The University of Chicago Law School Faculty Blog

Student Blogger - Winter WIP: Eric Posner and Omri Ben-Shahar Discuss the "Right to Withdraw"

Most Americans, after buying a product from a store, expect that they will be able to return it -- at least within a reasonable amount of time and assuming the item is undamaged. This instinct is borne out by the policies of most retailers, who generally allow returns of most items within a set time period, for a refund, exchange, or store credit. In Europe, this is a right explicitly protected by contract law. In the US, by contrast, the rules vary from state to state, but in general there is no legally protected right to return an item. In his latest WIP talk, Professor Eric Posner presented a paper he and Professor Omri Ben-Shahar are working on regarding what they call the "right to withdraw" from these contracts (alas, there are sound prudential reasons for not titling the proposal the "right of return").

The core insight Posner and Ben-Shahar develop is the function allowing the return of an item serves in terms of letting consumers assess an item's value. For some purchases, such as home or office furniture, it is very difficult to determine whether the purchase is worth the money without some time experiencing it in your home. You need to know if the chair is comfortable, or if the futon matches your living room color scheme. Allowing consumers to return a product makes them more willing to buy, because they know they'll have the opportunity to determine with greater certainty the actual value the product holds to them.

There is, of course, a story from the seller's side as well. Sellers want buyers to feel comfortable purchasing their products, but they also have to worry about depreciation if the goods are returning after weeks of use. The speed at which depreciation occurs varies from product to product -- perishable items depreciate quickly, permanent furnishings more slowly. Some goods, due to cultural taboos, lose essentially their entire resale value upon being used once, which is why even stores which have generally lenient return policies won't let you return a casket. Other goods, such as music or electronic media, are vulnerable to copying, and thus returns are usually prohibited after the consumer opens the box.

The fact that most stores allow returns, and most consumers expect some reasonable ability to return products they buy, counsels turning some right of withdrawal into at least a default rule, to insure that outlier stores don't exploit consumer expectations. But the content of such a rule is more complicated. Ideally, it should maximize the ability of the consumer to gain information about the value of the product, while minimizing the risk posed to sellers via depreciation. In theory, consumers could just have an unlimited right of return subject to paying the value of any depreciation. But depreciation is extremely difficult to measure objectively. So, as an alternative, Posner and Ben-Shahar propose using time as a proxy -- as more time passes (with a rate that varies depending on the type of good), the item will be presumed to have depreciated in value more. This prevents consumers from externalizing the costs of excessive inspection and deliberation, while still allowing them some ability to back out of the contract if the goods don't turn out to be as valuable to them as they initially estimated.

The second part of the paper looks for traces of this sort of doctrine in American law. And they find one potential source in the famous ProCD v. Zeidenberg case, reviled by the bulk Contracts professors and students alike (albeit for different reasons). ProCD held enforceable additional contract terms contained "inside the box" of a computer that was purchased remotely (and were a black box to the buyer at the time he purchased the good). The 7th Circuit concluded that giving all the terms over the phone would have been impracticable, hence, the "acceptance" of the contract only came after the consumer opened the box and read and assented to the terms. This, Posner and Ben-Shahar argue, is essentially a form of the right to withdraw -- once the consumer receives the goods and finds out more information about them (here, certain contractual terms he may find overly onerous), he has, according to the court, the legal right to return the item as a matter of contract law.

Another parallel comes from the right to reject non-conforming goods, codified in the UCC. Though there are differences, two key assumptions overlap with the idea behind a right to withdraw. The first is the assumption that the buyer might not have important information regarding the quality or kind of the goods until they actually arrive at her doorstep. The notion that there is some information about the product that the buyer is unlikely to be able to obtain until after they are in her presence is similar to a right of withdrawal. Second, the UCC conditions rejection on it occurring within a reasonable amount of time after the buyer discovers (or should have discovered) the defect, and before the goods have had a change in condition (that isn't caused by the defect). This rule is designed to protect the rejection rule from being used to exploit sellers and put them at too much of a disadvantage vis-a-vis their customers. The rule effectively creates a trade-off similar to the one Posner and Ben-Shahar recommend for returns: the longer the good is in the possession of the buyer, the greater the defect necessary to justify returning it.

