The Death of Caveat Emptor

Abstract: I argue that caveat emptor is no longer a fundamental principle in contract law; the principle that best explains the law is that of the least cost information gatherer (LCIG). Still, in practice, caveat emptor is more prominent in markets than it should be because courts do not consistently apply the LCIG principle. Courts err by underestimating which information is material (an error that is in turn caused by not fully understanding how search processes work in practice), by underestimating what type of statements effectively mislead buyers, by not systematically requiring efficient disclosure, or by mechanically applying per se rules (such as the opinion, value, or puffery rule) that are no more than proxies for other tests. As a result, caveat emptor is unintentionally re-introduced through the backdoor. Overall, markets would change fundamentally if the LCIG principle were consistently applied, as it should be. More specifically, the LCIG principle dictates that sellers (and service providers) should have a duty to publish their full price lists on the Internet; that it is up to producers (and not to consumers or consumer organizations) to finance quality tests; that insurers (and the sellers of related products, such as extended warranties) should reveal the actuarially fair price; that sellers should sometimes even reveal markups; that salespeople should reveal whether they give honest or biased advice and be held to fiduciary standards when they pretend to give honest advice; and that many common marketing and sales methods should become actionable for misrepresentation.