other) rules, or whether the rules focusing on paper transactions will suffice in this new environment.

Despite the somewhat rosier picture of the process of electronic standard-form contracting depicted above (after all, our college student has time to look at the form free from distractions not of her own making), lots of the less encouraging realities of the paper world apply equally to electronic standard-form transactions.²⁸⁵ Electronic standard forms are still non-negotiable (our student doesn’t have anyone to talk to), difficult to understand, and comprised of the same substantively problematic terms (such as an agreement to arbitrate in a distant place, to allow a business to invade our privacy, or to authorize automatic renewal and unilateral modification).²⁸⁶ At present, some evidence suggests e-businesses employ lots of different terms,²⁸⁷ but, before long, these businesses likely will start employing common terms, just as in the paper world.²⁸⁸

E-businesses can also experiment with methods of presentation of terms and produce standard forms most likely to induce acceptance (for example, by discouraging e-consumers to read through many pages of text and presenting the opportunity to click “I agree” on the first page).²⁸⁹ In addition, e-businesses can gain information about their users and tailor terms to different classes of e-consumers.²⁹⁰

On the other hand, certain aspects of e-commerce offer e-consumers greater protection than in the paper world. E-businesses may worry more than other businesses about the content of their standard forms because of the capacity of e-consumers to spread the word electronically about particularly nasty forms or presentations. E-businesses understand that “with a few mouse clicks, disgruntled e-consumers can broadcast their dissatisfaction to thousands of potential customers. These companies also know that they have to distinguish themselves from the unreliable Internet businesses that are using the Internet to take advantage of e-consumers.”²⁹¹

Further, as the example of the college student e-purchaser suggests, e-consumers have the opportunity to study electronic standard forms without the pressure of impatient people standing in line behind them or sales clerks expecting them to show their trust by declining to read the terms.²⁹² However, although e-consumers probably have lots more time to decide whether to purchase, they may have good reason not to use the time to try to decipher the legalese.²⁹³ E-consumers also may have come to expect instant gratification from their computers, and therefore be too impatient to try to read the standard form.²⁹⁴ In the article constantly appearing in the footnotes to this discussion, we coined the phrase “click happy” to describe today’s impatient e-consumer.²⁹⁵

Well, perhaps you are getting impatient to learn whether lawmakers have drafted new rules to account for electronic standard forms. For the most part, the answer is no. The cases that have spoken on the enforcement of electronic standard forms apply good old contract policing law, much as described already in this chapter.²⁹⁶ Courts generally enforce what they call “clickwrap” standard-form contracts, in which the e-consumer must click on “I agree” or similar language to form the contract after presentation of the standard form on the same screen or on another screen reachable by a link located on the “I agree” screen.²⁹⁷

A more worrisome method of presentation of terms has not been as well received by the courts. “Browsewrap” contracts do not require the e-consumer to view and agree to a set of terms presented on the screen.²⁹⁸ Instead, a screen may contain an optional “terms and conditions” hyperlink that takes the e-consumer to the terms.²⁹⁹ For example, at one time Netscape included a hyperlink that stated, “please review and agree to the terms of the * * * licensing agreement before downloading and using the software.”³⁰⁰ Browsewrap presents the possibility that an e-consumer would never see the hyperlink and would not have the opportunity to view the terms before making a commitment.³⁰¹ Browsewrap presentations therefore have been less successful in the courts on the ground that e-consumers have not received adequate notice of standard terms.³⁰²

Case law thus does not appear to be making dramatic changes to accommodate e-commerce.³⁰³ Both the paper and electronic worlds look (1) for a reasonable presentation of terms so the consumer has notice and an opportunity to review them; and (2) a manifestation of assent by the consumer.³⁰⁴ To date, legislation governing electronic transactions has been rather narrow and unsuccessful. At this writing, only two states have adopted the Uniform Computer Information Transactions Act (UCITA), which applies to the transfer of computer information, such as software, and not to the sale of goods or services. Further, it has not been endorsed by the American Law Institute. UCITA parallels existing case law by enforcing standard-form contracts only when a person manifests assent after an “opportunity to review” the terms.³⁰⁵ A person has an “opportunity to review” a term if it is “made available in a manner that ought to call it to the attention of a reasonable person and permit review.”³⁰⁶

Analysts have not been shy about making additional suggestions for legal intervention, but each leaves some questions open. For example, the law could require consumers to click “I agree” next to each contestable term, but won’t consumers speed through the terms and “click away” anyway? Another suggestion is to require preapproval of terms by a governmental agency. Yikes! Such an approach would be costly and time consuming and would be a substantial threat to freedom of contract. Still another suggestion is to increase the use of substantive unconscionability and other policing doctrines to rid standard forms of objectionable provisions. For example, the Restatement of the Law of Consumer Contracts, in draft form as of this writing, enhances the use of unconscionability and what it calls “deception.”³⁰⁷ Such an approach requires confidence that courts can distinguish enforceable from unenforceable terms in a manner that guides contract drafters and reduces litigation.³⁰⁸

The American Law Institute’s Principles of the Law of Software Contracts encourages businesses to disclose their standard forms on websites before a consumer enters a transaction. Such advanced disclosure could facilitate Internet watchdog groups and private rating services that evaluate and publicize potentially unfair terms.³⁰⁹

Disclosure is itself a contentious subject, however, with skeptics arguing that disclosure is costly and useless.³¹⁰ Here is only one argument made by such skeptics: “[W]e all spend uncounted hours dealing with disclosures, sometimes even reading them.”³¹¹ But the authors complain bitterly about how no one reads their disclosures (despite the last phrase of the authors’ quote), so how are we spending “uncounted hours” on them? I’ll end the Chapter with this profound point!

¹See Chapter 2.

²On standard forms, see Section E of this chapter.

³See Restatement (Second) of Contracts § 12 (1981); E. Allan Farnsworth, Contracts 219–34 (4th ed. 2004).

⁴Kiefer v. Fred Howe Motors, Inc., 158 N.W.2d 288, 290 (Wis. 1968) (citations omitted).

⁵See Farnsworth, supra note 3, at 226 (necessaries include “food, clothing, and shelter as are appropriate to the minor’s situation”).

⁶Riesett v. W.B. Doner & Co., 293 F.3d 164, 172–73 (4th Cir. 2002) (“When the substantive terms of a contract are so one-sided that a court is led to conclude that some defect in bargaining process (such as fraud, duress, or incompetence of a contracting party) led to the formation of the contract, then the unconscionability doctrine may be useful in helping courts ferret out such contracts, whose enforcement would neither promote the autonomy of the contracting parties nor enhance social welfare.”).

⁷See, e.g., Sanger v. Yellow Cab Co., Inc., 486 S.W.2d 477, 482 (Mo. 1972) (“[T]he general rule of freedom of contract includes the freedom to make a bad bargain.”).

⁸Phelan v. City & County of San Francisco, 52 P. 38, 39 (Cal. 1898).

⁹Totem Marine Tug & Barge, Inc. v. Alyeska Pipeline Serv. Co., 584 P.2d 15, 22 (Alaska 1978).

¹⁰S. P. Dunham & Co. v. Kudra, 131 A.2d 306, 309 (N.J. Super. Ct. App. Div. 1957).

¹¹For more groping, see In re Marriage of Shanks, 758 N.W.2d 506, 512 (Iowa 2008) (“There are two essential elements to a claim of duress in the execution of a contract: (1) one party issues a wrongful or unlawful threat and (2) the other party had no reasonable alternative to entering the contract.”); Kaplan v. Kaplan, 182 N.E.2d 706, 709 (Ill. 1962) (“Duress has been defined as a condition where one is induced by a wrongful act or threat of another to make a contract under circumstances which deprive him of the exercise of his free will * * *.”); Shlensky v. Shlensky, 15 N.E.2d 694, 698 (Ill. 1938) (“Duress has been defined as a condition which exists where one is induced by an unlawful act of another to make a contract or perform or forgo an act under circumstances which deprive him of the exercise of his free will.”). See also John D. Calamari & Joseph M. Perillo, The Law of Contracts 308–09 (4th ed. 1998) (“Today the general rule is that any wrongful act or threat which overcomes the free will of a party constitutes duress.”).

¹²See generally Robert L. Hale, Coercion and Distribution in a Supposedly Non-Coercive State, 38 Pol. Sci. Q. 470, 471–73 (1923).

¹³Michael J. Trebilcock, The Limits of Freedom of Contract 243 (Harvard University Press 1993); Gregory S. Alexander, Comparing the Two Legal Realisms—American and Scandinavian, 50 Am. J. Comp. L. 131, 145 (2002) (“All choices are constrained choices simply by virtue of the fact of being made in the context of society.”).

¹⁴Calamari & Perillo, supra note 11, at 310 (“[I]n determining whether a transaction may be avoided for duress, the main inquiry is to ascertain what acts or threats are branded as wrongful.”).

¹⁵Farnsworth, supra note 3, at 255; Olmsted v. St. Paul Pub. Schools, 830 F.3d 824, 828 (8th Cir. 2016) (duress requires physical force or unlawful threats); United States for the Use of Trane Co. v. Bond, 586 A.2d 734, 738 (Md. 1991).

¹⁶Restatement (Second) of Contracts § 174, cmt. a.

¹⁷Standard Box Co. v. Mutual Biscuit Co., 103 P. 938, 939 (Cal. Dist. Ct. App. 1909).

¹⁸Id.

¹⁹Id.

²⁰Id. at 944.

²¹Trebilcock, supra note 13, at 243. See Totem Marine Tug & Barge, Inc. v. Alyeska Pipeline Serv. Co., 584 P.2d 15 (Alaska 1978).

²²See Charles Fried, Contract as Promise: A Theory of Contractual Obligation 109–10 (Harvard University Press 1981). But see Joel Feinberg, Harm to Self 246, 248 (Oxford University Press 1986) (B’s consent valid when A exploits, but does not create B’s lack of choice).

²³This imaginative hypo is loosely based on Vietentours GMBH v. Ticket Co., Inc., 2011 WL 1103042 (Tex. App. 2011).

