ContractsProf Blog

Online Symposium on Oren Bar-Gill's Seduction By Contract, Part IIB: Alan White, The New Law and Economics and the Subprime Mortgage Crisis

This is the third in a series of posts on Oren Bar-Gill's recent book, Seduction by Contract: Law Economics, and Psychology in Consumer Markets.  The contributions on the blog are written versions of presentations that were given last month at the Eighth International Conference on Contracts held in Fort Worth, Texas.  This post is the second of a series within the series contributed by Professor Alan White of the CUNY School of Law (pictured at right).

At least three important points should be added to Oren’s account of the subprime market failure. First, the range of consumer and lender biases, abbreviated reasoning, and situational influences that cause mortgage products to depart systematically from rational welfare maximizing is considerably wider than the territory he surveys. Second, his account focuses on pricing, but much of the harm done by subprime mortgages was due to product features that needlessly increased the risk of default, quite apart from whether prices were excessive or misunderstood. Third, subprime mortgage originators and their funders did more than simply respond to consumer behavior. They deliberately framed the choices and exploited consumer behaviors to maximize yield spread. In other words, lenders had agency, and the product offerings were not merely a response to consumer demand.

Lauren Willis’ 2006 paper, for example, described subprime mortgage borrowers’ “assent” to harmful contracts as a result not only of the cognitive limitations mentioned by Oren, but also to the ego threat presented by the possibility a loan application will be denied, and the emotional distress attendant to the home purchase and financing context. She points out as well that abbreviated reasoning brought on by both cognitive limitations and emotional factors led subprime mortgage borrowers to focus almost exclusively on the initial monthly payment as a proxy for the loan price. Indeed, minority mortgage applicants may not attend to price terms at all, if their focus is primarily on finding a lender willing to approve a loan in the first place. These emotional factors are not readily addressed by better information disclosure.

Sellers, of course, are not perfectly rational either. Apart from the exploitation issue, any account of the subprime mortgage market that does not acknowledge overt and implicit racial bias is necessarily incomplete. The empirical evidence is clear that price discrimination, i.e. charging higher rates and fees to equally qualified borrowers, was rampant and had a disparate effect on minority borrowers. While price discrimination can be seen as rational rent seeking, it is difficult to explain the systematic practice of steering minority mortgage borrowers to unnecessarily expensive loan products when market share might have been gained by competing on price for these borrowers. It bears emphasizing that minority homeowners did not just face more expensive and risky loans because of lower credit scores and home values. The credible research tells us that homeowners of color paid higher rates and were more likely to get subprime mortgages than comparably qualified white homeowners. Homeowners lost homes, and much of their accumulated wealth, not just because they were financially weaker, but also because they were black or brown. The role of race in the descriptive story of the subprime mortgage market distinguishes it from the market failures in credit card, cell phone, and other consumer markets, and has important implications for regulation of mortgage contracts.

Even when loan prices reasonably reflect lender costs, subprime loans imposed welfare losses via excess risk of default and foreclosure. By increasing the loan amount, dispensing with income verification, adding prepayment penalties and deferring payment of interest and principal, lenders dramatically increased the risks of default, in ways that borrowers either misunderstood or predictably ignored. Often the same borrowers would have qualified for safer mortgages at similar cost, or in the case of income documentation, at lower cost. Consumers’ inability to judge loan risk or avoid needlessly risky mortgages is the topic of another paper by Professor Willis. While rational choice adherents would say borrowers who knowingly took on a 25% risk of default might have reasonably weighed the benefits of the loan and the risk, and therefore they were not harmed by taking such a risky loan, that account of welfare and utility is thin indeed. The excessive default risk of subprime mortgages is not easily fixed with disclosure-based solutions.

