Arguments

Ending Corporate America’s Coercive Contracts

Our existing contractual legal regime allows corporations to further exploit their power over workers and consumers. But public policy can, and should, change that.

By Daniel A. Hanley

Tagged equalityInequalitylawMonopolies

Contracts are unavoidable. From signing up for an online account, joining a new company for employment, signing a rental agreement, or even parking a car in a public garage—contracts are ubiquitous. But, while contracts may be omnipresent, they are not benign. As a legal instrument that defines the rights and obligations of the parties involved, corporations can use contracts for a variety of nefarious purposes such as restricting access to markets, limiting the mobility of workers, invading privacy rights, and even limiting one’s ability to sue another party in court. In the case of arbitration contracts, which force parties to litigate in a private forum rather than a court, aggrieved parties were only able to obtain damages in less than 5 percent of suits. Since contracts are so powerful, it is no wonder they have become a crucial mechanism for corporations to entrench and expand their power over consumers, businesses, and workers.

Recently, federal institutions have taken steps to wrangle the extensive usage of contracts. Congress held a hearing on September 28 and the Federal Trade Commission and the Department of Justice co-hosted an event on December 6th to learn about the usage of restrictive contracts on workers.

As debates continue about the role of contracts in marketplace governance, structuring markets, and allocating the rights of workers and consumers, we must engage in a deeper appraisal of contracts used by corporations across the economy. Stated simply, to rebalance power away from dominant corporations to consumers, small businesses, and workers, many types of contracts need explicit prohibitions.

Contracts Are Constructed From the Law

Most people would define contracts as a promise codified on paper. But contracts are much more than that. A valid contract is a powerful legal instrument that creates a government-backed enforceable obligation between two or more parties and provides judicial redress should the terms be breached.

Contracts, thus, like other areas of law, do not operate in a vacuum. They are defined and confined to what the government allows them to be. For example, even before Congress enacted the Sherman Antitrust Act in 1890, various contractual agreements such as price-fixing and market division contracts were illegal as violations of established public policy by the courts. In other words, businesses never operate within the “free market” fiction espoused by many politicians, economists, and television pundits. Instead, the law functions as a backstop to determine which business practices are acceptable and fair and which are not.

By regulating what contractual terms are allowed and the necessary circumstances to create a valid and enforceable contract, the state decides how much power various parties have in the agreement and how power can be used to demand certain contractual terms. In fact, public policy shapes every aspect of a contract, including its creation, enforcement, and availability of redress. Public policy can even create a contractual agreement when there isn’t one or destroy an otherwise valid contractual agreement that violates the public interest.

The predominant intellectual paradigm surrounding contracts is mostly fixed within a nineteenth-century model that assumes that “rational” parties voluntarily and consensually enter into contracts with roughly similar bargaining power and access to information. This theory also postulates that interference or limitations on an individual’s “freedom to contract” via regulations from the state deprive citizens of a fundamental right to engage in practically any means to dispense of their property and labor and to promote their own self-interest. Unfortunately, this view ignores the distribution of power between parties and the impact of certain agreements on the welfare of communities and the economy as a whole.

Currently, the law heavily favors the enforcement of contractual obligations and allows those with vast amounts of wealth and market power to exploit, extend, and enhance their position. But public policy surrounding contracts can, and should, change.

Contracts Are Integral to Dominant Corporations’ Control of Workers, Consumers, and Markets

In conjunction with a highly favorable legal regime, our heavily monopolized economy—where just one or two companies control the flow of goods in industries like ecommerce, smartphone operating systems, or various telecommunications services—further exacerbates the effectiveness of contracts as a means of subjugation. Rather than merely acting as agreements between parties, contracts in a monopolized economy function as a legal mechanism for corporations to unilaterally enact onerous, exploitative, and harmful requirements on weaker firms, workers, and consumers.

Consider Amazon. When Amazon does not use a traditional package delivery company like the U.S. Postal Service, the corporation uses two alternative methods to get packages to customers’ doors. Amazon’s Flex program uses contracts to hire members of the public to use their personal vehicles to deliver packages to customers. The program is best thought of as an Uber-like service for package delivery. Amazon’s Delivery Service Partners program uses contracts to license its intellectual property (mostly its branding) to third-party companies that employ drivers to exclusively deliver Amazon packages to customers.

The common thread between both programs is that Amazon, through the use of contracts, does not directly employ any of the drivers. Instead, the drivers are employed as independent contractors. Independent contractors are deprived of essential legal protections, such as being able to unionize, and do not have to be provided with any benefits by the corporation that hires them. Furthermore, by misclassifying workers as independent contractors, corporations are able to avoid significant portions of liability. For example, if a driver gets into a crash in order to meet Amazon’s onerous delivery standards, Amazon is not liable for the conduct and injured parties cannot sue Amazon. Thus, besides contracts serving as a means for a corporation to obtain the physical infrastructure (like delivery drivers and cars) to expand its market presence without having to make its own direct investments, contracts can also act as a powerful tool to control workers and engage in sophisticated legal arbitrage to unfairly dodge liability and responsibility to those they hire.

