Dark patterns: a market distortion

By Katri Nousiainen and Catalina Perdomo Ortega

Online commercial contracting could be more transparent and comprehensible. Often consumers have little or no understanding of their rights and obligations under these contracts, and unfortunately these online contracts usually become binding before one understands or can clarify the terms. Dark patterns in online contracting have worsened this situation and have raised concerns as to whether the current online contracting practice is in the best interest of the client or the company.

Regrettably, current practice often leads to a situation where consumers, for instance, are buying more and paying a higher price than they expected, or are bound by transactions that they did not intend to be bound by. Legal design can provide more transparency and comprehensibility for tackling the use of dark patterns in online contracting.

The law and economics framework provides a useful framework to understand dark patterns on online consumer commercial contracting. First, we will briefly refer to the current regulatory framework to police the use of dark patterns in the United States, and offer brief thoughts on key topics that policymakers should consider. Then, we will discuss the market distortion created by dark patterns and how a legal design approach can help tackle dark patterns in online contracting. Finally, we will draw general conclusions.

Brief notes on current regulatory framework and key topics for regulation

Dark patterns are architectures that confuse, coerce, manipulate or deceive users to take certain actions. Because of this undesired effect, consumer bureaus and legislators around the world are increasingly interested in identifying and regulating dark patterns. However, judicial courts in the United States have generally used existing doctrines or regulations to police manipulative architectures. In the EU, authorities mostly resort to the Unfair Commercial Practices Directive and the General Data Protection Regulation (GDPR). In the United States, courts have used classic contract law, privacy regulations and the Federal Trade Commission has relied on the Federal Trade Commission Act in cases that, in substance, are about dark patterns.

An interesting court case was McDonald et. al v. Kiloo A/S. According to the records available, the developers of the game Subway Surfers transmitted users’ (children) personal data to third parties that would target them with ads. The game’s code took personal identifiable information and kids’ activity across multiple apps (which is more personal information than they would expect to share on a game). Parents sued, claiming a violation of the Children’s Online Privacy Protection Act (COPPA), a common law tort claim, and a consumer protection claim. Even though an architecture to trick users into revealing more personal data than expected is a dark pattern, the record available does not mention the term.

Nonetheless, policymakers are pushing for new legislation, focused on prohibiting privacy-related dark patterns. California issued the California Privacy Rights Act (CPRA), which amended the California Consumer Privacy Act (CCPA). Colorado enacted the Colorado Privacy Act (CPA) and Connecticut issued its Data Privacy Act (CDPA). Additionally, the Federal Trade Commission has also filed actions against several companies for using dark patterns.

Since dark patterns can take a variety of forms and affect many areas of law, their regulation is a complex issue. However, policymakers can consider the following key topics as a starting point when drafting dark patterns regulation: the inclusion of a specific definition of dark patterns, the use of a rule-based approach and the sanctions regime (fines, disgorgement of benefits or other measures). Beyond legislative reform, the use of deceptive or manipulative contractual techniques by digital players is also a market distortion issue.

Dark patterns as a market distortion

Law and economics provides valid tools to understand dark patterns as a legal phenomenon in online contracting in data driven economic markets. Regarding market functioning, there is vast literature on law and economics, and behavioral economics studying human heuristics and cognitive biases. These are some of the human shortcomings that, for instance, web designers exploit to influence market actors' behavior. Exploiting these biases affects the functioning of the market, making it suboptimal:

• Consumers buy things that they do not really want. They give up their scarce resources (i.e., money) for things that do not necessarily increase their utility. 

• Consumers buy more products. The utility function works sub-optimally. Consumers spend their scarce resources buying more than would be established by their rational preferences - this can naturally cause financial difficulties. The consumer utility function and bundle are affected – as now, they are worse off, as they have less scarce resources left to use elsewhere.

• Consumers pay a higher price.  Their buying decision is now based on perceived price, making the demand higher, for instance through the scarcity patterns. Here, the company captures the consumer welfare - since consumers now buy products without any effective change in product prices.

• Market entry and competition is distracted. Manipulative practices allow companies to compete employing perceived prices, and consequently, consumers pay higher prices. They also bear higher financial risks - compared to a competitive market where companies compete in decreasing prices, not raising them.

According to economic theories, and given certain assumptions, market mechanisms will establish an optimal price level through supply and demand, and lead to an optimal distribution of resources. However, we have seen how dark patterns are not achieving this effect. Manipulative designs are causing the market actors to behave against their preferences, creating sub-optimal effects.

Behavioral economics, neuroscience and other fields can provide for a more realistic understanding of human behavior, stress the value of comprehensibility in contracting practice, and support the economic market to function in a more optimal way. One of those fields is legal design: a methodology founded in the design thinking process, aimed at empowering people with user-centered language and accessible terms, consequently increasing people’s comprehension of their legal rights and obligations.

A legal design approach in online contracting can foster and support optimal market functioning as it increases comprehension and transparency. The General Theory of Legal Design in the Law and Economics Framework can be used to understand how legal design provides incentives to tackle the use of dark patterns in online contracting and explains why profit-maximizing companies benefit from a more transparent and comprehensible contracting practice. Legal design favors increased legal quality, reduced transaction costs, business sustainability, and competitive business advantage.

Final thoughts

In online contracting, companies are often using dark patterns in web design. This can lead to short-term economic benefits but ultimately harms the market and consumers. Consumers pay higher prices, inadvertently accept new terms, and experience a decrease in healthy market competition, which can lead to market failure. Therefore, regulatory intervention might be useful to correct these issues and restore market functionality.

Additionally, research suggests legal design can enhance the clarity and comprehensibility of online contracts, leading to economic and social benefits. Therefore, a dual approach could be desirable: regulatory intervention and a legal design framework based on economic theory.

Whether through regulation or economic contract theory, the use of dark patterns in online contracting is still an issue. If you are interested in this matter, the Loyola Consumer Law Review will soon publish our paper Dark Pattern in Law and Economics Framework. In that paper, we delve deeper into the points made here.

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About the Author

Katri Nousiainen (l) is a Lawyer and Professional in Legal Education. She is a Teaching Faculty in the Management Program at Harvard University, and she holds a Resident Research Fellow position at Harvard Law School in the Program on Negotiation (PON). In addition to her work at the Program on Negotiation, she is also affiliated with the University of Cambridge Law (the United Kingdom) and with the Hanken School of Economics (Finland). Before joining Harvard, she was affiliated with the University of Berkeley Law, Center for Law and Technology (BCLT) and with the Aix-Marseille School of Economics.

She is known for her articles and book chapters on negotiation, commercial contracts, and legal design as well as on law & emerging technologies, especially related to quantum technologies. In her work, she supports and assists companies and other operators in improving the quality and efficiency of their legal processes, products, and services within the tools and methods of law & tech, innovation, and legal design. Presently she is pioneering research projects on the impact and value of legal design in negotiation and commercial contracting practice as well as on law & emerging technologies.

Catalina Perdomo Ortega (r) is a Senior Legal Counsel at TLB in London. With her expertise in legal design, she provides data-driven solutions to clients by redesigning legal documents and processes to make them user-centric and accessible. She also optimizes end-to-end legal workflows through technology and automation. Her background includes 5 years as a Corporate Law and M&A attorney in Colombia, where she managed complex legal affairs with both na- tional and international stakeholders.

Catalina is a Master of Laws (LL.M ‘23) from Harvard Law School, where conducted research on M&A inefficiencies using a legal design approach.

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