PHILADELPHIA (Legal Newsline) -  American Law Institute (ALI) is cooking up new common law rules covering consumer contracts that would give courts an unprecedented range of reasons to invalidate or rewrite contract terms.

Some of the nation’s leading business defense attorneys say that the potential consequences of the proposed changes are so grave that a  “whole swath of businesses” would be harmed, and that if the ALI formally adopts the changes in a “Restatement” of the law it jeopardizes its very reputation.

“I’ve always had great respect for ALI and its work,” said Victor E. Schwartz, chair of public policy practice at Shook, Hardy & Bacon, and long-time ALI member.  “But this move is unprecedented and blatant in its effort to give the trial lawyers a new weapon to pursue businesses.”

From the outset, ALI’s approach to the Restatement project has been flawed, Schwartz suggested.

Rather than relying principally on common law – the traditional province of ALI restatements – the project is based on a smattering of state consumer protection laws and regulations. The trouble, he said, lies with the power behind Restatements; judges rely on them as a guide to how years of case law decisions change the complexion of particular areas of the law.

Christopher E. Appel, also with Shook, Hardy & Bacon, said that since there is no common law of consumer contracts in this Restatement, the project Reporters looked to statutory law.

“This is, at least in our judgment, unprecedented and divorced from the basic purpose of a Restatement to explain what the common law is rather than try to create novel, broader common law rules,” Appel said.

The lead Reporter on the Restatement, Harvard law professor Oren Bar-Gill, responded to an email request for comment with a “no comment,” and other ALI members working on the Restatement either referred questions to another lawyer or did not respond at all.  

In broad terms, the draft Restatement ignores the 1925 Federal Arbitration Act (FAA) and a related 2011 U.S. Supreme Court ruling in AT&T Mobility v. Concepcion that preempts state laws regarding contracts and certain kinds of arbitration.. 

As a result of that ruling, businesses that include arbitration agreements with class action waivers can require consumers to bring claims only in individual arbitrations, rather than in court as part of a class action.

In more specific terms, one provision in the draft would undermine the validity of pre-dispute arbitration agreements through the broadening of the contract nullifying doctrine of “unconscionability.”  

The draft proposes a broad rule that would empower a court to use the doctrine of unconscionability to void a consumer contract if it “unreasonably expand[ed] the consumer’s liability, the business’s remedies, or the business’s enforcement powers,” or “unreasonably limit[ed} the consumer’s ability to pursue a complaint or seek reasonable redress for violation of a legal right.”  

“Virtually all of these terms are ambiguous and non-descriptive,” Appel said, “such that any court that does not wish to follow the Supreme Court’s interpretations of the FAA could rely on the Restatement to void the pre-dispute arbitration provision. Courts could similarly rely on the Restatement’s broad and ambiguous unconscionability provisions to void other contract terms that they simply do not like.”

In another provision, the courts could allow a consumer out of a contract that involves a “deceptive act or practice” – again in reliance on state consumer laws entirely disassociated from laws governing contracts. Defense attorneys say that just like the language in the unconscionability provision this language is vague, and open-ended, allowing the courts to rely on its very ambiguity to effectively reach whatever result it desired.

“ALI had a desired end and without common law to get to the result it wanted it looked to state law,” said another prominent business defense attorney who asked not to be identified.

Those opposed to the draft Restatement hope to convince enough ALI members to convert the Restatement to a “Principles project” at the group’s next meeting on the subject in May. A Principles project is an aspirational narrative of where ALI members would prefer the law to be, not where it is. It doesn’t carry the weight of a Restatement.  

In a letter sent to ALI in January, the U.S. Chamber of Commerce’s Institute for Legal Reform (ILR) urged ALI to reclassify its effort as a Principles project, as required by ALI’s own guidelines. ILR said that “the substantive provisions of the most recent draft are not only entirely inconsistent with current law, but also would threaten to invalidate a large majority of contracts currently recognized by courts as entirely lawful—creating uncertainty and waves of litigation that would impose increased costs on consumers.”

Editor’s note: The U.S. Chamber Institute for Legal Reform owns Legal Newsline.

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