These examples show the inadequacy of the present intellectual framework and why power disparities have real world consequences. As shown by the previous examples, in the case of an employer-worker relationship, a corporation controls an employee’s salary, employment status, benefits, workplace safety, and other important variables, giving an employer inherently more power over an individual worker. If an employee raises concerns about a contractual agreement with an employer, the employer can simply find another worker willing to tolerate their terms. On the other hand, workers have no such advantages, as they are dependent on their labor for income and are generally confined to a single geographic location for their work. Thus, some contracts unnecessarily force workers and other vulnerable parties to compete against themselves in a race to the bottom to accept the most adverse terms. Similar to setting a minimum wage, public policy can be used to make the marketplace fairer for workers and small businesses by establishing a minimum set of rules firms must follow to engage in business contracts.

Unfortunately, for decades, large corporations in nearly every sector of the economy have made prolific use of many types of coercive contracts to control other dependent businesses, markets, and workers. In fact, contracts are now a fundamental mechanism for how corporations structure industries and wield their power. And the significant legal backing that most contracts have only further incentivizes their use.

As revealed in the recent Epic Games case, Apple uses contracts to force developers, as a requirement to host their application on the iOS App Store, to exclusively use Apple’s payment system with all in-app transactions and allows Apple to pocket 30 percent of each transaction. This means that Apple uses contracts to tie its dominance in smartphone operating systems and application distribution to payment platforms and prevent rival service providers like PayPal from providing an alternative payment platform from operating on the iOS system.

Google employs similar tactics as Apple on Android but takes it another step further. As revealed in the landmark 450-page report from Congress released in October 2020 on competition in the technology sector, Google uses contracts, as a condition for being allowed to install Android, to force phone manufacturers to make Google Search the “default and exclusive search app pre-installed on the manufacturers’ device.” Such tactics inhibit competition and entrench Google’s control.

Google, Facebook, and other technology companies have also crafted entire business models monetizing data (primarily through digital advertising) that they harvest from billions of users. The critical component enabling technology companies to collect so much user data is indecipherable and lengthy “terms of service” contracts. Users merely click “accept” to these bewildering agreements in order to access products—without knowing they are relinquishing their privacy rights. Even if an individual desired to read all of the terms of service they encounter, according to one study, it would take a user more than 250 hours a year.

Corporations are also subjecting workers to increasingly restrictive contracts that inhibit their ability to escape abusive workplaces, utilize their skills, or obtain redress in a judicial forum. For example, noncompete agreements prevent workers from obtaining alternative employment in a similar field with a rival firm in a defined geographic area and thus rob workers of the ability to use their skills elsewhere. Assorted studies have revealed that between 36 and 60 million Americans are subject to noncompete agreements. Evidence also shows that noncompetes have suppressed wage and wage growth. Moreover, since workers subjected to noncompetes are restricted from working for a rival of their current employer, they can also be inhibited from starting their own business in their field of specialty—which can result in increased market concentration, increased prices for consumers and dependent businesses, and mean fewer firms to employ workers and provide consumers the benefits of increased firm rivalry.

Businesses are starting to take noncompetes even farther by using Training Repayment Agreements (TRAs). TRAs require a worker, upon leaving their current job, to reimburse the employer for the training they provided. These agreements include arbitrary costs, excessive interest rates, and almost no disclosure. That is, TRAs are a fee imposed on a worker simply for quitting. In one example, roofing sales associates would have been required to pay $42,000 for training they received if they decided to leave their job in three years or less.

TRAs thus function as an even worse form of a noncompete. While traditional noncompetes prevent a worker from quitting and becoming employed with a rival firm, TRAs apply no matter the reason a worker quits or who the worker is hired with after they leave. They effectively force workers to tolerate harsh and abhorrent working conditions simply because they cannot afford to pay back the arbitrary costs their employer may have imposed on them.

Employers also use nondisclosure agreements to prevent workers from doing things such as discussing incidents of sexual harassment in their place of work, using acquired skills in their place of employment with a competitor after they quit, or engaging in any behavior that would depict the company or its executives in an unfavorable image. Nondisclosures thus rob workers their voice in expressing their experience with a previous employer. A recent study shows that nearly a third of the American workforce is subject to some form of a nondisclosure restriction.