²⁴Olmsted v. St. Paul Pub. Schools, 830 F.3d 824, 828 (8th Cir. 2016) (no duress if contract made with “full knowledge of the facts” and time to investigate); In re Sea Turtle Cinemas, Inc., 440 B.R. 438, 442 (Bankr. D.S.C. 2010) (landlord failed to explore financing possibilities); Merrill Lynch, Pierce, Fenner & Smith, Inc. v. Adcock, 176 F.R.D. 539, 545 (N.D. Ill. 1997) (“[Defendant’s] choice negates any showing of duress.”); Pierce v. Atchison, Topeka & Santa Fe Ry. Co., 65 F.3d 562, 569 (7th Cir. 1995) (“[O]ne cannot successfully claim duress as a defense to a contract when he had an alternative to signing the agreement.”).

²⁵Zeilinger v. SOHIO Alaska Petrol. Co., 823 P.2d 653, 658 (Alaska 1992) (“In determining whether a reasonable alternative [is] available, we employ an objective test * * *.”); Austin Instrument, Inc. v. Loral Corp., 272 N.E.2d 533 (N.Y. 1971) (subjective test); S. P. Dunham & Co. v. Kudra, 131 A.2d 306, 309 (N.J. Super. Ct. App. Div. 1957) (“[O]ur courts have finally rejected the objective test * * *.”); Wise v. Midtown Motors, 42 N.W.2d 404, 407 (Minn. 1950) (“The standards of resisting power of the victim are personal and subjective rather than objective * * *.”); see generally Calamari & Perillo, supra note 11, at 309 (“[T]he overwhelming weight of modern authority uses a subjective test * * *. Still, an objective test governs in certain situations.”).

²⁶John Dalzell, Duress by Economic Pressure, I, 20 N.C. L. Rev. 237, 258 (1942) (“[T]he fact that [the debtor] did not create [the situation] should be treated as of little importance.”); S. P. Dunham & Co. v. Kudra, 131 A.2d 306, 310 (N.J. Super Ct. App. Div. 1957) (“[Defendant’s] argument * * * that plaintiff itself caused defendants to exert the duress * * * is without the slightest substance.”).

²⁷See Dalzell, supra note 26, at 257–58.

²⁸Trebilcock, supra note 13, at 243. But see Grubel v. Union Mut. Life Ins. Co., 387 N.Y.S.2d 442, 443 (App. Div. 1976) (“Actions, not motives, must cause economic duress.”).

²⁹Totem Marine Tug & Barge, Inc. v. Alyeska Pipeline Serv. Co., 584 P.2d 15, 22 (Alaska 1978) (“An available alternative or remedy may not be adequate where the delay involved in pursuing that remedy would cause immediate and irreparable loss to one’s economic or business interest.”); S. P. Dunham & Co., 131 A.2d at 310 (“[A] public suit [does] not constitute adequate relief”). But see Cabot Corp. v. AVX Corp., 863 N.E.2d 503, 514 (Mass. 2007) (“ ‘[C]ourts have consistently held that the presence of an adequate legal remedy undermines claims of economic duress.’ ”) (quoting Ismert & Assocs. v. New Eng. Mut. Life Ins. Co., 801 F.2d 536, 549 (1st Cir. 1986) (Breyer, J., concurring)).

³⁰See Chapter 5, Section (A)(1).

³¹See Restatement (Second) of Contracts § 176(2)(c).

³²In re Lehman Bros. Holdings Inc., 855 F.3d 459, 477 (2d Cir. 2017).

³³Restatement (Second) of Contracts § 175(2).

³⁴See Chapter 2, Section (A)(8).

³⁵See id.

³⁶See id.

³⁷See, e.g., International Paper Co. v. Suwyn, 951 F. Supp. 445, 448 (S.D.N.Y. 1997) (“[A] promise to perform an existing legal or contractual obligation is, without more, insufficient consideration to support a new contract.”); Schwartzreich v. Bauman-Basch, Inc., 131 N.E. 887, 889 (N.Y. 1921) (“Any change in an existing contract, such as a modification of the rate of compensation, or a supplemental agreement, must have a new consideration to support it.”).

³⁸See Chapter 2, Section (A)(8).

³⁹Contempo Design, Inc. v. Chicago & N.E. Ill. Dist. Council of Carpenters, 226 F.3d 535, 550 (7th Cir. 2000) (“[If the parties] agree to rescind the original contract, [they may] create a different contract on entirely new terms, without providing additional consideration.”); Recker v. Gustafson, 279 N.W.2d 744, 755 (Iowa 1979) (“Rescission and entry into a new contract, in contrast to modification, does not require new consideration.”); 1 E. Allan Farnsworth, Farnsworth on Contracts 525 (3d ed. 2004) (“In theory, this must leave both parties with at least an instant of freedom, during which they are no longer bound by the old contract and are under no duty to make a new one.”).

⁴⁰McCallum Highlands, Ltd. v. Washington Capital Dus, Inc., 66 F.3d 89, 94 (5th Cir. 1995) (“[W]here an alleged rescission is coupled with a simultaneous re-entry into a new contract and the terms of that new contract are more favorable to only one of the parties, doubt is created as to the mutuality of the agreement to rescind the original contract.”).

⁴¹See Chapter 2, Section (A)(8).

⁴²UCC § 2–209(1).

⁴³UCC § 2–209, cmt. 2.

⁴⁴Robert A. Hillman, Policing Contract Modifications under the UCC: Good Faith and the Doctrine of Economic Duress, 64 Iowa L. Rev. 849, 860, 870–73 (1979).

⁴⁵Trebilcock, supra note 13, at 243; see also Austin Instrument v. Loral Corp., 272 N.E.2d 533 (N.Y. 1971). For more on the good faith performance doctrine, see Chapter 7, section (B)(4).

⁴⁶William L. Prosser & W. Page Keeton, The Law of Torts § 1 (5th ed. 1984).

⁴⁷Id.

⁴⁸Id.

⁴⁹Id.

⁵⁰Id. at 665 (“Tort obligations are in general obligations that are imposed by law * * * to avoid injury to others.”); St. Clair v. B & L Paving Co., 411 A.2d 525, 526 (Pa. Super. Ct. 1979) (“Those who undertake an activity pursuant to a contract have both a self-imposed contractual duty and a ‘social’ duty imposed by the law to act without negligence.”); Busch v. Interborough Rapid Transit Co., 80 N.E. 197, 198 (N.Y. 1907) (“[A] tort ordinarily is a violation of a duty fixed by law, independent of contract or the will of the parties.”).

⁵¹See Chapter 3, Section (B).

⁵²Hargrave v. Oki Nursery, Inc., 636 F.2d 897, 898–99 (2d Cir. 1980) (“Tort liability is imposed on the basis of some social policy that disapproves the infliction of a specific kind of harm irrespective of any agreement.”).

⁵³Bonhomme v. St. James, 970 N.E.2d 1 (Ill. 2012).

⁵⁴Restatement (Second) of Contracts § 159 (“A misrepresentation is an assertion that is not in accord with the facts.”).

⁵⁵Olmsted v. St. Paul Public Schools, 830 F.3d 824, 829 (8th Cir. 2016) (material misrepresentation would “induce a reasonable person to manifest his or her assent * * *”).

⁵⁶Canpro Inv. Ltd. v. U.S., 130 Fed. Cl. 320, 343 (Ct. Fed. Cl. 2017) (“Unlike fraud, misrepresentation ‘does not require an intent to deceive.’ * * * It merely requires ‘an assertion that is not in accord with the facts’ ”) (citations omitted); see also Stephens v. Guardian Life Ins. Co., 742 F.2d 1329, 1333 (11th Cir. 1984) (“The most innocent misrepresentation will afford a reason to rescind if the truth is * * * material”).

⁵⁷Calamari & Perillo, supra note 11, at 326 (4th ed. 1998); Pence v. Brown, 627 F.2d 872, 874 (8th Cir. 1980) (“When a contract has been procured by fraud or material misrepresentation, even though innocently and non-negligently made, the injured party may rescind the contract.”); Jennings v. Lee, 461 P.2d 161 (Ariz. 1969) (allowing both rescission and damages).

⁵⁸Restatement (Second) of Torts § 552C (1977); cf. Kinkade v. Markus, 589 P.2d 1142, 1144 (Or. Ct. App. 1979) (“The general rule is that one who is induced to enter a contract by fraud may, upon discovery of the fraud, elect his remedy—he may either rescind the contract and be returned to his former position or he may affirm the contract and sue for damages suffered by reason of the fraud.”).

⁵⁹Cooper Power Sys. Inc. v. Union Carbide Chems. & Plastics Co., 123 F.3d 675, 682 (7th Cir. 1997) (“Misrepresentations * * * that ultimately concern the quality of the product sold, are properly remedied through claims for breach of warranty.”); Johnson v. Healy, 405 A.2d 54, 57 (Conn. 1978) (“Extension of warranty liability for innocent misrepresentation to a builder-vendor who sells a new home is, as a matter of policy, consistent with the developing law of vendor and purchaser generally.”).

⁶⁰Johnson, 405 A.2d at 59.

⁶¹405 A.2d 54 (Conn. 1978).

⁶²Id. at 55.

⁶³Id. at 56.

⁶⁴Id. at 57.

⁶⁵Id. at 59.

⁶⁶Restatement (Second) of Torts § 552(1); see also Giddings & Lewis, Inc. v. Indus. Risk Insurers, 348 S.W. 3d 729, 746 (Ky. 2011) (“[N]egligent misrepresentation requires an affirmative false statement.”).

⁶⁷Kearney v. J.P. King Auction Co., 265 F.3d 27, 34 n.8 (1st Cir. 2001) (“Claims for * * * negligent misrepresentation * * * require that the defendant have made a false representation of present fact and that the plaintiff justifiably relied on the representation as true.”); see also Jenkins v. KLT, Inc., 308 F.3d 850, 858 (8th Cir. 2002) (“A promisee can only recover damages for pecuniary loss incurred in reasonable reliance on a misrepresentation negligently made by the promisor.”).

