Monopoly

1
Monopoly

• Common law contains weak protections against
  monopoly
• Statutes provide protection against price gouging
• Exceptions
• Contracts of adhesion
• Unconscionability

2
Unconscionability

• Defense against the enforcement of a contract
  because the conditions were unfair to one party

3
Relevant Questions

• Were the terms unreasonably favorable to one
  party?
• Was there gross inequality of bargaining power?
• Did each party have a reasonable opportunity to
  understand the contract?
• Are the terms so unfair that enforcement of the
  contract should be withheld?
• One party would not voluntarily have accepted the
  terms. Therefore, they must either be incompetent
  or a victim of distress.
• Infers distress from the terms of the contract.

4
Cooter and Ulen

• ..Lawyers frequently distinguish between
  substantive and procedural Unconscionability.
  Substantive Unconscionability usually refers to a
  price that is utterly disproportionate to market
  value. In contrast, procedural Unconscionability
  consists of circumstances and procedures in the
  bargain that violate widely-accepted norms of
  fairness. Thus, substantive Unconscionability
  refers to the terms or results of the contract
  whereas procedural Unconscionability refers to
  the circumstances and procedures under which the
  contract was formed. Substantive and procedural
  Unconscionability are often combined in actual
  cases because an unfair procedure frequently
  results in an unfair price. Instead of thinking
  of substantive and procedural Unconscionability
  as types of cases, it is better to think of them
  as different aspects of the same case.

5
Unconscionability

• Procedural and substantive unconscionability
• Procedural focuses on unfairness at the
  formation of the contract
• Substantive disproportionate value

6
Procedural Unconscionability

• Procedural
• Focuses on unfairness at the formation of the
  contract
• Inequality in bargaining power
• Monopoly power
• Unfair surprise
• Terms highly favorable to one party
• Lack of mutuality

7
Examples of Procedural Unconscionability

• Use of incomprehensible or legalistic fine-print
  standard form contract provisions
• Inequality between parties due to factors like
  age or illiteracy
• Switching contract documents at the last moment
  to include non-negotiated, one-sided terms
• Pressuring signature on a contract before client
  can read it, or rushing the signing at a time
  when the consumer is vulnerable
• Purposefully selecting impoverished consumers to
  target for sales.

8
Substantive Unconscionability

• Procedural unconscionability often results in
  substantive unconscionability.
• Results are unreasonably favorable to one party
• Disproportionate price (price above opportunity
  cost?)
• Economic analysis might determine whether the
  bargain was one sided by determining whether
  there was a legitimate business justification for
  the contract terms.
• Is it efficiency enhancing?

9
Examples of Substantive Unconscionability

• Limitations or waiver of remedy clauses
• Disclaimer of warranties or limitation of damages
  
• Liquidated damages clauses
• Arbitration clauses
• Notice requirements
• Blanket security interests
• Excessive price terms where there is a gross
  disparity between price and value
• Clauses authorizing venue or jurisdiction in
  distant forums waiver of right to jury trial.

10
Add-on Clause

• A clause in a loan contracts that determines the
  default conditions on the loan
• The amount borrowed on the most recent purchase
  is added to the amount borrowed from previous
  purchases
• If the borrower defaults on the loan, all of the
  goods for which credit was extended may be
  repossessed to pay for the remaining balance on
  the loan.

11
Willliams v. Walker-Thomas Furniture

• Add on clause
• On April 17, 1962, appellant Williams bought a
  stereo set of stated value of 514.95. She too
  defaulted shortly thereafter, and appellee sought
  to replevy all the items purchased since
  December, 1957.
• The record reveals that prior to the last
  purchase appellant had reduced the balance in her
  account to 164. The last purchase, a stereo set,
  raised the balance due to 678. Significantly, at
  the time of this and the preceding purchases,
  appellee was aware of appellant's financial
  position. The reverse side of the stereo contract
  listed the name of appellant's social worker and
  her 218 monthly stipend from the government.
  Nevertheless, with full knowledge that appellant
  had to feed, clothe and support both herself and
  seven children on this amount, appellee sold her
  a 514 stereo set.We cannot condemn too
  strongly appellee's conduct. It raises serious
  questions of sharp practice and irresponsible
  business dealings.
• Weblink

12
Williams Postscript

• Case brought by Georgetown Law Students.
• Furniture store closed because it no longer could
  afford to extend credit to residents.
• Add-on clause created the necessary collateral to
  secure the loans
• Were the residents served well by this decision?
• Is it every possible for an add-on clause to be
  conscionable?
• If a Harvard lawyer signed this contract would it
  still be unconscionable?
• Is this unilateral mistake? Does this mean that
  Williams is exempt from reading the fine print?

13
Add-on clause may be a response to market failure

• Goods depreciate when purchased
• Down payment can cover the initial depreciation
• Add-on clause can serve as substitute for down
  payment
• An excess in value of reclaimed items over the
  remaining debt must be returned.
• Even with an add-on clause the dealer may not
  claim more than the remaining debt.
• Cooter suggests that not enforcing an add-on
  clause hurts poor consumers.