Behavioral economists tend to minimize the agency of sellers in framing and manipulating consumer biases and mental short cuts. The emphasis on consumer errors is significant. Oren repeatedly refers to lenders “responding” to consumer misperception and bias. A different characterization ascribes more responsibility to lenders: faced with consumer biases and heuristics, some mortgage originators deliberately manipulate consumer behavior. As he points out, lenders could respond to consumer optimism bias by marketing fixed payment loans and selling their safety compared to teaser-rate or teaser-payment loans. Instead, they chose to push payment deferral and to obfuscate prices, electing the profit-maximizing strategy of exploiting rather than correcting consumer bias. Whether we describe mortgage lenders as responding to consumer errors, on the one hand, or exploiting behaviors, emotional states and cognitive limitations of consumers on the other, will matter considerably when we turn to the normative and prescriptive conclusions to be reached from our better understanding of how the subprime market worked (or didn’t).

[Posted, on Alan White's behalf, by JT]

Online Symposium on Oren Bar-Gill's Seduction By Contract, Part IIA: Alan White, The New Law and Economics and the Subprime Mortgage Crisis

This is the second in a series of posts on Oren Bar-Gill's recent book, Seduction by Contract: Law Economics, and Psychology in Consumer Markets.  The contributions on the blog are written versions of presentations that were given last month at the Eighth International Conference on Contracts held in Fort Worth, Texas.  This post is the first of a series within the series contributed by Professor Alan White of the CUNY School of Law (pictured at right).

Oren Bar-Gill’s work on contracts in various consumer markets has contributed importantly to the deconstruction of the dominant law and economics paradigm.  That paradigm has centered around rational choice theory as a description of markets generally and consumer contracts in particular, on norms that are utilitarian, equating aggregate welfare with revealed preferences, and legal prescriptions that begin with deregulation and noninterference by the state.  The law and economics paradigm found expression in the broad deregulation of consumer credit contract terms generally, and mortgage loans particularly, from 1980 until 2008, by Congress, the banking agencies and the courts.  Oren’s application of behavioral economics to consumer credit markets helped pave the way not only for important academic debates but for the change in course for federal regulatory policy that followed the global financial crisis.

In Seduction by Contract, Oren lays out a general behavioral law and economics framework and then applies it in three consumer markets:  credit cards, mortgage loans, and cell phone contracts. I will address the chapter on mortgages, and will consider three aspects, the descriptive, the normative, and the prescriptive, in separate posts.  In this first part, I focus on Oren's descriptive model.  In tomorrow's post, I will suggest three additional points that supplement Oren's account of the subprime market failure.

The mortgage chapter begins by describing the contract design features of subprime mortgages that came to dominate the market just before the 2007 foreclosure crisis.  Oren then presents the rational choice model, that would explain whatever mortgage products and pricing that emerged during the run-up to the crisis as an expression of homeowner preferences.  The proliferation of home loans with rapidly escalating payments, negative amortization, and hefty prepayment penalties, would have been a response to consumer choices, so that homeowners and buyers rationally shifted away from fixed-rate amortizing loans in the face of higher home prices and reduced affordability.  Some mortgage borrowers, especially investors, might rationally have speculated on rising prices by taking out loans with below-interest payments gambling that they could resell homes at a profit. 

As Oren points out, the rational choice account is difficult to square with the empirical evidence.  There were investors, but rarely more than 10% to 20% of mortgage borrowers.  Prepayment penalties were contracted for by many borrowers who ended up paying the penalties to refinance or sell, and would have been better off paying a slightly higher rate without the penalty.  Most importantly, the massive default rates, as high as 25% or more for some types of mortgages even before home prices collapsed, reflected the fact that the “affordability” of initial low payments was illusory, and unlikely the result of rational borrowing decisions. 

Oren identifies the two essential characteristics of subprime mortgage design as cost deferral and pricing complexity.   He then argues that these features were not the product of rational consumer choice.  Instead, they responded to consumer behavioral biases, especially myopia, optimism, limited financial literacy and the tendency to focus on salient price elements while ignoring non-salient costs.  

