Guilt-Free Markets? Unconscionability, Conscience, and Emotions

by Hila Keren


“In a market society characterized by record-level socio-economic inequalities, many business opportunities for exploitation arise. Greed competes with conscience; to exploit or not to exploit becomes a pressing question. Each time greed wins, an oppressive contract is born, depriving the exploited party of limited resources, further enriching the exploiter, and increasing the ever-growing gap between the powerful and powerless.

Such was the case of Henrietta Charley as described in a 2014 decision of the Supreme Court of New Mexico.3 Ms. Charley worked hard to make ends meet. A mother of three and a medical assistant earning $10.71 per hour working in a medical center, she found herself under financial distress and had to take out a loan of $200 “to buy groceries and gas.”4 Although she had never done this before,5 taking the loan was easy. The lender’s storefront was one of many similar businesses crowding Farmington’s Main Street, only a few minutes’ drive from Ms. Charley’s workplace.6 Inside, employees of “Cash Loan Now” were trained to offer a swift ten-minute lending process to anyone with a job.7 They were instructed to misrepresent the interest rate in daily terms ranging “between $1.00 and $1.50 per day” for every one hundred dollars borrowed.8 The lender’s manuals further scripted the interactions with the borrowers, requiring employees to conceal the payment schedule and never explain that the loan was interest-only.9

It was only much later that Ms. Charley realized that “she would have to make sixteen biweekly payments of $90.68 each before any of her payments would be allocated toward her principal.”10 The terms of the schedule had been purposely buried in her file.11 Misleading Ms. Charley and taking advantage of her financial distress and lack of experience, the lender awarded her a $200 loan that in reality carried a total finance charge of $2,160.04, equal to a 1,147.14 APR (annual percentage rate).12 When sued, the lender cited a loophole, arguing that since it intentionally converted its loan products from payday loans to “signature” loans,13 Ms. Charley’s loan agreement was legal and therefore should not be invalidated by courts.14

Unfortunately, Ms. Charley’s loan agreement is by no means rare. In the world of fringe banking—the exploding industry of high-cost loans such as payday and auto-title loans—borrowers can only get credit under predatory terms, at sky-high costs that worsen their vulnerable financial state. Despite borrowers’ seeming consent to such loan agreements, the marks of exploitation15 are obvious: intentional targeting,16 calculated misrepresentation,17 callous taking advantage of others’ distress,18 and the imposition of egregious interests and fees.19

How should the law respond to exploitative market behaviors that yield predatory contracts? By and large, our legal system delegates the problem to the judiciary. Admittedly, many greed-born contracts slip under the legal radar because the exploited parties simply lack the means, monetary and otherwise, to seek legal help.

The exploiters, on the other hand, frequently rely on the law for enforcement of their contracts. Any time litigation ensues, courts must choose between greed and conscience, exploiters and exploited, and enforcement and non-enforcement. Courts are faced with a difficult dilemma: ignore the problematic behavior of the stronger party or follow their sense of moral correctness and refuse to support unscrupulous behavior. There is no doubt that courts are authorized to invalidate unfair contracts. Legislation and precedents have established a variety of legal tools that the courts may use, foremost among which is the unconscionability20 principle.21 There is, however, a greater doubt—and an unresolved debate—on the normative question of how courts should utilize this principle.22

On one side of the debate stand those who argue for minimal use of the unconscionability principle. Believing that any interference in the free market is undesirable, theorists argue that judicial intervention in the name of fairness is paternalistic and harmful.23 Courts influenced by these concerns have chosen to operate a formal version of the unconscionability principle and have often used it to raise the bar for invalidating contracts.24 On the other side of the debate stand those who argue for a broad use of the principle. Emphasizing the need to monitor the market, jurists have argued that judicial intervention is crucial to protect weaker parties in predatory transactions and to restrain inappropriate market behavior. Courts that follow these ideas, such as many in California, are more willing to utilize the unconscionability doctrine.25

This Article enters the debate from a unique angle: it considers in what way judges should use the unconscionability principle as opposed to how often. Its main goal is to find a way to effectively discourage—rather than unintentionally encourage—market exploitation. The Article departs from the conventional discourse in several important ways. Rather than critiquing the doctrinal characteristics of unconscionability, the Article illuminates its deep connection to the idea of conscience. Instead of highlighting the power of courts to sanction inappropriate behavior, it stresses the expressive power of law and its ability to incentivize people to follow their conscience and choose to behave appropriately.

As an alternative to focusing on economic incentives, the Article discusses the possibility of creating an environment that encourages self-restraint by evoking conscience-based behavior. Such a possibility has been explored outside of the unconscionability debate by Professor Lynn Stout in her book Cultivating Conscience: How Good Laws Make Good People.26 Yet, while Professor Stout stresses at the outset that her book’s goal is to consider behavior and not emotions,27 this Article adds to the discussion an understanding of the crucial role of the emotions. The Article uses the fresh approach of “law and emotions”28 against the conventional belief in legal rationality. It introduces the power of law to impact market actors’ decision making by influencing the emotions that drive conscience.