⁶⁸Calamari & Perillo, supra note 11, at 343.

⁶⁹Restatement (Second) of Torts § 552B(2).

⁷⁰Cf. Johnson v. Healy, 405 A.2d 54 (Conn. 1978).

⁷¹Christy v. Travelers Indem. Co. of Am., 810 F.3d 1220 (10th Cir. 2016) (setting forth elements of fraud); Fabbro v. DRX Urgent Care, 616 Fed. Appx. 485 (3d Cir. 2015) (mere promises or prediction as to the future are not fraudulent); Abt Assocs. v. JHPIEGO Corp., 104 F. Supp. 2d 523, 536 (D. Md. 2000); Gibb v. Citicorp Mortgage, Inc., 518 N.W.2d 910, 916 (Neb. 1994).

⁷²CMFG Life Ins. Co. v. RBS Securities, Inc., 799 F.3d 729 (7th Cir. 2015) (party alleging fraud must have relied); Extra Equipamentos E Exportacao Ltda. v. Case Corp., 541 F.3d 719, 722 (7th Cir. 2008) (“A claim of fraud requires proof that the victim of the fraud relied on the representations that he contends are fraudulent. Otherwise he cannot have been hurt by the fraud.”) (citations omitted); Channel Master Corp. v. Aluminum Ltd. Sales, Inc., 151 N.E.2d 833, 835 (N.Y. 1958) (“[O]ne ‘who fraudulently makes a misrepresentation of * * * intention * * * for the purpose of inducing another to act or refrain from action in reliance thereon in a business transaction’ is liable for the harm caused by the other’s justifiable reliance upon the misrepresentation.”) (quoting Restatement (Second) of Torts § 525); see also Restatement (Second) of Contracts § 162.

⁷³Restatement (Second) of Torts § 549(2) (“The recipient of a fraudulent misrepresentation in a business transaction is also entitled to recover additional damages sufficient to give him the benefit of his contract with the maker, if these damages are proved with reasonable certainty.”).

⁷⁴Id.; Air Host Cedar Rapids, Inc. v. Cedar Rapids Airport Comm’n., 464 N.W.2d 450, 454 (Iowa 1990) (“The measure of damage in false representation claims is under the benefit of the bargain rule.”).

⁷⁵Pesaplastic, C.A. v. Cincinnati Milacron Co., 750 F.2d 1516, 1527 (11th Cir. 1985) (“[I]n an action for fraudulent misrepresentation, punitive damages may be awarded.”); Hargrave v. Oki Nursery, Inc., 636 F.2d 897 (2d Cir. 1980).

⁷⁶Olmsted v. St. Paul Pub. Schools, 830 F.3d 824, 829 (8th Cir. 2016) (recipient must be justified in relying); Dexter Corp. v. Whittaker Corp., 926 F.2d 617, 620 (7th Cir. 1991) (The victim of fraud must prove not only that he relied to his detriment on the fraud but that he reasonably relied.; United States v. Perez-Torres, 15 F.3d 403, 407 (5th Cir. 1994)) (“[I]n cases * * * where estoppel is sought to be based on a misrepresentation [plaintiff must prove] a change in position in reasonable reliance on the misrepresentation.”).

⁷⁷United States v. Perez-Torres, 15 F.3d at 407 (“Reliance is not reasonable if at the time of acting the party seeking to invoke estoppel could reasonably have known the truth of the matter.”); Farnsworth, supra note 3, at 247.

⁷⁸See Farnsworth, supra note 3, at 245–52.

⁷⁹See Stearns v. Select Comfort Retail Corp., 2009 WL 1635931, at *11 (N.D. Cal. 2009).

⁸⁰Weintraub v. Krobatsch, 317 A.2d 68, 71 (N.J. 1974) (“[R]elief may be granted to one contractual party where the other suppresses facts which he, ‘under the circumstances, is bound in conscience and duty to disclose to the other party, and in respect to which he cannot, innocently, be silent.’ ”) (quoting Keen v. James, 39 N.J.Eq. 527, 540–41 (1885)); Swinton v. Whitinsville Sav. Bank, 42 N.E.2d 808, 808 (Mass. 1942) (“The charge is concealment and nothing more; and it is concealment in the simple sense of mere failure to reveal, with nothing to show any peculiar duty to speak.”); Gibb v. Citicorp Mortgage, Inc., 518 N.W.2d 910 (Neb. 1994).

⁸¹Swinton, 42 N.E.2d at 808–09.

⁸²Id. at 808.

⁸³Holcomb v. Zinke, 365 N.W.2d 507, 511 (N.D. 1985) (“Historically, the rule of caveat emptor shielded the seller of real estate from any duty to disclose, the buyer assuming all risks * * *. While such a rule may have had some merit in the agrarian society in which it was applied, the same cannot be said for its continued application to the complexities of our society.”); Wilhite v. Mays, 232 S.E.2d 141, 143 (Ga. Ct. App. 1976) (“[I]n cases of passive concealment by the seller of defective realty, we find there to be an exception to the rule of caveat emptor * * *.”).

⁸⁴Gibb, 518 N.W.2d at 916.

⁸⁵Id.; see also Wilhite, 232 S.E.2d at 143 (seller must disclose “in situations where he or she has special knowledge not apparent to the buyer and is aware that the buyer is acting under a misapprehension as to facts which would be important to the buyer and would probably affect its decision”).

⁸⁶FDIC v. Deloitte & Touche, 834 F. Supp. 1129, 1154 (E.D. Ark. 1992) (“As soon as discovery has occurred or reasonably should occur, the doctrine of fraudulent concealment ceases to operate.”); Fusco v. Johns-Manville Prods. Corp., 643 F.2d 1181, 1184 (5th Cir. 1981) (“There cannot be fraudulent concealment of facts which admittedly were or should have been known by [plaintiff].”); cf. Holcomb v. Hoffschneider, 297 N.W.2d 210, 212 (Iowa 1980) (“[A] buyer cannot generally be held to be able to judge the contents of a parcel of land by the eye. Even though a buyer examines land before purchasing, he may normally rely upon the representations of the seller as to measurement.”).

⁸⁷Weintraub v. Krobatsch, 317 A.2d 68, 74 (N.J. 1974).

⁸⁸See generally Akins v. Couch, 518 S.E.2d 674, 676 (Ga. 1999) (“A jury * * * is authorized to find that a purchaser exercised due diligence even without hiring an inspector.”).

⁸⁹Green Realty Mgmt. Corp. v. Mississippi Transp. Comm’n, 4 So.3d 347, 350 (Miss. 2009) (“[W]here fraudulent misrepresentation is shown, the plaintiff is under no duty to seek out public records.”); Kannavos v. Annino, 247 N.E.2d 708, 712–13 (Mass. 1969) (“[O]ur cases have not barred plaintiffs from recovery merely because they ‘did not use due diligence * * * [when they] could readily have ascertained from * * * records’ what the true facts were.”) (quoting Yorke v. Taylor, 124 N.E.2d 912, 916 (Mass. 1955)).

⁹⁰Kannavos, 247 N.E.2d at 711–12 (“Fragmentary information may be as misleading * * * as active misrepresentation, and half-truths may be as actionable as whole lies * * *.”) (quoting Fowler V. Harper & Fleming James, Jr., The Law of Torts § 7.14 (3d ed. 1996)).

⁹¹See generally Crompton v. Beedle, 75 A. 331, 334–35 (Vt. 1910) (“Where one has full information and represents that he has, if he discloses a part of his information only, and by words or conduct leads the one with whom he contracts to believe that he has made a full disclosure, and does this with intent to deceive and overreach and to prevent investigation, he is guilty of fraud against which equity will relieve, if his words and conduct in consequence of reliance upon them bring about the result which he desires.”).

⁹²See, e.g., Stephenson v. Capano Dev., Inc., 462 A.2d 1069, 1074 (Del. 1983).

⁹³See Chapter 9, Section (A)(1).

⁹⁴Mauldin v. Sheffer, 150 S.E.2d 150, 151–52 (Ga. Ct. App. 1966).

⁹⁵Id.

⁹⁶For a discussion of other differences between contract and tort, see Richard E. Speidel, The Borderland Of Contract, 10 N. Ky. L. Rev. 164 (1983).

⁹⁷See Chapter 5, Section (A)(7)(b).

⁹⁸Mauldin, 150 S.E.2d at 155; see also Housing Auth. of Carrollton v. Ayers, 88 S.E.2d 368, 373 (Ga. 1955) (“The law imposes upon persons performing architectural, engineering, and other professional and skilled services the obligation to exercise a reasonable degree of care, skill, and ability, which generally is taken and considered to be such a degree of care and skill as, under similar conditions and like surrounding circumstances, is ordinarily employed by their respective professions.”).

⁹⁹Mauldin, 150 S.E.2d at 154 (“[In cases of misfeasance] a cause of action ex delicto may be had.”); see also Dunn Const. Co. v. Cloney, 682 S.E.2d 943, 946 (Va. 2009) (punitive damages available if the wrongdoer breaches a common law duty, not merely a contract duty); Courtright v. Design Irrigation, 534 N.W.2d 181, 182 (Mich. Ct. App. 1995) (“Misfeasance is negligence during performance of a contract. While performing a contract, a party owes a separate, general duty to perform with due care so as not to injure another. Breach of this duty may give rise to tort liability.”).

¹⁰⁰Prosser & Keeton, supra note 46, at 657 (“There is no tort liability for nonfeasance, i.e., for failing to do what one has promised to do in the absence of a duty to act apart from the promise made.”); Courtright, 534 N.W.2d at 182 (“[F]ailure to perform a contract altogether constitutes nonfeasance and gives rise only to a suit for breach of contract.”).

¹⁰¹See supra note 97, and accompanying text.

¹⁰²See Speidel, supra note 96, at 168–71; White v. Unigard Mut. Ins. Co., 730 P.2d 1014, 1017 (Idaho 1986) (“The measurement of recoverable damages in tort is not limited to those foreseeable at the time of the tortious act* * *.”); Crisci v. Security Ins. Co., 426 P.2d 173, 178 (Cal. 1967) (“The general rule of damages in tort is that the injured party may recover for all detriment caused whether it could have been anticipated or not.”).

