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

'Voting with your wallet' doesn't work: Smart consumers are powerless to stop unregulated companies from screwing over the masses.

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.

"Vote with your wallet" sounds good in theory, but doesn't work in practice

"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.

Image: Shutterstock

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.

Aaron Perzanowski, a law professor at Case Western Reserve University and coauthor of The End of Ownership says that, if anything, consumers have lost power since Cruz's paper as companies have all converged on offering similar contracts across companies and sectors. And so saying "vote with your wallet" sounds good in theory, but doesn't work in practice.

"It's an understandable impulse. But these sort of restrictive terms have a way of becoming industry wide standards quickly once one company finds success, perhaps after taking some initial heat. Just look at digital media licenses for example. There isn't exactly a thriving market for EULA terms," he said. "It also overestimates how much competition there is in the market. We all complain about cell phone companies, but there are only four or five major competitors. So all those complaints are ignored."

Imperfect information is a common problem that should be considered and compensated for somehow

There are various ways manufacturers make sure consumers stay uninformed. The contracts are long and difficult to understand. Often, they apply to people who don't even know they've entered into them. And we are unwittingly entering into so many contracts that it's simply not worth it to read them all. Cruz notes that, even in 1996, many thermometers were coming with pages-long user agreements.

"Not only must one determine what the provisions mean, but one must also assess their impact on a case-by-case basis," Cruz wrote. "For many products, any cost whatsoever may be enough to induce consumers not to become informed."

A 2014 NYU study found that roughly a tenth of one percent of consumers even look at licensing agreements at all, and most read them for only a few seconds. For those of you who enjoy math, Cruz modeled his argument (this is a theoretical world where the market is truly efficient): 

Image: Hastings Law Journal

Cruz explains that such a world doesn't really exist. In the real world, people care about different issues (the people who care about privacy are not always the people who care about security, who are not always the people who care about repair, who are not always the people who care about property rights), and so it's unlikely that a sufficiently large informed minority would ever arise.

And so what you have here is one of the staunchest supporters of the free market in America arguing that specific aspects of the free market are fundamentally broken. Companies have used this inefficiency to get fantastically wealthy off the backs of their consumers, who can't do much of anything to fight back. Voting with your wallet generally does not work, and so in 1996, Cruz advocated for regulations or "compensation" for consumers who are harmed by companies.

"Imperfect information is a common problem that should be considered and compensated for somehow," he wrote. "While the current legal responses in contract and tort law may not be the best responses, neither are the actions of informed minorities."

I asked Cruz's office if this is still his stance toward regulations and for more information about his paper; I haven't heard back yet.