Corporations also make routine use of arbitration contracts with their customers and employees. These contracts deprive aggrieved parties from accessing a public judicial forum to obtain legal redress and (in most cases) are prevented from engaging in a class action. Arbitration contracts thus force parties to resolve their conflict in a secret private forum (often preselected by the defendant corporation) where a selected individual will resolve the claim and prevent other aggrieved parties from joining a larger consolidated case with many others in a class action. Parties subject to arbitration agreements have a significantly reduced ability to appeal any decision by the arbitrator and, unlike public judicial forums, arbitrations often have very restrictive rules to obtain evidence from the opposing party. One study by the Economic Policy Institute shows that more than 60 million people are subjected to arbitration agreements related to their employment. Evidence also shows that these private arbitration forums are highly favorable to corporate defendants and their proliferation has increased by 17 percent since last year. Arbitration agreements thus, like categorizing workers as independent contractors, serve as an incredibly robust contractual shield to limit a corporation’s legal liability and public exposure.

In all these circumstances, today’s deferential public policy has allowed corporations to structure markets and control workers and consumers with extremely favorable and restrictive contract terms. Worse still, the terms of many of these contracts are typically presented on a take-it-or-leave-it basis with no room for negotiation. Right now, both antitrust law and contract law have persistently held such exploitative contracts to be valid as long as a judge interprets them as “reasonable”—which is effectively a presumption of legality.

Even if an agreement is obviously illegal with overly broad and restrictive terms, our current system forces wronged parties to engage in costly and uncertain litigation if they want to seek redress. The mere threat of enforcement of the contract is often enough to ensure weaker parties are kept under control.

Our current legal landscape encourages corporations to offload risk and legal responsibility through dense webs of contracts while de-incentivizing them from producing high-quality products, paying workers a living wage with adequate benefits, and engaging in business on fair terms. In other words, contracts not only serve as a means to indirectly integrate and extend the market power of a firm’s operations, but the current legal regime governing contracts also allows powerful firms to limit the legal rights of weaker parties and subject them to private ordering.

Moreover, since many of these contracts are used by companies with workers in low-paying and low-skilled jobs, these unfair restrictions disproportionately fall on Black, brown, and other persons of color. Simply put, these coercive contracts exacerbate racial wealth disparities and provide dominant corporations a formidable state-backed legal mechanism that prevents the most disenfranchised Americans from acquiring wealth and fair working conditions.

Prohibiting coercive contracts must be made a top priority for advocates. Often advocacy organizations prioritize other remedies such as structural breakups or restrictions on mergers. However, the beneficial effects of these much-needed and potent remedies to tackle corporate power cannot be fully realized if the option for a corporation to use contracts to integrate its operations and unfairly control workers, dependent businesses, and consumers exists. Our political institutions must abolish coercive and abusive contracts. Thankfully, there are many different avenues to take.

The Law Can Be Used to Shift the Balance of Power

Administrative agencies like the FTC can use their rulemaking and adjudication powers to prohibit noncompetes and exclusive agreements as an “unfair method of competition.” The FTC initiated a request for information to inquire more about potential rules prohibiting certain contracts in July and recently released its statement on regulatory priorities where the agency stated it would explore rulemaking in the coming new year. Other federal agencies like the Consumer Financial Protection Bureau can use their rulemaking powers to reduce and prohibit the prevalence of arbitration agreements and other coercive and unfair contracts.

Meanwhile, Congress can take explicit legislative action to overturn current Supreme Court precedent and prohibit the usage of contractual clauses like arbitration agreements. Most recently, in 2019, members of Congress proposed the Forced Arbitration Injustice Repeal (FAIR) Act, which passed the House but not the Senate. In 2021, the FAIR Act was reintroduced with 39 senators expressing their support.

State legislatures also have enormous latitude to prohibit certain types of contracts, like noncompetes and TRAs, and to mandate certain minimum contractual terms. Kansas and Missouri, for example, require certain agricultural contracts to contain specified disclosures and limitations on liability and termination. In October, California Governor Gavin Newsom signed a bill that prevents nondisclosure contracts related to legal claims concerning sexual harassment, discrimination, or retaliation. In May, Oregon Governor Kate Brown enacted a new law that bans most noncompetes in the state.

Regardless of the policy route chosen, our political leaders must finally take decisive action to protect individuals from exploitation by contract. Without action by our political institutions, corporations will continue to take advantage of the current legal landscape and use contracts to radically enhance and perpetuate their power over consumers, dependent businesses, and workers. Changing the legality of certain coercive and restrictive contracts would dramatically reduce the degree of corporate rule in this country, promote fairer methods of business, and tip the balance of power toward the public interest.

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Daniel A. Hanley is a senior legal analyst at the Open Markets Institute. Follow him on Twitter at @danielahanley.

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