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Of Prom Dresses and Textbooks—A Commentary by Ian Ayres ’86

The following commentary was posted on Newyorktimes.com on September 13, 2010.

Of Prom Dresses and Textbooks
By Ian Ayres ’86

A few years ago, a contracts student of mine left me almost speechless when he admitted in class that he had purchased a tie from J. Press with the intent of returning it after he wore it to deliver a mock oral argument to me (as a mock Connecticut Supreme Court Justice).

I was appalled in part because the case he was arguing was centrally about promissory fraud. The law frowns upon people who make a promise that they don’t intend to perform. If you commit promissory fraud, you can be tagged in many states with punitive damages, and you can be prosecuted for the crime of false promise.

Here he was, making a mock argument about promissory fraud, but in real life he was skating perilously close to committing it. Then again, I’m fairly obsessed with the topic of promissory fraud. I tend to see it lurking where others don’t.

This story of pre-meditated return is also the answer to my earlier puzzler. Consumers of both prom dresses and textbooks will similarly buy these items with the present intention of returning them for a full refund. Why pay for a prom dress if you can wear it once and get all your money back? Stephen (comment number 73) wins the Freakonomics swag for his excellent guess to my puzzler. He wrote that “both of these items are being purchased for an event that is both finite in duration and singular in occurrence . . . [i]t is customarily or explicitly understood that the buyer will only be permitted to return the item for a refund before the usage occurs.” Bladt (comment number 13) deserves an honorary mention for guessing that the similarity between prom dresses and textbooks is that “[t]he School Board decides the areas that both must cover.”

Local college bookstores are not just losing sales to the Internet; they also have to contend with students who place an Internet book order and then buy the book from a brick-and-motor store, all the while planning to return it when the cheaper Internet book arrives.

Buying an item with a present intention of returning it for a full refund does not fit squarely with the elements of promissory fraud. But it is still a species of fraud. And you shouldn’t do it. It’s wrong.

Many commentators are so used to thinking of textbook and prom dress sellers as the rapacious bad guys that they had trouble thinking of wrongdoing happening on the buyer’s side of the transaction.

In his heart of hearts, my tie-buying student knew that J. Press wouldn’t have wanted to sell to him if he had disclosed his true intent. That should be a big clue that what he was doing was wrong.

Justice Scalia might have committed a different kind of return fraud in 2004 when he bought a round-trip ticket to return from the infamous duck hunting trip with Vice President Cheney. Justice Scalia had flown down to Louisiana on the vice president’s plane. To get back to Washington, he “purchased (because they were the least expensive) round-trip tickets” even though he only intended to fly one way. I worry that Justice Scalia was buying his ticket under an implicitly false pretense. As I wrote in a New York Times op-ed:

[I]t seems fair to assume that he bought what is known as a “throw-away ticket” — something the airlines expressly prohibit. US Airways, for example, does not allow the “use of round-trip excursion fares for one-way travel,” and reserves the right to refuse to board those who try to use them and to charge them the difference between the round-trip and one-way fare.

If Scalia knew of these provisions (and that’s a big if), he was committing a kind of promissory fraud. The airline, like the bookstore, J. Press and the dress shop, wouldn’t have wanted to sell the ticket if it had known Scalia’s undisclosed intent.

There are times, however, when a consumer can legitimately withhold information about their future intentions. If I work hard to learn that your rutabagas are worth more in the next city than you think, it is socially productive to allow me to withhold that information (and my intention to turn around and sell your rutabagas for a higher price). Giving me a return for my effort gives me a reward for helping to move the market price toward a more efficient level.

But the premeditated return buyer is not providing a similar social value. In fact, the buyer has good reasons to suspect that there aren’t joint gains of trade from this temporary transaction. This means that the seller is going to lose more than the buyer gains from the contract. (If there were joint gains, you could try negotiating a short-term rental of the book while you wait for the Internet copy.)

One of my super-sharp students, Richard Hernandez, suggested to me that the premeditated returner is doing society a favor by putting pressure on the bookstore to change its outmoded method of selling. He thought the store should charge a restocking fee or an outright rental fee.

But there are sound business and pedagogical reasons why we might prefer a system without restocking fees. We might prefer a world in which students can shop for courses. It is not wrong to buy a book and then return for a full refund if you change your mind and decide you are not going to take the class. This is not fraudulent. And many bookstores wouldn’t mind taking the risk of return under this circumstance. In fact, some college book stores only let you return for free if you can show that you’ve dropped the class. But requiring this kind of paperwork is itself a hassle which might be seen as a cost of return fraud.

The full refund policy is a kind of course-shopping insurance. You can try out a course — including using the textbook — for a few classes without being stuck with the class’s textbooks or restocking fees.

From this perspective, the premeditated return scam is an extreme form of adverse selection because the buyer knows that she plans to put in an insurance claim when she returns her book. The law can and should be structured to dampen and deter this form of opportunism.