systems design

Consumer Redress and “The New Handshake”

For many years, a tempest has surrounded public policy approaches to consumer protection, largely implicating three utterly inapt legal constructs:  FRCP 23, the Federal Arbitration Act, and traditional principles of contract formation.  Accustomed to managing customer complaints but unwilling to expose themselves to the coercion of class actions, companies have sought to require consumers to waive rights to collective remedies.  Courts have recognized the validity of contracts containing such waivers if they are embedded in agreements to arbitrate.  And consumer agreements to arbitrate have been enforced despite widespread acknowledgement that consumers have no idea that they are agreeing to anything, what they are agreeing to, or what rights they are waiving.

So intractable has been the legal discourse that Congress, through Dodd-Frank, created an agency to promulgate rules protecting consumers of financial products from “forced arbitration and class action waivers.”  And so vulnerable is our regulatory environment that once Congressional power shifted that promulgating agency (the Consumer Financial Protection Bureau) and its proposed rules are presumed to be dead before ever having come to life.

The whole thing has been a testament to the futility of the law to address a felt need in a way that conforms to our legitimate expectations.

Comes now Prof. Amy J. Schmitz of the University of Missouri and Colin Rule of Modria with an extra-legal, market-driven, empirically-based approach whose values reflect old-time America and yet whose execution relies upon cutting-edge technology.

Prof. Schmitz remembers when she would buy ears of corn from a local farm stand, hand the farmer a buck, and shake his hand.  The dollar signified the market value of the corn.  The handshake signified the farmer’s willingness, in the event that an ear was wormy, to replace it with a good one.

Harry Truman expressed his frustration with economic advisors who equivocated “On the one hand… but on the other hand…” by declaring that what this country needs is a one-armed economist.  Schmitz and Rule suggest that what this country needs is a New Handshake.  Their book of that name makes a compelling argument.

In a calm and informed voice, the authors explain the legitimate expectations of online retailers and their online customers.  Both seek, and almost always realize, accuracy, satisfaction, efficiency and responsiveness.  Retailers devise easy methods of product identification, ordering, payment and order fulfillment.  Moreover, they compete with others in the marketplace to provide those experiences better than their customers’ alternative suppliers.  Consumers want ease of use, quick delivery, conforming goods, and both privacy and safety with respect to the details of their financial transactions.

The question is, if 98-99% of those transactions go as contemplated, what do consumers expect with respect to the 1-2% that do not?  And what are the market justifications for retailers’ trying to meet those customer expectations?

Rule and Schmltz argue that the online nature of the transaction presents the opportunity for an online resolution of the disputes arising from this economy, and that management of disputes through the internet, arising from internet-based consumer transactions, presents opportunities for both customer satisfaction and enhanced business.  Setting aside the concerns of third party advocates, regulators and lawyers, the authors propose that what customers really want is a dispute process that is as easy to access as the sale was; is online, like the sale was; is fair, quick, private, confidential, effective and direct.  They do not want coupons, negotiations, arguments, excuses, or offers of discounts for future purchases, and they certainly do not want to have to pick up a telephone and have a recording tell them how important their call is.

Here comes the most compelling part of the study: based on a study of the buying behavior of millions of consumers on the retail site eBay, the authors conclude that consumers who are offered, and who initiate, online dispute processes concerning their purchases actually engage in more purchases – irrespective of the outcome of the dispute process they initiated.  That is to say, the mere availability of a direct, simple online access to remedy boost customer loyalty with respect to that online merchant.  The authors even call this phenomenon “Return on Resolution,” or RoR.

This can backfire if done badly, of course.  If the online consumer redress protocol is perceived as unfair, or complaints get lost, or other adverse experiences lead customers to feel hoodwinked, things will change rapidly for the worse.  But the empirically-based proposition is that the presence on a retail website of an online consumer dispute mechanism results in enhanced customer loyalty. It acts like a farmer’s handshake.

If you accept the validity of this behavior – and we’re talking about consumer behavior, not self-described consumer “satisfaction” – then a whole new world of online dispute resolution (ODR) presents itself, driven and enforced by the market rather than by legal theories or regulatory initiatives.  The authors envision a global, uniform, multi-lingual, cross-cultural system of online consumer redress that possesses certain design criteria:

  • The process is easy to access and to understand
  • The system is highly automated
  • User of the process are treated fairly and their privacy is respected
  • The system identifies “bad guys” – fraudulent sellers and repeated claimants – and uses a “tripwire” system to exclude them from participation or notify appropriate authorities
  • The process is sufficiently sophisticated to detect other efforts at “gaming”
  • The process must yield benefit to the merchants who take part
  • The system must self-improve through iterative lessons-learned

They go on to spell out in some detail how such a global network,, might be built on a single platform.  And they offer hypothetical case studies of how it would work in instances of buyer nonpayment, seller failure of delivery, dissatisfaction with quality of service, or other common B2C disputes.

This is timely, innovative, creative stuff.  And it is a refreshing reminder that the law follows, and seldom incites, human endeavors.  New developments in trade relationships come from the felt needs of the market, and when the market undergoes fundamental reshaping – such as the multi-jurisdictional, multi-legal, cross-cultural, click-able world of contemporary online retailing – we lawyers are fortunate to have people like Amy Schmitz and Colin Rule to point us to the leaders, and encourage us to follow.

1 Comment
  1. See your last paragraph–Professor Schmitz name is S-C-H-M-I-T-Z, not “Schultz”. Other than that, great review–you raise some important points that the “average” consumer would love to know about this new approach vs. the frustration they now face with the internet (not REALLY knowing who they are buying from or where the vendor is even located, or whose laws will govern the transaction). Comfort that the Schmitz/Rule approach would provide would also help small businesses around the world in terms of competing for this “online” business that is slowly, but surely, going to dominate the way the world works in the future. Congrats to you on your review, and to the authors for “thinking outside the “regulatory” box” and finding a workable solution to a growing problem

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