October 12, 2007
There Ought To Be a Law...
Arbitration is a creature of contract, and the Contracts course necessarily includes at least a few cases involving arbitration terms. But, pre-dispute arbitration could face its demise in many contexts. Senator Russ Feingold has proposed a bill called the Arbitration Fairness Act, which would invalidate pre-dispute arbitration agreements in employment, consumer and fanchise contracts and "dispute[s] arising under any statute intended to protect civil rights or to regulate contracts or transactions between parties of unequal bargaining power."
The proposed legislation contains the following findings:
(1) The Federal Arbitration Act (now enacted as chapter 1 of title 9 of the United States Code) was intended to apply to disputes between commercial entities of generally similar sophistication and bargaining power.
(2) A series of United States Supreme Court decisions have changed the meaning of the Act so that it now extends to disputes between parties of greatly disparate economic power, such as consumer disputes and employment disputes. As a result, a large and rapidly growing number of corporations are requiring millions of consumers and employees to give up their right to have disputes resolved by a judge or jury, and instead submit their claims to binding arbitration.
(3) Most consumers and employees have little or no meaningful option whether to submit their claims to arbitration. Few people realize, or understand the importance of the deliberately fine print that strips them of rights; and because entire industries are adopting these clauses, people increasingly have no choice but to accept them. They must often give up their rights as a condition of having a job, getting necessary medical care, buying a car, opening a bank account, getting a credit card, and the like. Often times, they are not even aware that they have given up their rights.
(4) Private arbitration companies are sometimes under great pressure to devise systems that favor the corporate repeat players who decide whether those companies will receive their lucrative business.
(5) Mandatory arbitration undermines the development of public law for civil rights and consumer rights, because there is no meaningful judicial review of arbitrators’ decisions. With the knowledge that their rulings will not be seriously examined by a court applying current law, arbitrators enjoy near complete freedom to ignore the law and even their own rules.
(6) Mandatory arbitration is a poor system for protecting civil rights and consumer rights because it is not transparent. While the American civil justice system features publicly accountable decision makers who generally issue written decisions that are widely available to the public, arbitration offers none of these features.
(7) Many corporations add to their arbitration clauses unfair provisions that deliberately tilt the systems against individuals, including provisions that strip individuals of substantive statutory rights, ban class actions, and force people to arbitrate their claims hundreds of miles from their homes. While some courts have been protective of individuals, too many courts have upheld even egregiously unfair mandatory arbitration clauses in deference to a supposed Federal policy favoring arbitration over the constitutional rights of individuals.
And, on the heals of this proposal, comes a 74-page report, titled "The Arbitration Trap," by a group called Public Citizen. The report exposes the troubling relationship between certain arbitration providers and the credit card industry, and concludes that pre-dispute arbitration is "a rigged game in which justice is dealt from a deck stacked against consumers."
Nevertheless, the near consensus of predictors is that the bill has no chance of passing (or even getting to the floors of the House or Senate). And, despite numerous academic writings that support these findings and the elimination of pre-dispute arbitration agreements in these contexts, there has been very little popular press coverage of the subject. The most mainstream press I have seen yet is this op-ed piece from Forbes, which, in light of credit card industry practices, encourages the passage of the Arbitration Fairness Act.
[Meredith R. Miller]
October 11, 2007
Teaching Assistants: Alan M. White
If you are looking for a clear, concise, well-written review of rational choice theory as it relates to consumer contracts, as well as a critique of that theory from the perspective of behavioral economics, the rational choice is to read Behavior and Contract, written by my new colleague, Alan White (pictured at left).