This behavioralist description, while it improves on the rational choice model, to my mind leaves out other lender and borrower behaviors that contributed critically to the widespread contract failure.  The departure from rational choice and welfare maximization was far worse in the subprime mortgage market than in credit card and cell phone contracts.  Welfare losses were not limited, as in the case of credit card customers, to paying 3% or 4% more than necessary on balances and a few hundred dollars in excess fees.  Subprime mortgages wiped out families’ entire net worth, evicted them from their homes, and had global external effects that we all know.   A deeper critique of rational choice theory in this context is essential to getting the prescriptive part right, i.e. to evaluating the welfare effects of various regulatory interventions in this market.

[Posted, on Alan White's behalf, by JT]

Online Symposium on Oren Bar-Gill's Seduction By Contract, Part I: Credit Cards

This is the first in a series of posts on Oren Bar-Gill's recent book, Seduction by Contract: Law Economics, and Psychology in Consumer Markets.  The contributions on the blog are written versions of presentations that were given last month at the Eighth International Conference on Contracts held in Fort Worth, Texas.  This post is contributed by University of Texas Law Professor Angela Littwin.

I am currently teaching a seminar on credit cards, so I was thrilled to present on the work of a major thinker in the field. If there’s one person whose name is synonymous with the behavioral economics of credit cards, it’s Oren Bar-Gill. His work has been influential within the academy and outside of it. The recent federal overhaul of credit card law, The Credit Card Accountability Responsibility and Disclosure Act of 2009 (CARD Act), was heavily influenced by law and behavioral economics. (Here’s another CARD Act link for those who want a summary instead of the whole statute.) Credit cards are also a great topic for Contracts, because with credit cards, contract design is the entire game. 

The credit card chapter in Seduction by Contract is very successful. If you want a primer on exactly what the trouble is with credit cards, this chapter is perfect place for you. The crux of Bar-Gill’s argument is that credit card issuers use complexity and cost deferral to seduce consumers into borrowing more in the short-term than they would prefer in the long-term. He illustrates how specific credit card pricing features play into the imperfect rationality of optimism-biased consumers. He concludes by discussing the recent CARD Act and with policy proposals centered on use disclosure. 

Convincing people that credit card contracts are complex is an easy sell. One way Bar-Gill does so is by simply listing all the of types fees consumers can pay (i.e., overlimit fees or application fees). There are nineteen of them. And this number doesn’t even include types of interest. I can also add that in my seminar, we have a day in which I ask the students to find and read a credit card contract. Student routinely say that this is the hardest reading they have done in law school.

What’s even more interesting than the complexity itself is the purpose of it. Credit card issuers use complexity as a way of shielding their pricing model from consumers. Issuers provide benefits through short-term, more salient product features (like teaser rates and rewards) and assess costs through long-term, less salient product features (like late fees and default interest rates). This pricing structure enables – or rather requires – issuers to compete for consumers via deception.

Bar-Gill’s policy proposal, use disclosure, addresses this deception directly. Use disclosure would require credit card issuers to give consumers information on how they use their credit cards. The CARD Act does some of this, but Bar-Gill proposes taking it further. Under Bar-Gill’s proposal, consumers would receive an electronic file that they could take to a new issuer or an intermediary, like Bill Shrink, to get a new total-cost credit card quote. Use disclosure seems like a great way to encourage consumer behavioral learning. My one critique is that consumers would have to learn the hard way. I think that many consumers would have to get in real trouble with credit cards before the behavioral learning would take place.

This is why my only disappointment with the chapter is that Bar-Gill stopped with use disclosure. I wanted to see him explore the CARD Act in more detail and offer more policy ideas. So I’ll end this blog post as I ended my talk, with a plug to read his paper with Ryan Bubb, Credit Card Pricing: The Card Act and Beyond (Cornell L. Rev., 2012), which addresses both of those points and more.

