Myths of Consumer Protection Law

As previously blogged here, the debate over predispute arbitration clauses in contracts between businesses and consumers, employees, and franchisees is heating up. Supporters of the Arbitration Fairness Act of 2009 held a press conference last week on “Fairness Arbitration Day.” See related posts after the jump.

In contrast, Professor Omri Ben-Shahar from the University of Chicago, spoke recently on the “Myths of Consumer Protection Law.” Part of the lecture, discussed at the University of Chicago Faculty blog is here:

Myth #2: Consumers need access to courts

Many boilerplate licenses—standard contract terms that are often reused—require mandatory arbitration or place the forum to settle abuses far away. These provisions make litigation an infeasible choice. The consumer protection advocates believe everyone deserves their day in court, making these types of contracts unenforceable. But even if we had broad freedoms to sue, would it help us?

If everyone had the freedom to sue, some would exercise that right and others would not. The people exercising their right to sue for inadequate consumer products would raise the products’ price. People who do not utilize their right to sue would have to pay this higher price, in effect subsidizing the litigious group.

It seems intuitive that only people who are informed of their legal rights will exercise them. Those that are informed would likely tend to be the affluent and wealthy users. Thus, instead of helping the class of people that consumer advocacy is most protective of—uninformed and poor consumers—broad legal rights serve as a subsidy from the have-nots to the haves.

On the other hand, legal rights to sue for inadequate products may deter businesses from pursuing illegitimate tactics. This would benefit all consumers. But this assumes that litigation is a good mechanism to distinguish the unfair and deceitful practices. Many observers believe that the outcomes of consumer protection suits are impossible to predict, undermining any desirable deterrent effect.

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