14
Judicially imposed limitations on adhesion
contracts

• A contract or provision which does not fall
  within the reasonable expectations of the weaker
  or "adhering" party will not be enforced against
  him.
• A contract or provision, even if consistent with
  the reasonable expectations of the parties, will
  be denied enforcement if, considered in its
  context, it is unduly oppressive or
  "unconscionable.
• Skier Sues for Injuries Even Though He Signed
  Release

15
Uniform Commercial Code

• 2-302. Unconscionable contract or Clause.
• (1) 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.
• (2) When it is claimed or appears to the court
  that the contract or any clause thereof may be
  unconscionable the parties shall be afforded a
  reasonable opportunity to present evidence as to
  its commercial setting, purpose and effect to aid
  the court in making the determination.

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Contracts of Adhesion

• Drawn up by one party and presented to the other
  on a take it or leave it basis
• Party presented with the contract has little
  power
• Standard form contracts can increase the
  efficiency of exchange
• The term contract of adhesion should not be
  applied to all standard form contracts

17
Analysis of Unconscionability

• Analysis begins with an inquiry into whether the
  contract is one of adhesion
• Two judicially imposed limitations on adhesion
  contracts (See Jaramillo)
• A contract or provision which does not fall
  within the reasonable expectations of the weaker
  or "adhering" party will not be enforced against
  him.
• A contract or provision, even if consistent with
  the reasonable expectations of the parties, will
  be denied enforcement if, considered in its
  context, it is unduly oppressive or
  "unconscionable."

18
In Gillman v. Chase Manhattan Bank, (N.Y. 1988)

• The New York Court of Appeals held that in order
  to determine whether there has been procedural
  unconscionability in the contract formation
  process, a court must assess such factors as
• (1) the size and commercial setting of the
  transaction
• (2) whether there was a "lack of meaningful
  choice" by the party claiming unconscionability
• (3) the "experience and education of the party
  claiming unconscionability" and
• (4) whether there was "disparity in bargaining
  power. The court added that "deception,"
  "high-pressured tactics," and the "use of fine
  print" were also appropriate factors to consider
  in the analysis.

19
Small v. HCF of Perrysburg, Inc. (6th
Dist.-2004)

• Widow and executor brought negligence action
  against nursing home arising out of resident's
  death after he had been admitted in a
  semiconscious state, with his wife signing a
  durable health power of attorney when he was
  admitted, which included an arbitration clause.
  Trial court abused its discretion in staying
  action pending arbitration.
• Clause is substantively unconscionable as a
  condition of admission, despite its language to
  the contrary, where there was no means of
  rejecting the clause it covered all claims and
  it provided for payment of prevailing party's
  attorney fees.
• Clause is procedurally unconscionable where at
  time of signing, decedent appeared to be
  unconscious and was about to be transported to
  hospital clause was not explained to elderly
  wife, who did not have an attorney present and
  she was under considerable stress.

20
Review contracts

• Housing contract
• EULA
• Click wrap contract

21
Click Wrap Contract

• Other names
• Click through
• Shrink wrap contract
• Studies have found that very few read the
  contract (1 or 2 out of 1,000)
• Shrink-wrap licenses are enforceable unless their
  terms are objectionable on grounds applicable to
  contracts in general

22
Liquidated damages

• Also called stipulated damages
• The contract stipulates a sum that will be paid
  upon breach
• Not enforced when it is out of line with the
  damages caused by the breach (unconscionable)

23
Reasons Courts Should Award Liquidated Damages

• Punitive element may be considered payment on an
  insurance contract
• They convey information about promisors
  reliability
• Penalties may be restated as bonuses
• Performance bonds are another alternative

24
Statutory Limitations

• Illegal contracts
• Antitrust laws
• Predatory lending
• Price gouging
• PayDay Lending

25
Price Gouging

• State legislation no federal prohibition
• At least 28 states have price gouging laws
• Usually limited to period of emergency
• Prices are capped at levels charged in the
  immediately preceding period

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LaBand on Price Gouging
Hourly value in cleanup Hourly value in cleanup Value of Groceries Real cost of 1 ice with 4-hour wait Real cost of 1 ice with 4-hour wait
Smith 10 50 41 Buys Ice   Buys Ice  
Jones 75 300 301 Doesn't buy ice Doesn't buy ice
27
Posner on Price Gouging

• Profound mistake
• The common law may not enforce contracts because
  of
• Necessity (Post v Jones)
• Duress (Alaska Packers)

28
Posner on Price Gouging

• He argues that these cases are different from
  price gouging
• Post v Jones
• The salvage ships did not create the distress
• Alaska Packers
• There was no shortage of labor. The workers
  created the shortage
• Windfall profits are unavoidable

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Are price ceilings an uncompensated taking?

• Is the controlled price just compensation?

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Reasons for price gouging laws

• Those without cash (the poor) will suffer
• Crisis redistribution
• High price may not stimulate additional supplies
  in the immediate period
• Does reputation keep stores from price gouging?
• Why dont stores mark up the price of umbrellas
  when it rains?

31
Price Gouging

• Price increase not due to a rise in costs
• How should cost be measured?
• Historical cost
• Market cost
• Replacement cost
• Opportunity cost

32
Florida v Medina

• Medina traveled from Miami-Dade County to the
  town of Matthews, North Carolina, where he
  purchased generators at a Costco store. (Map)
• Medina offered to consumers the Nikato generators
  for 600 that he had purchased for 279.99 each,
  and the Coleman generators for 900 that he had
  purchased for 529.99 each.
• Charged with violating Floridas price gouging
  statute

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