Unconscionability and Price Gouging Law

Michael Giberson

[This post is first of two on Eisenberg’s essay on unconscionability. Link to part two.]

Use of vague concepts like “unconscionability” in price gouging laws creates problems. Businesses are not always sure what prices are legal under such laws, and as a result may price products uneconomically low or remove products from the market altogether rather than risk prosecution. Prosecutors gain flexibility from the vagueness, but then bear the burden of convincing a judge or jury that a particular price was in fact unconscionable. In some cases states provide explicit guidance – maybe 10 percent, 15 percent, or even 25 percent over pre-emergency prices – but often states simply prohibit “unconscionable,” “excessive,” or “exorbitant” prices without providing further guidance.

Melvin Eisenberg has an essay on unconscionability in contract law that helps explain that term and may prove useful in understanding price gouging law (link in continuation). As it turns out, Eisenberg does offer some concepts useful to thinking about price gouging, but when he actually addresses price gouging directly his analysis neglects these concepts.  In a subsequent post I’ll discuss Eisenberg’s price gouging analysis, the remainder of this post looks at the general idea of unconscionability.

Eisenberg explains:

[U]nconscionability was not a recognized principle under classical contract law.

On the contrary, that school of thought embraced the bargain principle, under which bargains are enforceable according to their terms without regard to fairness. Exceptions were made for bargains involving fraud, duress, incapacity, and certain kinds of mistakes. However, those exceptions were narrowly bounded, and rested in part on the ground that a contract requires consent, and a contract that involves one of these exceptions lack true consent.

Beginning in the 1960s, the position of contract law changed radically, following Uniform Commercial Code Section 2-302, which provides that “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.” … The precise meaning and reach of the unconscionability principle, however, have still not been fully established.

Eisenberg explains that efforts to reconcile the idea of unconscionability with the bargain principle led to a distinction between procedural and substantive unconscionability, but this distinction doesn’t get us far. If the result of a contract is deemed unfair, that contracting procedures were fair does not address the sense of unfairness. Substantive unconscionability is the main point.

To determine whether or not a contract is unconscionable, Eisenberg points to two elements: whether the contract was made in a reasonably competitive market, and whether the contract involved a moral fault on the part of the promisee. Moral fault becomes key in Eisenberg’s view. Contracts made on reasonably competitive markets are rarely if even unconscionable, he says, but, “Regardless of the nature of the market on which a contract is made, the contract will not be unconscionable without the element of moral fault.”

It seems like existence of a reasonably competitive market may ensure procedural fairness, but again if the result is deemed unfair, the fairness of the process fails to remedy the sense of unfairness accompanying the result. So far the analysis hasn’t helped resolve the vagueness of “unconscionable” as used in price gouging laws. At best we have replaced the vague term of “unconscionable price” with the vague term “price involving an element of moral fault.”

Eisenberg elaborates on “moral fault”:

For contract-law purposes, moral fault should normally mean social morality, that is, moral standards that are rooted in aspirations for the community as a whole and, on the basis of an appropriate methodology, can fairly be said to have substantial support in the community, can be derived from norms that have such support, or appear as if they would have such support.

From a social science perspective, this reference to the moral standards of the community and “an appropriate methodology” seems promising. Finally, perhaps, we have a method for grounding our analysis, a means for reducing the vagueness of “unconscionable” and providing some specificity to price gouging laws.

Eisenberg does not pursue this direction.  Instead he suggests how a court may reason about unconscionability norms. Three general propositions underlie his methodology, he says, the first concerning competitiveness, the second concerning the bargain principle, and the third offering specific guidance for a court. The workings of these three propositions seem mainly to be to grant the broadest possible scope to a court. Competitiveness of markets is important because unconscionable results are more likely to the degree that markets deviate from the ideal of perfect competition. The bargain principle is important because it rests on ideas of fairness and efficiency, and in cases in which revising a contract will not impair efficiency, fairness considerations can dictate. Finally, “specific unconscionability norms can often be developed by using the general unconscionability principle as a charter that enables the court to either create wholly new rules and enlarge the traditional boundaries of existing rules, such as those dealing with duress, incapacity, and undue influence.” I’m not a legal theorist, but it strikes me as unwise to grant courts charter to create wholly new rules and revise existing boundaries when the foundation is no better detailed than a “general unconscionability principle.”

Yet there in much useful in the following analysis. Eisenberg presents two hypothetical cases, The Desperate Traveler and The Desperate Patient, which provide insights useful to the examination of price gouging law. Unfortunately, when Eisenberg examines price gouging directly, he neglects to apply the distinctions just developed and his analysis lacks subtlety.

I’ll look at these aspects of Eisenberg’s paper in a subsequent post.

REFERENCE: Eisenberg, Melvin A.(2009). The Principle of Unconscionability. UC Berkeley: Berkeley Program in Law and Economics. Retrieved from: http://escholarship.org/uc/item/77h162nt.