¹⁰³See Chapter 5, Section (A)(4)(b).

¹⁰⁴L.L. Cole & Son, Inc. v. Hickman, 665 S.W.2d 278, 281 (Ark. 1984) (“The courts * * * have tended to extend the tort liability for misfeasance whenever the misconduct involves a foreseeable, unreasonable risk of harm to the plaintiff’s interests.”).

¹⁰⁵Prosser & Keeton, supra note 46, at 660.

¹⁰⁶Cenex, Inc. v. Arrow Gas Serv., 896 F. Supp. 1574, 1583 (D. Wyo. 1995) (“For punitive damages to be recoverable, there must be conduct on the part of the actor amounting to aggravation, outrage, malice or willful and wanton misconduct.”); Bud Wolf Chevrolet, Inc. v. Robertson, 519 N.E.2d 135, 137–38 (Ind. 1988) (“[A jury may award punitive damages if there is clear and convincing evidence that the defendant] acted with malice, fraud, gross negligence or oppressiveness which was not the result of a mistake of fact or law, honest error or judgment, over-zealousness, mere negligence or other human failing, in the sum [that the jury believes] will serve to punish the defendant and to deter it and others from like conduct in the future.”).

¹⁰⁷See Chapter 5, Section (A)(7)(b).

¹⁰⁸MCR Federal, LLC v. JB&A, Inc., 808 S.E.2d 186, 192 (Va. 2017) (“In determining whether a cause of action sounds in tort, contract, or both, ‘the source of the duty violated must be ascertained.’ ”) (quoting Richmond Metro. Auth. v. McDevitt Street Bovis, Inc., 507 S.E.2d 344, 347 (Va. 1998)).

¹⁰⁹Mauldin v. Sheffer, 150 S.E.2d 150 (Ga. Ct. App. 1966).

¹¹⁰See, e.g., Romero v. Mervyn’s, 784 P.2d 992, 998 (N.M. 1989).

¹¹¹See Chapter 7, Section (B)(4).

¹¹²See Chapter 2, Section (A)(7).

¹¹³See id.

¹¹⁴See Chapter 7, Section (B)(4).

¹¹⁵See id.

¹¹⁶San Bernardino Valley Water Dev. Co. v. San Bernardino Valley Mun. Water Dist., 45 Cal.Rptr. 793, 805 (Dist. Ct. App. 1965) (“[R]ejection of performance of a satisfaction contract [must] be made in good faith, with reasonable promptness, and with an explanation of the grounds of dissatisfaction so that defects in performance may be cured if possible.”); Hood v. Meininger, 105 A.2d 126, 128 (Pa. 1954) (“[In contracts where] performance was conditioned on the satisfaction of the owner, the test of adequate performance was not whether the owner ought to have been satisfied but whether she was satisfied * * *. [T]he dissatisfaction must be genuine and not prompted by caprice or bad faith * * *.”).

¹¹⁷See Chapter 5, Section (A)(7)(b).

¹¹⁸Thomas v. Metropolitan Life Ins. Co., 40 F.3d 505, 510 (1st Cir. 1994) (“Under New York law, a plaintiff may recover punitive damages for ‘bad faith’ breach of contract where there is evidence of morally reprehensible conduct directed at the general public, or an extraordinary showing of a disingenuous or dishonest failure to carry out a contract.”).

¹¹⁹William M. Goodman & Thom Greenfield Seaton, Foreward: Ripe for Decision, Internal Workings and Current Concerns of the California Supreme Court, 62 Cal. L. Rev. 309, 346 (1974) (“The insurers’ obligations are * * * rooted in their status as purveyors of a vital service labeled quasi-public in nature. Suppliers of services affected with a public interest must take the public’s interest seriously, where necessary placing it before their interest in maximizing gains and limiting disbursements.”).

¹²⁰Pinto v. Allstate Ins. Co., 221 F.3d 394, 398 (2d Cir. 2000) (“Because an insurance company has exclusive control over a claim against its insured once it assumes defense of the suit, it has a duty under New York law to act in ‘good faith’ when deciding whether to settle such a claim, and it may be held liable for breach of that duty. The insurer acts in good faith when it gives equal consideration to its insured’s interest in avoiding liability in excess of the policy limit as it does to its own interests when considering plaintiff’s demand to settle a lawsuit.”); Commercial Union Ins. Co. v. Liberty Mut. Ins. Co., 393 N.W.2d 161, 164 (Mich. 1986) (“If the insurer is motivated by selfish purpose or by a desire to protect its own interests at the expense of its insured’s interest, bad faith exists, even though the insurer’s actions were not actually dishonest or fraudulent.”); Comunale v. Traders & Gen. Ins. Co., 328 P.2d 198, 201 (Cal. 1958) (“The insurer, in deciding whether a claim should be compromised, must take into account the interest of the insured and give it at least as much consideration as it does to its own interest.”).

¹²¹Pinto, 221 F.3d at 396 (“New York implies a duty of good faith in insurance policies requiring the company—when it decides whether to settle a claim—to give the same consideration to its insured’s interests as it does its own.”); Murphy v. Allstate Ins. Co., 553 P.2d 584, 586 (Cal. 1976) (“[T]he insurer must settle within policy limits when there is substantial likelihood of recovery in excess of those limits. The duty to settle is implied in law to protect the insured from exposure to liability in excess of coverage as a result of the insurer’s gamble—on which only the insured might lose.”).

¹²²Farnsworth, supra note 3, at 762; Crisci v. Security Ins. Co., 426 P.2d 173 (Cal. 1967) (mental distress).

¹²³Foley v. Interactive Data Corp., 765 P.2d 373 (Cal. 1988).

¹²⁴Id. at 374.

¹²⁵Id. at 394–96.

¹²⁶Id. at 390.

¹²⁷Id. at 396.

¹²⁸E.g., Seaman’s Direct Buying Serv., Inc. v. Standard Oil Co., 686 P.2d 1158 (Cal. 1984).

¹²⁹See, e.g., VanLente v. University of Wyo. Research Corp., 975 P.2d 594, 598 (Wyo. 1999) (“The situations are rare in which * * * a special relationship exists when employment is at will.”); Freeman & Mills, Inc. v. Belcher Oil Co., 900 P.2d 669, 675 (Cal. 1995) (“[Language in recent decisions] strongly suggests courts should limit tort recovery in contract breach situations to the insurance area, at least in the absence of violation of an independent duty arising from principles of tort law other than denial of the existence of, or liability under, the breached contract.”).

¹³⁰Computrol, Inc. v. Newtrend, L.P., 203 F.3d 1064, 1070 (8th Cir. 2000) (“[There is a] strong public policy favoring freedom of contract.”).

¹³¹See Chapter 1 at note 1, and accompanying text.

¹³²See, e.g., Christy v. Travelers Indem. Co. of Am., 810 F.3d 1220, 1226 (10th Cir. 2016) (“[P]arties are free to structure their contractual obligations as they wish, so long as they do not clearly contravene public policy”); Gladden v. Boykin, 739 S.E.2d 882, 883 (S.C. 2013) (“Our courts must determine public policy by reference to legislative enactments wherever possible.”); Medical Specialists, Inc. v. Sleweon, 652 N.E.2d 517, 527 (Ind. App. 1995) (“When determining whether or not a contract is against public policy, we must keep in mind that it is to the best interest of the public that persons should not be unnecessarily restricted in their freedom of contract.”) (quoting Hodnick v. Fidelity Trust Co., 183 N.E. 488, 491 (Ind. Ct. App. 1932)).

¹³³McGrath v. SNH Dev., Inc., 969 A.2d 392, 396 (N.H. 2009) (“We have found an agreement to be against public policy if, among other things, it is injurious to the interests of the public, violates some public statute, or tends to interfere with the public welfare or safety.”)

¹³⁴Black’s Law Dictionary 608 (8th ed. 2004) (“A contractual provision relieving a party from liability resulting from a negligent or wrongful act.”)

¹³⁵UCC § 2–316.

¹³⁶John E. Gregory & Son, Inc. v. A. Guenther & Sons Co., 432 N.W.2d 584, 586 (Wis. 1988) (“[An exculpatory clause] is not enforceable in such cases of abuse as intentional wrongdoing or gross negligence, on the part of the party seeking to be protected.”); Mankap Enters., Inc. v. Wells Fargo Alarm Servs., 427 So.2d 332, 333–34 (Fla. Dist. Ct. App. 1983) (“The law is settled that a party cannot contract against liability for his own fraud in order to exempt him from liability for an intentional tort, and any such exculpatory clauses are void as against public policy.”); Kalisch-Jarcho, Inc. v. City of New York, 448 N.E.2d 413, 416 (N.Y. 1983) (“[A]n exculpatory clause is unenforceable when, in contravention of acceptable notions of morality, the misconduct for which it would grant immunity smacks of intentional wrongdoing.”).

¹³⁷McCutcheon v. United Homes Corp., 486 P.2d 1093, 1097 (Wash. 1971) (exculpatory clause in lease); Henderson v. Quest Expeditions, 174 S.W.3d 730 (Ct. App. Tenn. 2005) (white-water rafting); see also Brown v. Soh, 909 A.2d 43, 49 (Conn. 2006) (“[W]e conclude that exculpatory agreements in the employment context violate Connecticut public policy.”).

¹³⁸See, e.g., Henderson v. Quest Expeditions, 174 S.W.3d 730 (Ct. App. Tenn. 2005).

¹³⁹See generally Richard A. Epstein, Unconscionability: A Critical Reappraisal, 18 J.L. & Econ. 293 (1975).

¹⁴⁰See generally Robert A. Hillman, The Rhetoric of Legal Backfire, 43 B.C. L. Rev. 819 (2002).

¹⁴¹For such a discussion, see id.

