Mistaking the Symptom for the Disease

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Disclosure is not a substitute for regulations that protect consumers.

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More than You Wanted to Know: The Failure of Mandated Disclosure argues entertainingly, thoroughly, and convincingly that disclosure is a failed regulatory tool, and one that under current conditions cannot succeed in most contexts. Unfortunately, the authors, Omri Ben-Shahar and Carl Schneider, tend to confuse the symptom—ineffective disclosure—with the underlying disease—a society that has failed to effectively regulate the marketplace and permits firms to use disclosure to take advantage of consumers. Positioning disclosure itself as the problem leads the authors to serve up yet another tired indictment of regulatory interference with “the market.” Yet disclosure is not regulation so much as it is a fig leaf for not regulating. Confusing under-regulation with over-regulation leaves the authors bereft of suggestions for useful reform.

According to Ben-Shahar and Schneider, disclosure makes people feel less autonomous: “studying disclosures can detract from your sense of control.” Disclosure imposes “‘depleting and unpleasant’” opportunity costs, “interfer[ing] with things people like doing.” But it is not disclosure that imposes these costs; it is the experience of attempting to navigate the mercurial, multifarious, multidimensional choices offered in our poorly regulated modern marketplace.

A “primary reason” for people’s aversion to making choices, Ben-Shahar and Schneider assert, “is the burden disclosures impose on people.” But people are not decision averse because of burdensome disclosures; they are averse to burdensome decisions. With or without disclosure, people do not want to have to choose among 30 prescription drug plans with varying price structures and coverages when they cannot confidently identify the best plan for their unknowable future medical needs.

Ben-Shahar and Schneider glancingly acknowledge that disclosure’s failure has something to do with the choices Americans daily face. For example, they explain that the “problem” with even clearly-written privacy disclosures “is less the words than the lushness of legitimate uses.” But they then proceed to interrogate disclosure rather than the legal doctrine that permits firms to employ disclosure to bless uses of personal data far afield from consumers’ expectations.

Ben-Shahar and Schneider make the same mistake when they opine that “disclosure” leads to “wariness” that “‘leaves us feeling all the time that we’ve probably been taken.’” It is not disclosure that is disempowering; rather, what is disempowering is the loss of rights—to a jury trial, to privacy, to a safe product, to property—that the law permits disclosure to effectuate. A disclosure may remind people that the law will hold them accountable for “choosing” to pay fees they do not understand, but ignorance is rarely bliss. With or without disclosure, consumers have been taken.

Furthermore, it is not true that people do not want disclosure, as Ben-Shahar and Schneider repeatedly claim. People want disclosure, perhaps especially those disclosures they do not read. Disclosure gives people the illusion of knowledge and a security blanket woven from the myth that if the firm reveals the terms, then the terms cannot be all that bad, or other “savvy” consumers would have driven the product out of the market.

Because Ben-Shahar and Schneider mistake the symptom for the disease, they are unable to propose reforms that would help. The only way to change the disempowering experience of losing one’s rights in the fine print is to change the law such that people cannot forfeit rights in this way. The law should not allow us to be taken through disclosure, whether through “warning” disclosures that give firms immunity from tort liability for defective products or through fine print that hides unexpected fees.

Take the case of Ms. Castellana, discussed in Ben-Shahar and Schneider’s book. As they see it, she was screwed by the combination of a prior inconsistent oral representation, an incomprehensible disclosure, and the parole evidence rule. But the real problem in her case was the design of the yo-yo transaction itself. Even if the salesperson did not tell her that her credit had been approved and the car was hers, giving someone physical possession of a car with financing terms contingent on future credit approval is a trap.

Yo-yo transactions exploit consumer vulnerability created by the physical loss of a traded-in car, the endowment effect, and the consumer’s ordinary expectation that when she is handed the keys and congratulated on her new car, she can stop shopping for financing. Meanwhile, the seller searches for a lender to buy the financing contract. The seller can then take an overage when it can find one (the lender funds the loan at the price quoted to the consumer and gives the seller a kickback). The seller can then railroad the buyer into a more expensive loan or, as in Ms. Castellana’s case, renege on the deal if it cannot find the terms it wants. No disclosure mandate is needed to facilitate the scam; all that is needed is for the law to permit the car buyer to be taken in this way.

