Ted Cruz’s Law Paper From 1996 Is the Best Argument Against Letting Tech Companies Run Rampant

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Ted Cruz's Law Paper From 1996 Is the Best Argument Against Letting Tech Companies Run Rampant
// Later On

Jason Koebler had an interesting article in Motherboard a couple of weeks ago:

There's a common refrain I see online anytime I write about the "right to repair" movement or licensing agreements that screw over customers: "Why not just vote with your wallet?"

The argument boils down to this: If a corporation is using business practices that are unfair to its customers, its customers should simply spend their money elsewhere. If you don't like that you can't repair your John Deere tractor, or your iPhone, or your Playstation 4, just buy from another company. Eventually, big companies will have to treat their customers better or they will lose money.

It's an argument I've heard often enough that I started researching whether voting with your wallet is actually a plausible strategy. What I found is that even the staunchest free market supporters don't believe that an "informed minority" can change corporate behavior that screws over consumers. In fact, in 1996, Ted Cruz (yes, that Ted Cruz), cowrote one of the most important and forceful papers arguing that legal intervention (regulation, maybe!) is necessary to prevent large corporations from taking advantage of the masses.

Published in the Hastings Law Journal while Cruz was clerking for Supreme Court Justice William Rehnquist, the 43-page tour-de-force explains that there is an inherent information asymmetry between companies and their consumers. Companies create contract terms that they understand because they wrote them, and consumers cannot be reasonably expected to understand the legalese. More importantly, the ones who do understand the legalese of contracts are not powerful enough to effect change.

"The [informed minority argument] defenders argue that if a sufficient number of consumers read and understand latent terms and thereby become informed, then they will demand efficient terms, and the producers will in turn provide those terms to all consumers," Cruz wrote. "While having some intuitive appeal and, indeed, some theoretical validity, this argument carries little practical force … the informed minority argument is a poor tool for the defenders of the market."

"Inefficient contracts"—ones in which corporations have an advantage—are often used by companies to create a parallel legal system. Cruz writes mainly about warranty terms, but today's legal scholars say Cruz's argument can be applied to many corporate activities today.

The End User License Agreements that come with essentially every piece of software; the terms of your broadband contract, which often includes provisions to allow for the sale of your data to advertisers; companies that use "Authorized Service Provider" programs to monopolize the repair market; the fine print in your credit card agreements or bank agreements.

The crux of Cruz's argument is that, even though a company may lose a few of the "informed" consumers ("marginal consumers," in econ speak), the money a company loses from those consumers will never be more than it makes from screwing over the masses.

To maintain this balance of power, companies make it so difficult to actually become informed that the vast majority of consumers have "imperfect information" and, thus, companies will never need to offer fair terms of service.

"Regardless of the amount of competition, unless a significant number of consumers is well informed, it will be costly for the manufacturer to provide efficient terms because the consumers will not be willing to pay for efficient terms that they do not know exist or that they improperly value," Cruz wrote.

In the real world, this means that the number of consumers who care about and understand the fine print and are willing to spend their money elsewhere is vastly outnumbered by the number of consumers who simply don't. People aren't willing to read thousands of words of contracts to understand when, specifically, Google or AT&T or Facebook can sell your information. They may think independent repair is important, but not important enough to forego having an iPhone or a John Deere Tractor. . .

Continue reading.

This power imbalance is exactly when the government should act to defend the (relatively powerless) public from predatory practices, but in the US businesses no longer permit legislators to act in the public interest but instead require them to act in the interests of business. It's not a good situation.

Filed under: Business, Congress, Daily life, Government, Law
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