Alan's key observation, it seems to me, is that while law and economics has incoporated many of the insights of behavioral scientists, "behavioral law and economics has clung stubbornly to goals of efficiency and autonomy." (3) In order to advance these goals, rational choice theorists, who have come to influence legislators and government agencies empowered to implement consumer protection laws, advocate deregulation, which, according to Alan, "produces significant consumer harm, exploitation and rent-seeking, and does not necessarily increse consumer welfare." (5) Orthodox law and economics scholarship thus fails to achieve its stated goals and that failure, Alan urges, ought to cause us to question "the impoverished norm of efficiency." (6)
This is all quite provocative stuff, and there are of course articles on the other side (for example, this one). But the great advantage of Alan's piece (and the reason why I recommend it as a teaching assistant) is that he clearly and succinctly: (1) summarizes the rational choice model; (2) introduces the major insights from behavioral law and economics that undermine the rational choice model; and (3) reviews various attempts by both scholars and regulators to operationalize the insights of behavioral law and economics so as to provide better consumer protections in the contractual realm. Alan provides a menu of options and acknolwedges that none fully addresses the various issues raised by the behavioral sciences. Ultimately, Alan would replace the norm of efficiency with a trio of utliitarian sufficiency, autonomy and equity. (50-51) The competing norms complicate the task of consumer regulation, as Alan's model is not nearly as parsimonious as the rational choice model. But Alan is willing to trade parsimony for a model that more accurately reflects the circumstances in which consumers make choices. He advocates a return to regulation and rejects accusations of paternalism: "Consumer's choices will be framed either by sellers or by legal rules. Allowing the consumers the freedom and autonomy to be manipulated and exploited does not promote autonomy." (50)
October 10, 2007
In the News: October 10, 2007
The Atlanta Falcons can make former star quarterback Michael Vick return some $20 million in signing bonuses, an arbitrator rules. Vick was convicted of conspiracy in connection with dog-fighting, and may never play again.
Aluminum can maker Ball Corp. says it will pay $70 million to settle a contract dispute with Miller Brewing Co., although it's not clear what the breach was.
In India, ten lakh tonnes (about 2 million U.S. tons) of rice already under contract for export are in limbo after the Cabinet voted to ban shipments of non-basmati rice from the country.
The former basketball coach at Ball State University has lost his claim for $150,000 in contract damages he claims he suffered when he was reassigned from his coaching job to on in university advancement.
Meanwhile, a Baton Rouge jury is preparing to hear the contract and discrimination claims brought by a former football coach at Louisiana-Lafayette, who says he was fired because he was black.
Bales on Employment at Will
Although it's been at the top of our weekly charts for a few weeks now, some of us have just recently got around to checking out the new paper by Richard Bales (No. Kentucky), Explaining the Spread of At-Will Employment as an Inter-Jurisdictional Race-to-the-Bottom of Employment Standards, forthcoming in the Tennessee Law Review.
One of the problems in explaining the growth of at-will employment in 19th century America is that it originally sprang into existence not in the industrialized states of the North, where factory-owners were increasingly viewing workers as replaceable parts to hire and fire as they chose, but in the least industrialized states. It was the states of the South and West which were early adopters, while the big industrial states like New York and Pennsylvania came much later. This fact raises problems for what is perhaps the most widely held explanation for at-will employment, which is that it was a judge-made rule to benefit capitalist businesses at the expense of workers.
But Bales offers a different and ingenious take on the subject. True, he said, it wasn't the industrialists of the Northeast who pushed the rule through. (They presumably lacked the political power in the industrialized states to get their own judges to adopt favorable rules.) But the point of the new rule was still to benefit businesses that were increasing in size and scope. Courts in Southern and Western states, he theorizes, adopted the rule to attract industry by offering better rules for the capitalists than they were already getting in New York and Pennsylvania. It was this competition, he argues, that ultimately led the industrial states to go along with the trend. It's a brief but interesting read. Here's the abstract:
The at-will employment rule is often attributed to Horace Gay Wood, who described the rule in an 1877 treatise. Over the next forty years, the rule was judicially adopted in most American states. How and why the rule spread, however, has been the subject of considerable academic debate.
This essay argues that the underindustrialized states first adopting the at-will rule likely did so as a means of attracting capital. In any event, and more importantly, this essay argues that once the first underindustrialized states adopted the rule, other underindustrialized states would have been compelled to adopt the rule to remain economically competitive with the early-adopters, and industrialized states would have been compelled to adopt the rule to maintain their competitive advantage in the labor market. The adoption of the at-will rule by a handful of underindustrialized states, therefore, precipitated an inter-jurisdictional race-to-the-bottom in employment standards, culminating in the universal adoption of the at-will rule.
Though the focus of this essay is on labor market conditions that existed as the United States was transitioning from a local to a national economy, the implications resonate today as the United States transitions from a national to an international economy, and attempts to avoid a competitive "race to the bottom" with developing countries that are using low wages and un- or under-regulated working conditions to gain an advantage in the global labor market.
Seinfeld on Contractual Liability
I think the only reason we go to the dry cleaner is so I can say to the dry cleaner, "Well, it's ruined." And of course, the dry cleaner can respond, "It’s not our fault. We’re not responsible. We just ruin the clothes. That ends our legal obligation."
Seinfeld "The Stock Tip," June 21, 1990.