None of this is to say that disclosure does not cause problems of its own. As Ben-Shahar and Schneider explain, using mandated disclosure as a regulatory tool poses regulatory opportunity costs because legislators pretend to have solved the problem and move on. Disclosure—mandated or not—can give consumers false comfort and overwhelm consumers into making worse decisions. Disclosure exacerbates inequality when better-off consumers use disclosed information to obtain better deals or to protect themselves from harm, while already-disadvantaged consumers do not.

Yet the deeper problem is that the law allows firms to employ disclosure to bind consumers to terms outside consumers’ ordinary expectations. Mandated disclosure addresses the information asymmetry between firms and consumers, but it does nothing to address their asymmetric decision-making positions. For a firm making thousands of sales, it is worthwhile to add a raft of boilerplate to the deal, design prices in complex and opaque ways that require pages to explain, and change terms frequently. For a consumer to understand and bargain over every term is never worthwhile, given the number of different transactions the consumer engages in daily.

Ben-Shahar and Schneider understand the decision problem of the individual, and they explain that “you should ignore” the fine print because the contingencies addressed therein are so remote. But while no one donut will harm you, a steady diet of donuts just might. The law allows firms to exploit their economies of decision-making scale, at the expense of consumers.

Why do Ben-Shahar and Schneider position disclosure as the problem rather than a symptom? One reason may be their unfounded trust in the market to protect consumers. “Many disclosures fail because they are not … needed,” they say, because people “correctly rely on government and the market to reduce the risks of leaving disclosures unstudied.” Ben-Shahar and Schneider admit that “disclosers often have reasons to fudge and smudge the data,” but they then nakedly assert that “[d]isclosers are rarely trying to write unreadably.” The “essential problem,” to their minds, “is that complexity makes it hard for lawmakers to write clear instructions and for disclosers to understand them.”

Pity the poor discloser. Ben-Shahar and Schneider’s response to a mortgage settlement agent who either did not understand or did not bother to take the time to accurately explain a document signed at closing is telling: “How could the agent know this was a warning about loan-flipping scams,” they ask without sarcasm. But how could the agent, who is paid to understand and coordinate the transaction, not?

Ben-Shahar and Schneider so trust the market that they compare boilerplate with background legal rights and find the latter wanting, given how much simpler boilerplate is. Of course it is simpler to state a rule that unrelentingly favors one party (“You agree that in the event of any dispute between us, your remedies are limited to a refund of the purchase price you paid for the item”) than to state a set of rules for consequential damages that fairly balances the needs and expectations of the parties without creating incentives not to take due care. It never figures into Ben-Shahar and Schneider’s calculus that background legal rights have a normative basis in democratic theory, whereas boilerplate is normatively unjustifiable.

What are the alternatives to disclosure? Ben-Shahar and Schneider assure us that often, no alternatives are needed, because firms are standing by to help. In a particularly unpersuasive passage, they tell us: “Drug companies cheerfully tell … hospitals and HMOs about their wares. Walmart solicits information about its suppliers’ compliance with environmental and labor standards.” Information intermediaries (a category in which Ben-Shahar and Schneider include Yelp, HMOs, and Walmart) “do much better than mandated disclosures at giving people the advice they need to make unfamiliar and complex decisions.” Perhaps Ben-Shahar and Schneider have not heard that some businesses hire others to write their Yelp reviews, drug companies sometimes bury adverse drug trial results, and Walmart’s own contractors apparently have used subcontractors to violate federal and state labor laws.

No matter these failings, More than You Wanted to Know should be required reading for policymakers. The widespread faith in disclosure ought to be shaken. At the tail end of the book, Ben-Shahar and Schneider get it exactly right – disclosure alone, whether mandated or not, “should not have legal consequences.” This is the key normative point, whether those legal consequences entail the loss of life or freedom that Ben-Shahar and Schneider reference, or the loss of civil justice rights, the loss of privacy, the loss of product safety, or the loss of other terms a consumer would reasonably understand in a particular context to be part of the transaction. Firms should be permitted neither to brandish disclosure as a sword against consumers nor to raise disclosure as a shield from liability for unfair, deceptive, and abusive conduct. Disclosure is no substitute for effective regulation.

This essay is part six of a seven-part series on The Regulatory Review entitled, Is Mandatory Disclosure Helping Consumers?

Lauren Willis

Lauren E. Willis is a Professor of Law at Loyola Law School Los Angeles (visiting at Cornell Law School Fall 2015). Her most recent work, Performance-Based Consumer Law, forthcoming in the University of Chicago Law Review, http://papers.ssrn.com/abstract=2485667, suggests replacing mandated disclosure with a requirement that firms demonstrate that their customers understand key product features and/or are nonetheless using the products suitably.