[Posted, on Angela Littwin's behalf, by JT]

Crime and Punishment . . . and the Parol Evidence Rule

In Book II, Chapter 1 of Crime and Punishment by Fyodor Dostoevsky (pictured), beginning on page 192 in the version to which I have linked, the novel's protagonist, Rodion Romanovich Raskolnikov, describes an oral agreement with his landlady.  The context is as follows:

The day after Raskolnikov has committed a double homicide, he is called to the police office.  He is understandably unnerved and fears that the authorities are on to him.  Moreoever, he is about to fall into a fit of delirium and is in no condition to keep his wits about him before the police.  However, when he arrives, it turns out that he has been called in as a debtor.  The supersilious assistant superintendent informs Raskolnikov that he has been called in on an I.O.U. that he made out to his landlady, the widow Zarnitsyn, for 115 roubles. It appears that the good widow has assigned the I.O.U. to one Mr. Tchebarov who is now seeking recovery.

Raskolnikov, relieved that he has not been called in for murder, explains to the authorities why he is so surprised to be expected to pay his debt.  He informs them that he had had his rooms with the widow Zarnitsyn for three years.  Early in his time there, he promised to marry the widow's daughter, and since he was practially a son-in-law, the widow extrended credit to him.  But the daughter had died of typhus.

Some time after that, the widow came to Raskolnikov and, while claiming that she still trusted him, offered that she would trust him more if he gave her an I.O.U. for the full amount of the debt that he owed her for the lodgings -- that would be the 115 roubles.  He signed the I.O.U. based on her assurances that, once he signed, she would trust him and would never, never seek to enforce it.  Raskolnikov adds a sort of laches argument that the widow had waited until he had lost his lessons and had no source of income whatsoever to seek to recover on the I.O.U. 

The authorities were not interested in these details, instructing Raskolnikov: :"You must give a written undertaking, but as for your love affairs and all these tragic events, we have nothing to do with that."  If any of our readers has any familiarity with 19th-century Russian law, feel free to weigh in, but it does seem like Raskolnikov has only the weakest of fraud in the inducement claims and so his testimony as to the widow's promise, though perhaps admissible despite the written agreement, will carry little weight.  Of course, Raskolnikov would have to show that the widow knew, at the time she promised not to enforce the I.O.U. that she in fact would do so.  And does it matter that such a promise should not be taken seriously on any account, or were 19th-century Russians really so romantic that they valued signed undertakings even if they had no intention of enforcing them?  

Or, even absent a showing of fraud, Raskolnikov's parol evidence might be relevant to show the parties' frames of mind.  Although the document looks legally binding, perhaps neither party regarded it as such.  Both had in mind only a written affirmation of their mutual obligations -- the landlady avowed her trust and Raskolnikov evidenced his trustworthiness through his willingness to sign.  The I.O.U. is no more enforceable than a written pledge to be best friends forever.  

There is also the additional issue.  The widow did not seek to enforce the I.O.U.; she assigned it to Tchebarov, whom she likely did not inform of her promise to Raskolnikov.  If the I.O.U. really is unenforceable, then the transfer of it ought not to make it any more so, and if the widow has committed some sort of fraud, it might arise from passing on an I.O.U. that she knows to be worthless as though it were of some value.

[JT]

 

For Those Who Have 76 Days to Spare

( H/T to Ben Davis -and his student - for posting about the article to the Contracts Prof list serv).

This article indicates that the average Internet user would need 76 work days in order to read all the privacy policies that she encounters in a year.  (Unfortunately, the link to the study conducted by the Carnegie Mellon researchers and cited in the article doesn’t seem to be working).  But you don’t need a study to tell you that privacy policies are long-winded and hard to find.  That’s one of the reasons you don’t read them.  Another is that they can be updated, often without prior notice, so what’s the point in reading terms that are constantly changing? Finally, what can you do about it anyway?  Don’t like your bank’s privacy policies – good luck finding another bank with a better one.