October 9, 2007
In the News: October 9, 2007
R&B singer (and former paralegal) Ginuwine has filed a $4 million contract and fraud action against King Music Group, alleging he was duped into signing the agreement and that the company doesn't actually exist.
The manufacturer of the Rusty line of "surf inspired clothes" is suing the trademark owner, claiming its license to produce the stuff was improperly terminated.
The Ottawa (Ont.) city council is threatening a lawsuit to force the minor-league Ottawa Lynx baseball team to give up a proposed move to Allentown (Pa.), claiming its contract requires the Lynx to play home games in the Capital City until 2009.
Britain's House of Lords is hearing arguments this week on a case with major e-commerce ramifications: are credit-card issuers in Britain required to refund charges to customers who are dissatisfied with the goods they buy using those cards, even when those sales occur outside the U.K.?
Rap mogul Sean Combs is being sued for $19 million by a man who says that Combs didn't pay him the agreed-on license fees for music cut by the late Notorious B.I.G. Combs reportedly has said that the plaintiff was involved in Biggie's still-unsolved 1997 murder.
George Washington University may be headed to trial in a $200,000 dispute with a software firm, after mediation failed to reach an agreement.
Weekly Law School Rankings
In the world of law school rankings, somebody's lemon is always somebody else's lemonade. USC's Gould School of Law took a tumble, which means that for the first time in just about forever Cal-Berkeley has a higher-rated law school than does Southern Cal. Gould's drop was good news for the Paul M. Hebert Law Center at Louisiana State, which is now number one and is making Chancellor Jack Weiss (left) look pretty happy.
Three schools join the Top 20, while the folks at Missouri-Columbia have their highest ranking (10) since the invention of the Gregorian calendar. All rankings based on ContractsProf's proprietary secret but very exact ratings methodology. Last week's rank in parentheses.
1 (2) LSU (Hebert)
2 (3) Cal-Berkeley (Boalt)
3 (4) Ohio State (Moritz)
4 (6) Boston College
5 (9) Oklahoma
6 (1) Southern California (Gould)
7 (11) West Virginia
8 (12) Oregon
9 (13) South Carolina
10 (15) Missouri-Columbia
11 (17) Arizona State (O’Connor)
12 (8) Florida (Levin)
13 (14) Hawai'i (Richardson)
14 (18) Cincinnati
15 (5) Wisconsin
16 (7) Kentucky
17 (-) Illinois
18 (-) Kansas
19 (-) Florida State
20 (16) Texas
Dropped out of Top 20: Georgia, Nebraska, Miami
A Funny Thing Happened on the Way to the Parthenon
The law on the books, as we are fond of telling our students, is not always the same as the law in action. And the law in action is often only a small slice of the larger commercial environment. Even where a party might save money by breaching a contract, that party will usually perform -- not because it is worried about being sued, but rather because performing is the "right" thing to do. Those who have tried to install modern contract law in environments where social norms don't encourage the performance of promises have found that all the statutes and court decisions in the world can't create a hospitable contracting environment.
So how do you get a hospitable contracting environment? In a new essay, Morality, Social Norms and Rule of Law as Transaction Cost-Saving Devices: The Case of Ancient Athens, scholars Anastassios Karayiannis (Piraeus) and Aristides N. Hatzis (Athens) examine how the Greeks came to develop one of the earliest and most successful systems of the ancient world. Here's the abstract:
The importance of the institutional framework for economic development is widely accepted today and it is duly stressed in the economic literature. The protection of property rights, the enforcement of contracts and an efficient legal system are the pillars of the contemporary rule of law. However, formal institutions cannot function without being internalized by the citizens and without the backing of social norms. Morality and social norms are the major elements of the informal institutional structure, the social capital, which is also critical for social welfare and economic development. In this paper we will discuss both the formal and the informal institutional framework of Ancient Athens, which was a free market society with economic problems similar to contemporary market societies. Athenians developed a highly sophisticated legal framework for the protection of private property, the enforcement of contracts and the efficient resolution of disputes. Such an institutional framework functioned effectively, cultivating trust and protecting the security of transactions. This entire system however was based on social norms such as reciprocity, the value of reputation and business ethics. Conformity to social norms as well as moral behavior was fostered by social-sanction mechanisms (such as stigma) and moral education. The Athenian example is a further proof of the importance of morality and social norms as transaction cost-saving devices even in quite sophisticated legal systems. Their absence or decline leads inevitably to the need for more regulation, clear-cut rules, less judicial discretionary power and more litigation. Athenian law was pioneering in the development of rules and institutional mechanisms suitable for the reduction of transaction costs, many of them surviving in the most complex contemporary legal systems.