¹⁴²Henderson v. Quest Expeditions, 174 S.W.3d 730 (Ct. App. Tenn. 2005) (exculpatory clause enforceable); Valhal Corp. v. Sullivan Assocs., 44 F.3d 195, 202 (3d Cir. 1995) (“The law recognizes different methods by which a party can limit his/her exposure to damages resulting from his/her negligent performance of a contractual obligation. An exculpatory clause immunizes a person from the consequences of his/her negligence.”); Scott v. Pacific W. Mountain Resort, 834 P.2d 6, 10 (Wash. 1992) (“The general rule in Washington is that exculpatory clauses are enforceable unless * * * the negligent act falls greatly below the standard established by law for protection of others.”); O’Connell v. Walt Disney World Co., 413 So.2d 444, 446 (Fla. Dist. Ct. App. 1982) (“While exculpatory clauses are enforceable, they are looked upon with disfavor; and any attempt to limit one’s liability for his own negligent act will not be inferred from an agreement unless such intention is expressed in clear and unequivocal terms.”).

¹⁴³Zambelli Fireworks Mfg. Co. v. Wood, 2009 WL 159182, at *9 (W.D. Pa. 2009) (“An employer has a right to protect trade secrets, confidential information, goodwill, customer relationships and unique or extraordinary skills through the use of non-competition and non-solicitation agreements. In addition, a restrictive covenant may be used to prevent a competitor from profiting from the ‘specialized training and skills’ of a former employee.”); Hopper v. All Pet Animal Clinic, Inc., 861 P.2d 531, 539 (Wyo. 1993) (“There is general recognition that while an employer may seek protection from improper and unfair competition of a former employee, the employer is not entitled to protection against ordinary competition.”); Allen v. Rose Park Pharmacy, 237 P.2d 823, 826 (Utah 1951) (“Restrictive covenants are generally upheld by the courts where they are necessary for the protection of the business * * *.”).

¹⁴⁴Gomez v. Chua Med. Corp., 510 N.E.2d 191, 195 (Ind. Ct. App. 1987) (“[W]e respect and believe in individual freedom to contract. That freedom, if it is to be real, must necessarily include the freedom to enter into enforceable contracts that are unwise or even foolish* * *. If an individual agrees to be bound by a covenant against competition under circumstances where he is terminated at will, we see no compelling reason to deny enforcement of his promise.”).

¹⁴⁵Intelus Corp. v. Barton, 7 F. Supp. 2d 635, 641 (D. Md. 1998) (“A covenant not to compete is enforceable if its duration and geographic area are only so broad as is reasonably necessary to protect the employer’s business * * *.”).

¹⁴⁶RLM Comm., Inc. v. Tuschen, 831 F.3d 190, 196–197 (4th Cir. 2016) (courts may enforce only a part of a covenant); Thiesing v. Dentsply Int’l, Inc., 748 F. Supp. 2d 932, 949 (E.D. Wis. 2010) (“[T]he inclusion of products that ‘resemble’ those manufactured or distributed by the defendants is more broad than what is reasonably necessary to protect itself against Thiesing’s solicitation of its customers * * *.”); Static Control Components, Inc. v. Darkprint Imaging, Inc., 240 F. Supp. 2d 465 (M.D.N.C. 2002) (striking a covenant not to compete for overreaching); Tandy Brands, Inc. v. Harper, 760 F.2d 648 (5th Cir. 1985) (striking a covenant not to compete for being “unreasonable as to territorial scope”).

¹⁴⁷Stunfence, Inc. v. Gallagher Sec. (USA), Inc., 2002 WL 1838128, at *6 (N.D. Ill. 2002) (“Because covenants not to compete at their heart restrain trade, they warrant careful scrutiny. If the covenant is reasonably calculated to safeguard the interests of one party without overburdening the other’s ability to effectively do business or impeding the benefit to the public of a competitive market, courts will enforce these agreements according to their terms.”); Petrzilka v. Gorscak, 556 N.E.2d 1265, 1269 (Ill. App. Ct. 1990) (“Noncompetition clauses should be limited in time so that the agreement is no more restrictive than necessary to accomplish this goal so as to prevent injury to the public from a restraint on trade.”).

¹⁴⁸Karpinski v. Ingrasci, 268 N.E.2d 751 (N.Y 1971).

¹⁴⁹Id. at 752.

¹⁵⁰Id. at 754–56.

¹⁵¹Id. at 752.

¹⁵²Rieves v. Buc-EE’s LTD., 532 S.W.3d 845, 851 (Ct.App. Tex. 2017).

¹⁵³Id.

¹⁵⁴United States Nursing Corp. v. Saint Joseph Med. Ctr., 39 F.3d 790, 792 (7th Cir. 1994) (“[W]hen a statute makes an act illegal, contracts for the performance of the illegal act are deemed void and unenforceable.”); Lloyd Capital Corp. v. Pat Henchar, Inc., 603 N.E.2d 246, 247 (N.Y. 1992) (“Illegal contracts are, as a general rule, unenforceable.”).

¹⁵⁵Early Detection Ctr., Inc. v. Wilson, 811 P.2d 860, 867 (Kan. 1991) (“While it may not always seem an honorable thing to do, a party to an illegal agreement is permitted to set up the illegality as a defense even though the party may be alleging his or her own turpitude.”); United Calendar Mfg. Corp. v. Huang, 94 A.D.2d 176, 180 (N.Y. App. Div. 1983) (“ ‘[A] party to an illegal contract * * * cannot ask a court of law to help him carry out his illegal object * * *. The denial of relief to the plaintiff in such a case is not based on any desire of the courts to benefit the particular defendant. That the defendant may profit from the court’s refusal to intervene is irrelevant.’ ”) (quoting Stone v. Freemen, 82 N.E.2d 571, 572 (N.Y. 1948)).

¹⁵⁶Marathon Petrol. Co. v. Chronister Oil Co., 687 F. Supp. 437, 442 (C.D. Ill. 1988) (“It is a well established rule in Illinois that when the parties to an illegal bargain are in pari delicto, ‘the law will not stoop to inquire whether one has gained an advantage over the other.’ ”) (quoting Arter v. Byington, 44 Ill. 468, 469 (1867)); Grant v. Grant, 286 S.W. 647, 650 (Tex. Civ. App. 1926) (“[W]hile a court of equity will on swift wings fly to relieve the innocent from wrong and injury, it travels with leaded feet and turns a deaf ear, when called on to furnish a cloak of righteousness to cover sin, and, where both parties are equally guilty, neither can be said to come with clean hands, and the court will relieve neither, but leave the parties where they are found.”).

¹⁵⁷See Chapter 5, Section (A)(8).

¹⁵⁸See id.

¹⁵⁹See id.

¹⁶⁰Id.; see also Robert A. Hillman, Debunking Some Myths About Unconscionability: A New Framework for U.C.C. Section 2–302, 67 Cornell L. Rev. 1 (1981) (hereinafter Hillman, Debunking).

¹⁶¹For a more complete discussion, see Arthur Allen Leff, Unconscionability and the Code—The Emperor’s New Clause, 115 U. Pa. L. Rev. 485 (1967).

¹⁶²Id., see also Robert A. Hillman, The Richness of Contract 131 (Kluwer 1997) (hereinafter Hillman, Richness).

¹⁶³Campbell Soup Co. v. Wentz, 172 F.2d 80, 83 (3d Cir. 1948) (“[A contract may be] too hard a bargain and too one-sided an agreement to entitle the plaintiff to relief in a court of conscience.”); see also Brunsman v. DeKalb Swine Breeders, Inc., 138 F.3d 358, 360 (8th Cir. 1998) (“[A] court considering a claim of unconscionability should consider the factors of assent, unfair surprise, notice, disparity of bargaining power, and substantive unfairness.”).

¹⁶⁴See Restatement (Second) of Contracts § 208.

¹⁶⁵UCC § 2–302(1).

¹⁶⁶American Software, Inc. v. Ali, 54 Cal. Rptr.2d 477, 479 (Ct. App. 1996).

¹⁶⁷UCC § 2–302, cmt. 1; See generally Hillman, Richness, supra note 162, at 129–43.

¹⁶⁸See, e.g., James v. National Financial, LLC, 132 A.3d 799, 815 (Del. Ct. Chancery 2016) (“The two dimensions of unconscionability do not function as separate elements of a twoprong test. The analysis is unitary * * *.); Fensterstock v. Education Fin. Partners, 618 F. Supp.2d 276, 279 (S.D.N.Y. 2009) (“For a contractual provision to be held unconscionable under California law, it must be both procedurally and substantively unconscionable. However, ‘the more substantively oppressive the contract term, the less evidence of procedural unconscionability is required to come to the conclusion that the term is unenforceable.’ ”) (citation omitted); American Stone Diamond, Inc. v. Lloyds of London, 934 F. Supp. 839, 844 (S.D. Tex. 1996) (“[T]he party asserting unconscionability of contract bears the burden of proving both the substantive unconscionability and the procedural unconscionability of the contract at issue.”); Leff, supra note 161, at 487–88.

¹⁶⁹See Bischoff v. DirecTV, Inc., 180 F. Supp. 2d 1097, 1107 (C.D. Cal. 2002) (“[A] contract is unconscionable when both procedural unconscionability, meaning surprise or distress stemming from unequal bargaining power, and substantive unconscionability, meaning overly harsh or one-sided terms are present.”); Am. Stone Diamond, Inc., 934 F. Supp. at 844 (“[T]he party asserting unconscionability of contract bears the burden of proving both the substantive unconscionability and the procedural unconscionability of the contract at issue.”); Strand v. United States Bank Nat’l Ass’n ND, 693 N.W.2d 918, 922–93 (N.D. 2005) (“The majority of courts * * * have held that a showing of some measure of both procedural and substantive unconscionability is required, and courts are to employ a balancing test looking at the totality of the circumstances to determine whether a particular provision is unconscionable and unenforceable.”) (citations omitted). Hillman, Debunking, supra note 160, at 30.

¹⁷⁰See, e.g., Ellis v. McKinnon Broad. Co., 23 Cal. Rptr.2d 80 (Dist. Ct. App. 1993); Hillman, Debunking, supra note 160, at 32.