On one hand, the Article demonstrates how the law can unintentionally impair the emotions that facilitate conscience-based decision making, thus worsening socio-economic problems. On the other hand, it proposes three constructive steps that courts can take in order to evoke such emotions. Following this proposal would allow courts to support the operation of conscience and foster self- restraint in the market. Notably, the idea introduced by this Article circumvents the problem of less versus more use of unconscionability: thoughtfully crafted, judicial decisions can help market actors to internalize a norm against exploitation, thereby yielding more self-restraint and less need for judicial interventions.

Existing discussions of unconscionability have tended to stick to the question of the economic incentives created by judicial decisions, ignoring the possibility that people may change their behavior in response to the way such decisions frame, discuss, and evaluate questionable market behaviors. Drawing on studies in psychology and the neurosciences, this Article presents such a possible impact.
Underscoring the historical and contemporary importance of conscience in unconscionability decisions, it conceptualizes the phenomenon of market exploitation as a moral dilemma and not merely a rational choice. Parties that are presented with an opportunity to profit through exploitation do not have to seize the moment in full. Rather, they have the equally available option to restrain themselves and contract fairly, acting less selfishly and more prosocially.

One can, for example, lend another a sum of money for a variety of interest rates, all profitable to the lender, without choosing an egregious percentage. Tempting as the opportunity to exploit can be, virtually any contracting party has the ability to listen to the voice of conscience and exercise self-restraint. How, then, can the law work to support and encourage such self-restraint? What legal response to abusive market behavior might yield less future abuse?

Having framed those new questions, the Article responds to them by proposing that judicial decisions condemning exploitative bargaining practices have important, unrecognized potential: to galvanize self-restraint by participating in the social cueing of conscience. The Article conceptualizes conscience as a metaphor for the dynamic interaction between changing social norms and shifting individual beliefs. It is here that we form personal normative judgments.29 Within this framework the Article envisions law as an important mediator between society and the self. If conscience is perceived “[a]s a voice straddling the inner and the outer,”30 law can operate to amplify this voice. It can assist market actors in exercising self-restraint in the face of temptation to profit from exploitation.31

As argued in this Article, the law can, for example, discourage transgression by a clear articulation of the relevant social norm, thereby reminding us that misbehavior may come with a price: the painful experience of guilt. Such a legal reminder of the prospect of guilt draws on the deep connection between conscience and the moral emotions. To appeal to the conscience is by definition not merely or even mainly a cognitive exercise. Rather, conscience, as an inner judge, reflects a dialog with our environment in which emotions are the leading form of communication. To use the words of the second epigraph, “[r]ightness and wrongness . . . are things we feel.”32

Expanding and deepening the conversation to include the moral emotions is imperative for two main reasons. First, since emotions dictate the operation of conscience and thus the probability of self- restraint, we must understand the impact of law on the affective domain in order to fully assess how legal decisions may influence future behaviors. Second, the emotions have a normative value for anyone interested in curbing greed.33 Even those who ideologically support the free market may appreciate the opportunity to decrease exploitation, not by increasing the frequency of intervention, but rather by creating the ethical and affective conditions that would encourage individuals to regulate their own behavior. Indeed, lab studies of human behavior in transactional contexts have shown that most people expect fairness of exchanges and strongly condemn greedy behavior.34

The Article unfolds in four parts. Part I is dedicated to the relationship between the unconscionability principle and the concept of conscience. It explores the rise and fall of the bond between the two, how the principle was born joined to concerns of conscience but increasingly broke away from them and has reached a point when many believe unconscionability has little to do with conscience or morality. Part II explores the connection between conscience and emotions. It draws on interdisciplinary studies to explain the impact of moral emotions on self-restraint and on choices between selfish and prosocial behaviors. This Part focuses on the human ability to anticipate feelings of guilt as a key to self-restraint. Part III applies the understanding developed in Part II to the debate concerning the way courts use the unconscionability principle. It illustrates how the framing, content, and rhetoric of judicial reviews of exploitive contracts can influence the moral emotions of people and thus shape their future behavior.

Part III does so by offering a careful textual analysis juxtaposing two contemporary decisions: one that has the power to disable the moral emotions required for the operation of conscience and one that can induce those emotions and support conscience-based decisions. Part IV generalizes these examples and proposes a normative argument: if courts have the ability to either discourage or encourage conscience-based and emotionally-informed decision making they should aim at fostering rather than suppressing non-exploitative behavior. To achieve such a goal, this Part proposes a concrete model for applying the unconscionability principle effectively. This model is clear and easy to implement and is comprised of three characteristics: framing that welcomes, rather than ostracizes, the moral emotions; rhetoric that clarifies, rather than clouds, pertinent social norms; and content that thoughtfully portrays the harm caused to the exploited party.

Overall the Article calls for a renewed and redefined linkage between the judicial employment of the unconscionability principle and the concept of conscience. Given the power of law and the authority of judges, the review of market behavior in the manner proposed below has the power to encourage the operation of the moral emotions, facilitate the working of conscience, support self- restraint, and improve the fairness of the market.
Furthermore, the Article’s contribution is not limited to the context of market exploitation. It suggests more broadly that in many other contexts, judicial decisions, as well as other legal signals, could and should be evaluated in terms of their impact on human emotions. Despite the fact that emotions drive behavior, such impact is currently under-acknowledged—a status that this Article seeks to change by marking a path for a more nuanced understanding of the operation of law and a better use of its given power.”

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