But we contracts profs are familiar with the disadvantages of standard form contracts. We’re also familiar with the efficiency argument in favor of them. The same issues arise with privacy policies – only there’s one important difference between a privacy policy and a contract, even an adhesive one. A privacy policy isn’t really a contract, at least not in most cases. That’s one of the arguments I make in my forthcoming book, WRAP CONTRACTS:  FOUNDATIONS AND RAMIFICATIONS.  A privacy policy is typically a notice, not a contract.  Courts – especially in cases involving digital contracts – have tended to confuse or conflate the two.  If you look at the wrap contracts (shrinkwrap,browsewrap, clickwrap) cases under traditional contract law, they make no sense.  If you analyze them as notice cases, they have some consistency. Unfortunately, courts are treating wrap contracts as contracts, not notices. 

So, what’s the difference between a contract and a notice?  The big difference is that the enforceability of a notice depends upon the notice giver’s existing entitlements, i.e. property or proprietorship rights whereas a contract requires consent.

If I put a sign on my yard that says, Keep off the grass, I can enforce that sign under property and tort law.  As long as the sign has to do with something that is entirely within my property rights to unilaterally establish, it’s enforceable.  If the sign said, however, ‘Keep off the grass or you have to pay me $50” – well that’s a different matter entirely.  That would require a contract because now it involves your property rights.

Privacy policies are more like notices – and should be treated as such even if they are in the form of a contract (such as a little clickbox that accompanies a hyperlink that says TERMS).   If a company wants to elevate a notice to a contract, it should require a lot more than that simple click.  Because the fact is, contract law currently does require the user to do more than click – it requires the user to read pages and pages of terms spread across multiple pages – at a cost of 76 days a year.  The standard form contract starts to look a lot less efficient when viewed from the user’s perspective.

[Nancy Kim]

 

Victor Goldberg on Columbia Nitrogen

We posted earlier in the semester about the baffling case Columbia Nitrogen v. Royster.  Victor Golberg (pictured) wrote to us to recommend his book chapter on the subject in his Framing Contract Law (2007).  Professor Goldberg names Columbia Nitrogen, together with Nanakuli Paving as a "Terrible Twosome," that should render law professors apoplectic.  That is so because when courts use course of dealing or custom to set aside fied price terms, contracting parties can have "little confidence in their ability to predict the outcomes if their disputes do end up in litigation" (p. 162).  

John Murray, writing in 1986, praised the decision for evidencing "a sophisticated judicial understanding of the major modifications in contract law" and for its "sophistication with respect to [UCC §] 2-207."  But Professor Goldberg sees a darker story, in which CNC's counsel attempted to undo, by whatever  means necessary, what had turned out to be a bad bargain."  As a result, says Professor Goldberg, the court "converted a straightforward agreement into an incoherent mess" (p. 187). 

Happily, according to Professor Goldberg, Columbia Nitrogen is not followed.  Contractual relationships are governed by two complementary systems: legal enforcement, which has strict rules, and social enforcment, which is governed by informal norms.  The mistake of the court and the "potential cost of Columbia Nitrogen" is to infer legal rules from social rules in a way that allows legal rules to hamstring informal social norms (p. 188).  

It is a nice piece of wisdom to pull out of a troublesome opinion.  The full details of the case, going well beyond what is available in the published opinion, can be found in PRofessor Goldberg's book.

[JT]

Are Contracts to Blame for Rising Mortality Rates on Downton Abbey?

***SPOILER ALERT: IF YOU HAVE NOT YET FINISHED SEASON 3 AND DO NOT WANT TO KNOW WHAT HAPPENS, READ NO FURTHER***

As those of you who watched Season 3 of Downton Abbey already know, several major characters died unexpectedly this season.  Today's New York Times contains an interview with screenwriter Julian Fellowes, who suggests that contracts are to blame for these deaths.  Fellowes claims that, while American actors in a television series routinely sign on for five or even seven years, English agents won't agree to more than three.  

So, says Fellowes, the actors portraying the late Lady Sybil and the late Matthew Crawley, wanted to go after three seasons, and the screenwriter had no choice but to off them (as melodramatically as possible).  Fellowes then explains why death was the only option.  If they were merely servants, well, the writers would simply find the characters a new situation in a different household and that would be that.  But when you are dealing with members of family, death is the only option if they are unwilling to perform the occasional cameo.  Actually, this may show the limits of Mr. Fellowes' imagination.  One of my all-time favorite shows, My So-Called Life, had a fairly significant character who never appeared on screen at all, although he was referenced in almost every episode.