¹⁷¹See Hillman, Richness, supra note 162, at 131; Adler v. Fred Lind Manor, 103 P.3d 773, 782 (Wash. 2004) (“In some instances, individual contractual provisions may be so one-sided and harsh as to render them substantively unconscionable despite the fact that the circumstances surrounding the parties’ agreement to the contract do not support a finding of procedural unconscionability. Accordingly, we now hold that substantive unconscionability alone can support a finding of unconscionability.”); Gillman v. Chase Manhattan Bank, N.A., 534 N.E.2d 824, 829 (N.Y. 1988) (“While determinations of unconscionability are ordinarily based on the court’s conclusion that both the procedural and substantive components are present there have been exceptional cases where a provision of the contract is so outrageous as to warrant holding it unenforceable on the ground of substantive unconscionability alone.”); Jones v. Star Credit, 298 N.Y.S.2d 264 (Sup. Ct. 1969) (striking a term based on substantive unconscionability).

¹⁷²Rite Color Chem. Co. v. Velvet Textile Co., 411 S.E.2d 645, 648 (N.C. Ct. App. 1992) (“Procedural unconscionability involves ‘bargaining naughtiness’ in the formation of the contract.”) (citing James J. White & Robert S. Summers, Uniform Commercial Code § 4–3 (3d ed. 1988)); Calamari & Perillo, supra note 11, at 373 (“More frequently elements of both [substantive and procedural unconscionability] are present.”).

¹⁷³James v. National Financial, LLC, 132 A.3d 799, 827 (Del. Ct. Chancery 2016).

¹⁷⁴Hillman, Debunking, supra note 160, at 6.

¹⁷⁵Davis v. Kolb, 563 S.W.2d 438 (Ark. 1978).

¹⁷⁶Vom Lehn v. Astor Art Galleries, Ltd., 380 N.Y.S.2d 532 (Sup. Ct. 1976).

¹⁷⁷See also Industralease Automated & Scientific Equip. Corp. v. R.M.E. Enters., Inc., 396 N.Y.S.2d 427 (App. Div. 1977) (unconscionability finding based on duress).

¹⁷⁸Williams v. Walker-Thomas Furniture Co., 350 F.2d 445, 449 (D.C. Cir. 1965).

¹⁷⁹Walker-Thomas, 350 F.2d 445.

¹⁸⁰Id. at 447.

¹⁸¹Id.

¹⁸²Id.

¹⁸³Id. at 450.

¹⁸⁴See generally Hillman, Debunking, supra note 160.

¹⁸⁵See supra notes 8–156, and accompanying text.

¹⁸⁶See Richard A. Epstein, Unconscionability: A Critical Reappraisal, 18 J.L. & Econ. 293, 303–05 (1975).

¹⁸⁷Hillman, Debunking, supra note 160.

¹⁸⁸See, e.g., Ryan v. Weiner, 610 A.2d 1377 (Del. Ch. 1992).

¹⁸⁹Harris v. Green Tree Fin. Corp., 183 F.3d 173, 181 (3d Cir. 1999) (“Substantive unconscionability refers to contractual terms that are unreasonably or grossly favorable to one side * * *.”); Hayes v. Oakridge Home, 908 N.E.2d 408, 414 (Ohio 2009) (“[A]n assessment of whether a contract is substantively unconscionable involves consideration of the terms of the agreement and whether they are commercially reasonable. Factors courts have considered in evaluating whether a contract is substantively unconscionable include the fairness of the terms, the charge for the service rendered, the standard in the industry, and the ability to accurately predict the extent of future liability.”); Kinney v. United HealthCare Servs., Inc., 83 Cal.Rptr.2d 348, 353 (Cal. Dist. Ct. App. 1999) (“Substantive unconscionability focuses on the terms of the agreement.”).

¹⁹⁰Hillman, Debunking, supra note 160, at 31.

¹⁹¹See supra notes 168–171, and accompanying text; see also Delmore v. Ricoh Americas Corp., 667 F. Supp. 2d 1129, 1138 (N.D. Cal. 2009) (“there is a reasonable justification for the one-sided term”).

¹⁹²Monsanto Co. v. McFarling, 302 F.3d 1291, 1301 (Fed. Cir. 2002) (“[T]he one-sidedness of the [challenged provision’s] substantive terms provides strong evidence that the forum selection clause was imposed, rather than (even in the abstract sense) bargained for.”) (Clevenger, J., dissenting).

¹⁹³Frank’s Maint. & Eng’g, Inc. v. C. A. Roberts Co., 408 N.E.2d 403, 410 (Ill. App. Ct. 1980) (“Substantive unconscionability concerns the question whether the terms themselves are commercially reasonable.”).

¹⁹⁴E.g., Ahern v. Knecht, 563 N.E.2d 787, 792 (Ill. App. Ct. 1990) (“Gross excessiveness of price alone can make an agreement unconscionable.”); American Home Improvement, Inc. v. MacIver, 201 A.2d 886, 889 (N.H. 1964) (“Inasmuch as the defendants have received little or nothing of value and under the transaction they entered into they were paying $1,609 for goods and services valued at far less, the contract should not be enforced because of its unconscionable features.”); Restatement (Second) of Contracts § 208, cmt. c.

¹⁹⁵James v. National Financial, LLC, 132 A.3d 799 (Del. Ct. Chancery 2016).

¹⁹⁶Friendly Ice Cream Corp. v. Beckner, 597 S.E.2d 34 (Va. 2004) (citing cases).

¹⁹⁷James v. National Financial, LLC, 132 A.3d 799 (Del. Ct. Chancery 2016); Hillman, Debunking, supra note 160, at 33.

¹⁹⁸350 F.2d 445 (D.C. Cir. 1965).

¹⁹⁹Leff, supra note 161, at 555–56.

²⁰⁰276 N.E.2d 144 (Ind. 1971).

²⁰¹Id. at 145.

²⁰²Id.

²⁰³Id. at 148; See also Fensterstock v. Education Fin. Partners, 618 F. Supp.2d 276, 279 (S.D.N.Y. 2009) (“[W]hen an arbitration clause requires a consumer to waive the right to bring claims on behalf of a class, that waiver is unconscionable if (1) the waiver is found in a consumer contract of adhesion, (2) in a setting in which disputes between the contracting parties predictably involve small amounts of damages, and (3) it is alleged that the party with the superior bargaining power has carried out a scheme to deliberately cheat large numbers of consumers out of individually small sums of money.”); Ahern v. Knecht, 563 N.E.2d 787 (Ill. App. Ct. 1990).

²⁰⁴560 F.3d 1087 (9th Cir. 2009); see also Brazil v. Dell, Inc., 2007 WL 2255296 (N.D. Cal. 2007); Scott v. Cingular Wireless, 161 P.3d 1000, 1003 (Wash. 2007).

²⁰⁵563 U.S. 333 (2011). For additional Supreme Court cases that favor arbitration, see American Express Co. v. Italian Colors Restaurant, 133 S.Ct. 2304 (2013); DIRECTV, Inc. v. Imburgia, 136 S.Ct. 463 (2015).

²⁰⁶9 U.S.C. § 2.

²⁰⁷I’m happy to say that the general law of preemption is complex and beyond the subject matter of this book.

²⁰⁸113 P.3d 1100 (Cal. 2005).

²⁰⁹Id. at 1110.

²¹⁰The court stated that “[t]he overarching purpose of the FAA, evident in the text * * * is to ensure the enforcement of arbitration agreements according to their terms so as to facilitate streamlined proceedings. Requiring the availability of classwide arbitration interferes with fundamental attributes of arbitration and thus creates a scheme inconsistent with the FAA.” 131 S.Ct. at 1748.

²¹¹Id. at 1747.

²¹²George A. Bermann, Arbitration in the Roberts Supreme Court, 2012 Am. U. Int. L. Rev. 893, 908 and cases cited therein (emphasis added). The Bermann article also discusses other Supreme Court cases that illustrate the Court’s penchant to champion arbitration almost at any cost.

²¹³9 U.S.C. § 2. For a discussion of Internet contracting, see infra notes 283–311. For readers fascinated by arbitration issues, another fun issue is who should decide the validity of an arbitration provision in a contract, arbitrators or a court, especially if the contract contains a so-called “delegation clause.” Such clauses provide that the arbitrators have the exclusive right to determine whether a contract dispute goes to arbitration. See David Horton, Arbitration About Arbitration, 70 Stan. L. Rev. 363 (2018).

²¹⁴See W. David Slawson, Standard Form Contracts and Democratic Control of Lawmaking Power, 84 Harv. L. Rev. 529 (1971).

²¹⁵See Friedrich Kessler, Contracts of Adhesion—Some Thoughts About Freedom of Contract, 43 Colum. L. Rev. 629 (1943); see also Arthur A. Leff, Contract as Thing, 19 Am. U. L. Rev. 131 (1970); Todd D. Rakoff, Contracts of Adhesion: An Essay in Reconstruction, 96 Harv. L. Rev. 1173 (1983).

²¹⁶Farnsworth, supra note 3, at 285 (“Sometimes basic terms relating to quality, quantity, and price are negotiable. But the standard terms * * *—the boilerplate—are not subject to bargain. It must simply be adhered to if the transaction is to go forward.”).

²¹⁷See Kessler, supra note 215, at 632 (“[A consumer] is frequently not in a position to shop around for better terms, either because the author of the standard contract has a monopoly (natural or artificial) or because all competitors use the same clauses.”); Richard L. Hasen, Efficiency Under Informational Asymmetry: The Effect of Framing on Legal Rules, 38 UCLA L. Rev. 391, 126–27, 430–31 (1990); Alan Schwartz & Louis L. Wilde, Intervening in Markets on the Basis of Imperfect Information: A Legal and Economic Analysis, 127 U. Pa. L. Rev. 630, 661 (1979) (“[I]n the absence of formal analysis it cannot be said that term competition occurs in precisely the same way as price competition.”).