Student Blogger - Fall WIP: Bradford and Ben-Shahar on Rewarding the Enforcers of International Law

They say you catch more flies with honey than with vinegar. They might be wrong. But what would really be great is if the same substance could serve as both honey or as vinegar, as the job requires. Anu Bradford, presenting a paper co-written with fellow Chicago Professor Omri Ben-Shahar, thinks they may have that magic policy in the nettlesome field of international law enforcement.

Enforcement of international agreements is a difficult and costly endeavor. In an ideal world, the threat of sanction would be the preferable way of deterring cheating behavior, because a threat alone is costless. Unfortunately, a threat is only effective if it is credible, and it is only credible if the cost of following through is less than the cost of simply absorbing the bad behavior. Because sanctions are often expensive, many threats of punishment are not credible, and thus bad behavior goes undeterred.

An alternative to punishment (vinegar) is rewards (honey) -- paying off potential violators to encourage them to play nice. Rewards are generally cheaper than punishment, but at root the suffer from a similar problem: if the amount of harm to the enforcer is less than the benefits accruing to the violator, the enforcer has no incentive to offer a reward high enough to convince the wrongdoing to cease misbehaving. Consequently, if there is a desire to continue reducing the level violation below this point (for example, to account for difficult to monetize externalities, as often is the case in environmental regulations)

Bradford and Ben-Shahar's solution is deceptively simple: have the money do both. Enforcers should pre-commit a certain amount of money to an escrow account, with the promise that it will be offered out as a reward to violators who clean up their act. If the violator refuses to do so, then that money is used instead to finance a punishment, effectively multiplying the investment. They analogize this to a system wherein bail money is used to finance bounty hunters (if the defendant skips town). Not only does the wrongdoer lose the money they put up for bail (the reward for coming to trial), but they also face increased resources directed against them as punishment.

IP: Cultural Theory and Economics Analysis (Omri Ben-Shahar)

I was not officially invited to join the discussion, but I wanted to sneak in a thought or two in reaction to some of the themes already raised.

First, it may well be that the incentive perspective has been the dominant approach in American IP law, but it would be incorrect to characterize it as the prescription of economic analysis. To restate what is probably obvious to all, a utilitarian (or “economic”) social welfare function, as applied to IP, measures only one dimension: the total net value from creation, use of, and access to the information goods. Incentives-to-create matter only indirectly, as a feasibility constraint, to guarantee that information goods that are costly to produce and to distribute will be supplied.  But what the social welfare function is set to maximize— the ultimate goal under the utilitarian framework—is not to promote more inventions but rather to promote more value from use.

Second, it may well be that the tools of economic analysis do not currently have the necessary resolution to prescribe the precise limits of IP rights, such limits that would strike the perfect balance between incentives and access, and would lead to maximization of social welfare. But the fact that the principle identified by economic theory—the tradeoff between access and incentives—is difficult to implement with precision does not mean that other principles for limiting IP rights should trump it. Choosing not to look at incentives, or to “override” the incentive/feasibility calculus, would not make it go away. Ironically, the conclusion I draw from the complaint that economic analysis is too crude is that we need to focus on it more, to further refine it, rather than to look elsewhere.

Student Blogger - The Myths of Consumer Protection Law

Update: Audio of this talk is now available and video is embedded after the jump.

Professor Omri Ben-Shahar spoke on the "Myths of Consumer Protection" at this year’s annual Ronald H. Coase lecture for first year law students. Ben-Shahar discussed why he believes the modern consumer protection movement is largely misguided. Consumer advocates cite three things that consumers need: information about products, access to courts, and remedies for wrongs done to them. In the eyes of the consumer advocate, a consumer cannot compete with large corporations without these three things. It would be David versus Goliath; and Goliath would always win.

