The Tyranny of Contract

The Supreme Court today issued another opinion (American Express v. Italian Colors Restaurant) making it harder to sue in federal court after you've "agreed" to arbitration and "agreed" to waive any authority to pursue a class action. This kind of case—strengthening arbitration clauses and weakening class action privileges—is what people point to as exemplifying the "pro-business" bias of the Roberts Court. I've pushed back on that argument before, but today I want to push back a little the other way.

Specifically, I want to push back on the idea that these decisions are admirable as vindicating the "liberty of contract." A good example of that argument is made by graysilverback-blawger Walter Olson, who hails today's decision as "a victory for freedom of contract."

I do not think today's decision and the others like it are a victory for any kind of freedom or liberty of contract. I think they are better understood as furthering a pernicious tyranny of contract. No one—and I mean no one—negotiates a credit card or cell phone or cable television contract. This is true for consumers and it is true for small businesspeople. These are take-it-or-leave it arrangements, so the only option is to vote with your feet and sign on with a competitor. But it is no surprise that all the options impose these same onerous terms and waivers because in the final analysis no consumer or small businessperson will ever choose a credit card or cell phone based on finely printed dispute-resolution procedures. We choose on price and features, full stop. Anyone sophisticated enough to understand the effect of these provisions is sophisticated enough to know there is no choice but to accept them.

That is not to say that the Supreme Court's decisions in these cases are necessarily wrong to enforce these provisions. I am suspicious of the "effective vindication" doctrine that was at issue in today's case because it is a judicially crafted exception to rather clear federal legislation. And the objectives the plaintiffs' bar seek to vindicate can be achieved the old fashioned way: through legislation.*

So these decisions can be defended in terms of judicial modesty, and as consistent applications of basic interpretative principles. But it goes way too far, I think, to celebrate them as a triumph for freedom. The existence of these contracts is best understood as a market failure. They have the effect—undisputed in today's opinion—of making it cost prohibitive for people to prove violations of their statutory rights. It may well be wise of the Supreme Court to say, "this is not our problem." (Or, as Justice Kagan put it, "too darn bad.") But let's not pretend that individual freedom was actually increased as a result.

UPDATE: Walter Olson points out on Twitter that "grayback" is apparently an obscure insult, which was not my intent. I meant "silverback," which is to say that Mr. Olson is like a gorilla and that is not at all offensive. In seriousness, I was ineffectively just referencing the fact that he's been blogging about the law longer than just about anyone.


*FOOTNOTE: The chances of such legislation getting passed are undeniable small, for much the same reason that the companies are able to impose these terms in the first place. The companies each have billions on the line, and the consumers have literally pocket change at stake. So there are public choice problems. But another way of looking at this is just that Congress is "pro-business" too.

Big Ten Expansion: The Legal Angle

As Mr. Gillette recently reported (in a Gillette-Torvik Non-Exclusive Breaking News Item of the Day), Maryland and Rutgers will be joining the Big Ten athletic conference.

One of the footnotes in this news is that the members of the ACC (Maryland's current affiliation) recently voted to impose a $50 million "exit fee" on institutions that leave the conference. (Until September, the fee was a mere $20 million.) In the press conference announcing the decision to go over to the Big Ten, Maryland's president was somewhat dismissive of this requirement, implying that the fee would get whittled down in negotiations: "As far as that exact amount of that sum, that is something that we will discuss in private with the ACC."

Well, the ACC has taken things very public by suing Maryland in North Carolina state court to recover the $50 million. I haven't reviewed the contract between Maryland and the ACC, but I presume the exit fee is styled as "liquidated damages" for the harm caused by Maryland's breach. Such provisions are generally permitted under contract law so long as they don't amount to a penalty. I expect that Maryland will argue that the fee is an excessive penalty that is not meant to recompense the ACC for any damages but rather to penalize it for jumping ship.

Maryland's best argument, it seems to me, is the recent and sudden increase in the fee from $20 to $50 million. Is there any basis to believe that the reasonable approximation of damages suddenly increased 150%? It seems much more reasonable to believe that the conference realized that $20 million wasn't enough to make it uneconomical for members to leave for greener pastures. In other words, it became evident that the fee wasn't punitive enough to prevent breach. Seems like a penalty.

A Gillette-Torvik Prediction™:  Maryland and the ACC will soon settle this suit for an undisclosed sum, "in private." That undisclosed sum will be around $25 million.

UPDATE: They settled for $31 million, publicly.