²¹⁸See Michael I. Meyerson, The Reunification of Contract Law: The Objective Theory of Consumer Form Contracts, 47 U. Miami L. Rev. 1263, 1270 n. 33 (1993); Melvin Aron Eisenberg, Text Anxiety, 59 S. Cal. L. Rev. 305, 309 (1986).

²¹⁹See Robert A. Hillman & Jeffrey J. Rachlinski, Standard-Form Contracting in the Electronic Age, 77 N.Y.U. L. Rev. 429, 452–54 (2002); Rakoff, supra note 215, at 1221.

²²⁰See Karl N. Llewellyn, The Common Law Tradition: Deciding Appeals 370 (Little, Brown & Co. 1960); see also John J. A. Burke, Contract as Commodity: A Nonfiction Approach, 24 Seton Hall Legis. J. 285, 293 (2000).

²²¹See Rakoff, supra note 215, at 1179 (“Virtually every scholar who has written about contracts of adhesion has accepted the truth [that consumers do not read their forms] and the few empirical studies that have been done have agreed.”); id. at 1179 n.22; see also Stroklund v. Nabors Drilling USA, LP, 722 F. Supp. 2d 1095, 1098–99 (D.N.D. 2010) (“[W]here the plaintiff sign[s] a preprinted contract on a ‘take it or leave it’ basis, procedural unconscionability is established.”).

²²²Melvin Aron Eisenberg, The Limits of Cognition and the Limits of Contract, 47 Stan. L. Rev. 211, 243 (1995) (“For the form giver * * * a form contract is a high-volume, repeat transaction. Thus, a rational form giver will spend a significant amount of time and money * * * to prepare a form contract that is optimal from his perspective.”).

²²³See Kessler, supra note 215, at 631 (“[U]niformity of terms of contracts typically recurring in a business enterprise is an important factor in the exact calculation of risks.”); Farnsworth, supra note 3, at 286 (“Because a judicial interpretation of one standard form serves as an interpretation of similar forms, standardization facilitates the accumulation of experience.”).

²²⁴See Kessler, supra note 215, at 631–32; Farnsworth, supra note 3, at 285.

²²⁵But see Rakoff, supra note 215, at 1204.

²²⁶Rakoff, supra note 215, at 1230 (“[C]osts saved by shifting risks to the customer via form terms may well be returned to the customer by means of lower prices * * *.”).

²²⁷See Hasen, supra note 217, at 426–27 (citing Schwartz & Wilde, supra note 217, at 660).

²²⁸See Arthur Alan Leff, The Leff Dictionary of Law: A Fragment, 94 Yale L.J. 1855, 1931–32 (1985).

²²⁹See Michael I. Meyerson, The Efficient Consumer Form Contract: Law and Economics Meets the Real World, 24 Ga. L. Rev. 583, 596 (1990) (“Even though consumers may know many of the characteristics of frequently purchased products, they will remain ignorant of the characteristics of contract terms which typical experience does not reveal.”); Rakoff, supra note 215, at 1231 (“Because customers generally neither are expected to nor do read, understand, or shop the form terms, market behavior gives no clue to their preferences.”); Hasen, supra note 217, at 428 (“If consumers do not read the standardized terms, and are concerned only about price, they will be unaware that one firm’s standard contract is better than another’s * * *. Although consumers know that some contracts contain unfavorable terms, they cannot identify which contracts contain unfavorable terms and which contain favorable terms.”).

²³⁰See Meyerson, supra note 229, at 1270–71 (“Despite wishful commentary to the contrary, there is no evidence that a small cadre of type-A consumers ferrets out the most beneficial subordinate contract terms, permitting the market to protect the vast majority of consumers.”); R. Ted Cruz & Jeffrey J. Hinck, Not My Brother’s Keeper: The Inability of an Informed Minority to Correct for Imperfect Information, 47 Hastings L.J. 635, 636 (1996) (asserting that the “informed minority” argument is incorrect).

²³¹See Eisenberg, supra note 222, at 242–43 (form contracts designed to hide rights); W. David Slawson, The New Meaning of Contract: The Transformation of Contracts Law by Standard Forms, 46 U. Pitt. L. Rev. 21, 44 (1984) (lawyers draft form contracts “as one-sidedly in the interests of the corporate client as possible”).

²³²Hillman & Rachlinski, supra note 219, at 454–63.

²³³Llewellyn, supra note 220, at 370:

Instead of thinking about ‘assent’ to boiler-plate clauses, we can recognize that so far as concerns the specific, there is no assent at all. What has in fact been assented to, specifically, are the few dickered terms, and the broad type of transaction, and but one thing more. That one thing more is a blanket assent (not a specific assent) to any not unreasonable or indecent terms the seller may have on his form, which do not alter or eviscerate the reasonable meaning of the dickered terms. The fine print which has not been read has no business to cut under the reasonable meaning of those dickered terms which constitute the dominant and only real expression of agreement, but much of it commonly belongs in.

²³⁴Id.

²³⁵See Jeffrey E. Thomas, An Interdisciplinary Critique of the Reasonable Expectations Doctrine, 5 Conn. Ins. L.J. 295, 308 & n.63 (1998) (quoting Gordon R. Foxall & Ronald E. Goldsmith, Consumer Psychology for Marketing 31 (1994)):

[N]umerous studies [indicate] that consumers drastically limit their search for information about durable products like furniture and cars, and services such as those of general practitioners * * *. [M]ost consumers for domestic appliances visit a single store, fail to consult advertising, use restricted price information, consider only one make, and employ perceptions of the manufacturer’s reputation and packaging rather than make evaluations of the product/service attributes to arrive at judgments of quality.

But see Eisenberg, Text Anxiety, supra note 218, at 309 (“The same consumer who is willing to read simple narrative text that discloses a product attribute (such as a list of ingredients) is often unwilling to read the dense text that comprises a form contract.”).

²³⁶Llewellyn, supra note 222, at 370; see also Karl N. Llewellyn, Book Review, 52 Harv. L. Rev. 700, 704 (1939) (reviewing Otto Prausnitz, The Standardization of Commercial Contracts in English and Continental Law (1937)) (maintaining that the presumption of assent does not apply to “utterly unreasonable clauses”).

²³⁷Hillman & Rachlinski, supra note 219, at 457.

²³⁸American Software, Inc. v. Ali, 54 Cal.Rptr.2d 477, 480 (Ct. App. 1996) (“Substantive unconscionability is indicated by contract terms so one-sided as to ‘shock the conscience.’ ”) (quoting Osgood v. Franklin, 1 N.Y.Ch.Ann. 275 (1816)).

²³⁹Am. Software, Inc., 54 Cal.Rptr.2d at 480 (“Substantive unconscionability is indicated by contract terms so one-sided as to ‘shock the conscience.’ ”) (quoting Osgood v. Franklin (1816 N.Y. Ch.)).

²⁴⁰Bower v. The Estaugh, 369 A.2d 20, 23 (N.J. Super. Ct. App. Div. 1977) (“With no evidence of undue influence or overreaching * * * we see no basis for interfering with the obvious and expressed intention of the parties to the agreement.”).

²⁴¹See Curtis J. Berger & Vivian Berger, Academic Discipline: A Guide to Fair Process for the University Student, 99 Colum. L. Rev. 289, 330 (1999) .

²⁴²See Restatement (Second) of Contracts § 211, discussed in Rakoff, supra note 215, at 1191.

²⁴³See Rakoff, supra note 215, at 1191.

²⁴⁴See Restatement (Second) of Contracts § 211, cmt. f, discussed in Rakoff, supra note 215, at 1191.

²⁴⁵See Hillman & Rachlinski, supra note 219, at 458–59.

²⁴⁶See Michael M. Greenfield, Consumer Law: A Guide for Those Who Represent Sellers, Lenders, and Consumers §§ 4.1, 5.1 (1995).

²⁴⁷Id.

²⁴⁸Id. at 160–61, 228.

²⁴⁹Robert A. Hillman, Symposium: A Tribute to Professor Joseph M. Perillo: Rolling Contracts, 71 Fordham L. Rev. 743, 744 (2002) (hereinafter Hillman, Symposium) (“In a rolling contract, a consumer orders and pays for goods before seeing most of the terms, which are contained on or in the packaging of the goods. Upon receipt, the buyer enjoys the right to return the goods for a limited period of time.”). Much of the discussion of Hill v. Gateway 2000 that follows is based on this article.

²⁵⁰See Klocek v. Gateway, Inc., 104 F. Supp. 2d 1332, 1337 (D. Kan. 2000) (“Authority from other courts [on the issue of rolling contracts] is split.”). Compare Step-Saver Data Sys., Inc. v. Wyse Tech., 939 F.2d 91 (3d Cir. 1991) (printed terms on computer software package not part of agreement); U.S. Surgical Corp. v. Orris, Inc., 5 F. Supp. 2d 1201 (D. Kan. 1998) (single use restriction on product package not binding agreement); and Arizona Retail Sys., Inc. v. Software Link, Inc., 831 F. Supp. 759 (D. Ariz. 1993) (license agreement shipped with computer software not part of agreement); with Hill v. Gateway 2000, Inc., 105 F.3d 1147 (7th Cir. 1997), cert. denied, 522 U.S. 808 (1997) (arbitration provision shipped with computer binding on buyer); ProCD, Inc. v. Zeidenberg, 86 F.3d 1447 (7th Cir.1996) (shrinkwrap license binding on buyer); and M.A. Mortenson Co., Inc. v. Timberline Software Corp., 998 P.2d 305 (Wash. 2000) (following Hill and ProCD on license agreement supplied with software); see also Uniform Computer Information Transactions Act (UCITA) §§ 103(a); 111; 112(a) & (e)3; 208, and 209(a) & (b) (2000) (in a “computer information transaction,” a party is bound to conscionable terms that arrive after the party “becomes obligated” only if the party “manifests assent” after an “opportunity review.” The party must have the right to return the goods).

²⁵¹Hill v. Gateway 2000, Inc., 105 F.3d 1147 (7th Cir. 1997).