October 8, 2007
In the News: October 8, 2007
Singer Bruce Springsteen and his wife are being sued for breach of contract, after they allegedly backed out of a deal to buy am $850,000 horse for their daughter.
The United Auto Workers gave Chrysler Corp. a 72-hour strike notice after negotiations between the car company and the union on a new contract seemed to stall.
Meanwhile, the lights may not be all that bright on Broadway, where a producers and union stagehands are locked in discussions about a new contract; producers have threatened a lockout in their attempt to cut back the required number of hands at each show.
Kazakhstan had apparently decided not to try to rework its contract with Italy's oil giant Eni ti develop the Kashhagan oil field. The project has been hit with a number of delays.
A bad harvest means that hundreds of Australian grain farmers aren't going to be able to come up with the grain their contracts require them to deliver to dealers this year; they're mulling whether to try legal action or seek to renegotiate.
Speaking of Australia, a new survey says that 46 percent of companies have had a contract dispute with their IT providers.
Weekly Top Ten
Major turnover in the rankings this week, with a new Number One and six new entries on the charts. Following are the Top 10 most-downloaded new papers from the SSRN Journal of Contract and Commercial Law for the 90 days ending October 7, 2008. (Last week's rank in parentheses.)
1 (2) Explaining the Spread of At-Will Employment as an Inter-Jurisdictional Race-to-the-Bottom of Employment Standards, Richard A. Bales (No. Kentucky).
2 (4) Anti-Social Contracts: The Contractual Governance of Online Communities, Joshua Fairfield (Indiana-Bloomington).
3 (5) Renting the Good Life, Jim Hawkins (Independent).
4 (-) Securitization and Its Discontents: The Dynamics of Financial Product Development, Kenneth C. Kettering (New York LS).
5-tie (10) Morality, Social Norms and Rule of Law as Transaction Cost-Saving Devices: The Case of Ancient Athens, Anastassios Karayiannis (Piraeus) & Aristides N. Hatzis (Athens-Philosophy).
5-tie (-) Utility and Rights in Common Law Reasoning: Rebalancing Private Law Through Constitutionalization, Hugh Collins (London School of Economics).
7 (-) A Study of Interest, John Y. Gotanda (Villanova).
8 (-) Arbitral Jurisdiction and the Dimensions of Consent, Alan Scott Rau (Texas).
9 (-) Behavioral Law and Economics, Paternalism, and Consumer Contracts: An Empirical Perspective, Joshua D. Wright (Geo. Mason).
10 (-) Nonbanks in the Payments System: Vertical Integration Issues, Nicholas Economides (NYU-Business).
Third Party Beneficiaries: Classic Hypo, Different Ansewr
The English case of Avraamides v Colwill,  EWCA Civ 1533, decided last year by the Court of Appeal, concerned an old chestnut in the context of third-party contractual rights: If I buy a business and promise to pay off its liabilities, can its creditors claim as third party beneficiaries? (Note that, however hackneyed this question may be in the U.S. context, it's new in England, where our anti-privity legislation only dates from 1999).
Put briefly, in Avraamides, A signs up Corporation B to reconstruct his bathroom; B botches the work and is liable to A. B then sells the business to C, C agreeing (1) "to settle the current liabilities of the company" and (2) "to complete outstanding customer orders taking into account any deposits paid by customers as at 31 March 2003, and to pay in the normal course of time any liabilities properly incurred by the company as at 31 March 2003." B being judgment-proof, A sues C as third-party beneficiary.
Held, the suit fails -- not on the basis of any sophisticated analysis, but simply on the basis of the wording of our anti-privity legislation (i.e. the Contracts (Rights of Third Parties) Act 1999). This says in § 1(3):
The third party must be expressly identified in the contract by name, as a member of a class or as answering a particular description but need not be in existence when the contract is entered into.
Here, says the court, there's no express naming of the third party, and the word "express" means you can't infer who it might be from the wording or intent of the contract as a whole.
This shows the problems of legislating in a nation of strict-constructionists. Had C agreed to "pay the current creditors of the company," A would presumably have won. As it is, C must be thanking his lucky stars his lawyers chose to say "settle the current liabilities of the company," even though no doubt the lawyers thought it made no odds which way they put it.
[Andrew Tettenborn (Exteter) sent this quite a while back, but it somehow got lost, perhaps while Frank Snyder was laid up. We though it was still an interesting case even though it's not really "recent."]