Myth #1: Consumers will be better off if they have more information

Warning labels are on everything. You can’t install a piece of software or use a web site without checking some box guaranteeing that you have read the Terms of Service. Do these forms of disclosure benefit consumers?

Ben-Shahar believes not. Disclosures of information are often technical and hard to digest. People do not want to spend the time to read these disclosures. In a study of online viewing habits, 1/1000 people actually read a site’s Terms of Service, and that single curious individual only glanced at the complicated contract for an average of forty seconds—perhaps just a misclick.

Audio/Video: Fault in Contract Law

In September, Frank and Bernice J. Greenberg Professor of Law Omri Ben-Shahar and Fischel-Neil Visiting Professor of Law Ariel Porat organized a conference intended to reevaluate the role of fault in contract law. Speakers included Chicago faculty Saul Levmore, Eric Posner, Richard Epstein and Judge Richard Posner, along with experts in contract law from around the world. Subscribers to our Faculty Podcast may have already heard Judge Posner's "Let Us Never Blame a Contract Breaker," and audio and video of the entire conference is now available on the conference website. You may also watch Professor Ben-Shahar's introduction to the conference in the video embedded after the jump.

Israeli Election: How Winning Can Backfire

This week’s Israel’s general election produced a small surprise. The ruling centrist party Kadima edged the right wing Likud party by a small margin, despite polls predicting a Likud win. Under Israeli constitutional law, it is usually the largest party that gets a first crack at building a coalition and holding the Prime Minister position. Kadima therefore claims that its leader Tsipi Livni should be granted the first opportunity to build a coalition.

Upon first reflection, this result suggests that the government-to-be would be less committed to right wing ideology than had the results been otherwise and the Likud had won. Surely, its plurality victory gives Kadima a better chance of forming a coalition than it would otherwise stand. But the irony is that because of Kadima’s victory, and despite the fact that a centrist party rather than a right-wing party received the most votes, it is now more likely that Israel will end up having a more extreme right wing government. Here is why.

In the 120-member Knesset (parliament), Kadima will have 28 seats and Likud 27. The more extreme right wing and religious parties have a combined 38 seats; the parties more left of Kadima (including Labor, 13) have 27 seats. To establish a coalition, the ruling party needs to assemble support of at least 61 members.

Student Blogger - Are Our Reactions to "Willful Breach" Rational?

Imagine you are at the airport gate waiting for a flight home on Christmas Eve, and an announcement is made: your flight has been overbooked. Even though the airline offers significant compensation, and even though you know this is a standard practice from which you benefit in the form of lower ticket prices, you are (probably) quite angry. Or imagine that you have ordered a custom bicycle from a high-end shop. Later you go to pick it up only to find out that the shop has sold it to someone else who made a better offer. Even though the shop refunds your money and offers you a valuable coupon, you remain angry and might resolve not to do business with the shop anymore.

Both examples are cases of "efficient breach," which law and economics scholars have powerfully argued should not be punished above and beyond standard compensatory remedies for contract breach. According to the standard account, these kinds of actions are in fact social-welfare maximizing (so long as the "victim" is compensated), so that even if we are (possibly irrationally) aggravated by them individually, we should permit and even celebrate them as a society, and at a minimum refrain from punishing them. At least doctrinally, this describes the law (at least in the US) - it does not entitle you to any extra compensation for these "willful" breaches of contract.

But this is not always true in practice - courts in the US often award punitive damages or similar remedies for breaches of contract characterized as willful. In other countries, particularly those with civil law systems, the law may explicitly provide for different penalties for willful and non-willful breach. Why doesn't practice match up with theory and doctrine? More deeply, why are even economists and others who pride themselves on rational thinking still aggravated by these kinds of behavior when they experience them?

Professor Omri Ben-Shahar has attempted to answer these questions in his paper (with Professor Oren Bar-Gill of NYU) "An Information Theory of Willful Breach," which he presented at this week's Works in Progress (WiP) talk at the Law School.