²⁵²See, e.g., The Gateway Thread—AALS Contracts Listserv, 16 Touro L. Rev. 1147 (2000) [hereinafter Gateway Thread]; for a recent case following Hill, see Bischoff v. DirecTV, Inc., 180 F. Supp. 2d 1097, 1107 (C.D. Cal. 2002).

²⁵³Hill, 105 F.3d at 1148.

²⁵⁴Id.

²⁵⁵Id. at 1148, 1150.

²⁵⁶Id. at 1148.

²⁵⁷UCC § 2–207(2) (“The additional terms are to be construed as proposals for addition to the contract.”). The rest of the subsection would not apply because the Hills were not merchants. For discussion of UCC § 2–207, see Chapter 2, Section (B)(7)(c).

²⁵⁸Hill, 105 F.3d at 1150.

²⁵⁹Id.; see also M.A. Mortenson Co. v. Timberline Software Corp., 998 P.2d 305 (Wash. 2000); Westendorf v. Gateway 2000, Inc., 763 A.2d 92 (Del. 2000); Brower v. Gateway 2000, Inc., 676 N.Y.S.2d 569 (App. Div. 1998); Levy v. Gateway 2000, Inc., 1997 WL 823611 (N.Y. Sup. Ct. 1997).

²⁶⁰UCC § 2–206(1)(b); Shubha Ghosh, Where’s the Sense in Hill v. Gateway 2000?: Reflections on the Visible Hand of Norm Creation, 16 Touro L. Rev. 1125, 1132–33 (2000) (pointing out Section 2–206(1)(b)’s applicability).

²⁶¹See Chapter 2, Section (B)(7)(d).

²⁶²See UCC § 2–206(1)(b).

²⁶³Hill, 105 F.3d at 1150.

²⁶⁴See UCC § 2–209(1).

²⁶⁵Id. (“An agreement modifying a contract within this Article needs no consideration to be binding.”).

²⁶⁶Hillman, Symposium, supra note 249.

²⁶⁷See supra notes 232–236, and accompanying text.

²⁶⁸Hill, 105 F.3d at 1149 (“Payment preceding the revelation of full terms is common for air transportation, insurance, and many other endeavors.”)

²⁶⁹See ProCD, Inc. v. Zeidenberg, 86 F.3d 1447, 1452 (7th Cir. 1996) (“[Eliminating rolling contracts] would drive prices through the ceiling or return transactions to the horse-and-buggy age.”); Restatement (Second) of Contracts § 211, cmt. a (“Standardization of agreements serves many of the same functions as standardization of goods and services; both are essential to a system of mass production and distribution.”).

²⁷⁰Hill, 105 F.3d at 1149 (“If the staff at the other end of the phone for direct-sales operations such as Gateway’s had to read the four-page statement of terms before taking the buyer’s credit card number, the droning voice would anesthetize rather than enlighten many potential buyers. Others would hang up in a rage over the waste of their time. And oral recitation would not avoid customers’ assertions (whether true or feigned) that the clerk did not read term X to them, or that they did not remember or understand it.”).

²⁷¹See generally Hillman & Rachlinski, supra note 219, at 447–50 (social pressures on consumers not to read and discuss terms).

²⁷²See Matthew J. Smith, Comment, An Overview of the Uniform Computer Information Transactions Act: Warranties, Self-Help, and Contract Formation—Why UCITA Should be Renamed “The Licensors’ Protection Act,” 25 S. Ill. U. L.J. 389, 399 (2001).

²⁷³James J. White, Autistic Contracts, 45 Wayne L. Rev. 1693, 1717 (2000).

²⁷⁴Hill, 105 F.3d at 1148.

²⁷⁵Hall Street Assocs., L.L.C. v. Mattel, Inc., 128 S.Ct. 1396, 1402 (2008) (“Congress enacted the FAA to replace judicial indisposition to arbitration with a ‘national policy favoring [it] and plac[ing] arbitration agreements on equal footing with all other contracts.’ ”) (quoting Buckeye Check Cashing, Inc. v. Cardegna, 546 U.S. 440, 443 (2006)); Gilmer v. Interstate/Johnson Lane Corp., 895 F.2d 195, 196 (4th Cir. 1990) (“[T]he Supreme Court has endorsed arbitration as an effective and efficient means of dispute resolution.”); Zosky v. Boyer, 856 F.2d 554, 562 (3d Cir. 1988) (“Arbitration is an expeditious and inexpensive mode of alternative dispute resolution.”).

²⁷⁶Gateway Thread, supra note 252, at 1172 (statement of Franklin G. Snyder); see 9 U.S.C. § 2 (“[A] contract evidencing a transaction involving commerce to settle by arbitration a controversy thereafter arising out of such contract or transaction, or the refusal to perform the whole or any part thereof, or an agreement in writing to submit to arbitration an existing controversy arising out of such a contract, transaction, or refusal, shall be valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract.”).

²⁷⁷See, e.g., Katherine Van Wezel Stone, Rustic Justice: Community and Coercion under the Federal Arbitration Act, 77 N.C. L. Rev. 931 (1999).

²⁷⁸676 N.Y.S.2d 569 (App. Div. 1998).

²⁷⁹Id. at 574.

²⁸⁰Id.

²⁸¹See Hillman & Rachlinski, supra note 219, at 480.

²⁸²Gateway Thread, supra note 252, at 1165 (statement of Kenneth C. Kettering) (“The focus on the process by which the terms are communicated to the buyer before the buyer makes the final decision whether to consummate the purchase seems to me ultimately a red herring. * * * [I]n most cases ‘buyers will not bother to read or fathom the significance of the terms.’ ”).

²⁸³See Hillman & Rachlinski, supra note 219, at 429–30.

²⁸⁴Id. at 468–69.

²⁸⁵Id. at 464.

²⁸⁶See, e.g., Nicosia v. Amazon.com, Inc., 834 F.3d 220 (2d Cir. 2016) (discussing, among other things, unilateral modification).

²⁸⁷Hillman & Rachlinski, supra note 219, at 473.

²⁸⁸Id.

²⁸⁹Id. at 481.

²⁹⁰Id. at 482.

²⁹¹Id. at 470.

²⁹²Id. at 448, 478.

²⁹³Id. at 478.

²⁹⁴Id. at 479.

²⁹⁵Id. at 480.

²⁹⁶See supra notes 214–248, and accompanying text. See, e.g., Major v. McCallister, 302 S.W.3d 227, 230 (Mo. Ct. App. 2009) (enforcing a browsewrap term).

²⁹⁷See, e.g., Smallwood v. NCsoft Corp., 730 F. Supp. 2d 1213, 1227 (D. Haw. 2010) (clickwrap enforceable); Comb v. PayPal, Inc., 218 F. Supp. 2d 1165 (N.D. Cal. 2002); Barnett v. Network Solutions, Inc., 38 S.W.3d 200, 204 (Tex. App. 2001) (“Parties to a written contract have the obligation to read what they sign; and, absent actual or constructive fraud * * * they are not excused from the consequences attendant upon a failure to read the contract. The same rule applies to contracts which appear in an electronic format.”); Caspi v. Microsoft Network, L.L.C., 732 A.2d 528 (N.J. Super. Ct. App. Div. 1999).

²⁹⁸Specht v. Netscape Commc’ns Corp., 306 F.3d 17, 23 (2d Cir. 2002) (“[Readers] were required neither to express unambiguous assent to that program’s license agreement nor even to view the license terms or become aware of their existence * * *.”); see also Nicosia v. Amazon.com, Inc., 834 F.3d 220 (2d Cir. 2016) (discussing Specht and reviewing Internet contract law).

²⁹⁹See, e.g., Fteja v. Facebook, 841 F. Supp.2d 829 (S.D.N.Y. 2012); Major v. McCallister, 302 S.W.3d 227, 230 (Mo. Ct. App. 2009) (enforcing a browsewrap term); ACTONet, Ltd. v. Allou Health & Beauty Care, 219 F.3d 836, 839 (8th Cir. 2000); America Online, Inc. v. Nat’l Health Care Disc., Inc., 121 F. Supp. 2d 1255, 1261 (N.D. Iowa 2000); Ticketmaster Corp. v. Tickets.Com, Inc., 2000 WL 525390, at *1 (C.D. Cal. 2000).

³⁰⁰Specht, 306 F.3d at 23.

³⁰¹Id. at 23 (“[Readers] were required neither to express unambiguous assent to that program’s license agreement nor even to view the license terms or become aware of their existence * * *.”); see also Jerez v. JD Closeouts, LLC, 943 N.Y.S.2d 392 (D.Ct. Nassau County 2012) (forum selection clause not part of the contract).

³⁰²Specht, 306 F.3d at 29–30 (“[A] consumer’s clicking on a download button does not communicate assent to contractual terms if the offer did not make clear to the consumer that clicking on the download button would signify assent.”); Hoffman v. Supplements Togo Mgmt. LLC, 18 A.3d 210 (N.J. Super. Ct. App. Div. 2011); but see Fteja v. Facebook, 841 F. Supp.2d 829 (S.D.N.Y. 2012) (enforcing a browsewrap term); Major v. McCallister, 302 S.W.3d 227, 230 (Mo. Ct. App. 2009) (enforcing a browsewrap term).

³⁰³See, e.g., Nicosia v. Amazon.com, Inc., 834 F.3d 220 (2d Cir. 2016) (no fundamental change in contract principles applied to Internet commerce).

³⁰⁴UCITA § 105(d) (1999).

³⁰⁵UCITA § 112(a).

³⁰⁶UCITA § 112(e)(1).

³⁰⁷Restatement of Consumer Contracts (Counsel Draft No. 3, §§ 5 and 6 (2017)).

³⁰⁸See Part D of this Chapter.

³⁰⁹Principles of the Law of Software Contracts § 2.02 cmt. h (Am. Law Inst. 2009).

³¹⁰Omri Ben-Shahar & Carl E. Schneider, More Than You Wanted to Know 13 (2014) (“[M]andated disclosure persistently fails to achieve its purposes, cannot be fixed, and too often causes harm. Lawmakers should stop using it . . . .”).

³¹¹Id. at 170.