In any case, it seems unfair to makes contracts the heavy.  In the case of Lady Sybil, clearly English medicine bears part of the blame.  And in Matthews case, the whole business could have been avoided with seat belts, air bags, anti-lock brakes and paved roads wide enough to accomodate two motorcars.

Of course, all of this will be different when Netflix brings out the American version of Downton.  In that version, viewers will get to vote characters out of the series, and I would off Cora as quickly as possible -- but tastefully, off-stage.  We wouldn't want to overtax the actor's abilities.  If I were deciding the vote, we'd pretty quickly be left with just the Dowager Countess, Carson and the dog.

[JT]

Teaching Sales 7: Valparaiso Students Revolt Against Entrustment Doctrine

My mild-mannered students became unexpectedly ferocious during last week's class when we discussed entrustment doctrine last week.  UCC § 2-403(3) defines "entrustment" as follows:

"Entrusting" includes any delivery and any acquiescence in retention of possession regardless of any condition expressed between the parties to the delivery or acquiescence and regardless of whether the procurement of the entrusting or the possessor's disposition of the goods have been such as to be larcenous under the criminal law. 

Notwithstanding the clearly expansive nature of the doctrine, my students would not accept that, for example, a mechanic with whom you had left your car for repairs could sell same car and your only remedy against the mechanic (under the UCC) would be a suit for damages.  When I informed them of the true state of the law, their outrage was unquenchable.

"You could still have the authorities pursue criminal charges for theft," I offered.

Not good enough.

Backing away from the lectern and eyeing the emergency exit, I pleaded, "There are likely state statutory protections that would enable you to recover the car.  After all, the buyer is going to have a problem when he tries to register title to the car."

Still not satisfied.

Finally, left with no other choice, I threw Karl Llewellyn under the bus.  "Look, I just teach this stuff," I said.  "I didn't draft the UCC.  Blame Karl! Blame Karl!! Blame Karl!!!!

I put up a white flag from the teaching station that I was hiding behind to avoid the projectiles headed my way, and then it came to me.  "Wait," I said.  "Let's talk about Kahr v. Markland."  In that case, a man gave Goodwill a bag of clothes.  Unbeknowst to him, the bag also included valuable sterling silver.   The court held there had been no entrustment because Kahr intended to donate the clothes but not the silver.  It's reasoning is as follows:

An entrustment requires four essential elements: (1) an actual entrustment of the goods by the delivery of possession of those goods to a merchant; (2) the party receiving the goods must be a merchant who deals in goods of that kind; (3) the merchant must sell the entrusted goods; and (4) the sale must be to a buyer in the ordinary course of business. ( Dan Pilson Auto Center, Inc. v. DeMarco (1987), 156 Ill. App. 3d 617, 621, 509 N.E.2d 159, 162.) The record establishes there was no delivery or voluntary transfer of the sterling silver because plaintiffs were unaware of its place in the bags of clothes.

My students were appeased.  Ahhh.  

But wait!  Whence the court's notion that "there was no delivery or voluntary transfer"?  Saying that there was no delivery in this case is more than a stretch.  It's simply factually untrue.  And saying that the transfer was not voluntary turns on what the term "voluntary," means.  Nobody put a gun to Kahr's head.  He just made a mistake.  In any case, voluntariness is not an element of the test for entrustment as laid out by the Kahr court.  

Of course, I merely thought all these things.  I didn't say them for fear of my students' wrath.  

But how about this hypothetical based on personal experience:  I donate a bunch of books to Goodwill, including an old copy of Atlas Shrugged with a hideous paper cover on it.  One week later, my wife asks me where her copy of Atlas Shrugged is.  Since she is always after me to clear away old books that we are not going to read or re-read, I proudly announce that I delivered it to Goodwill.  

Her jaw drops.  "But that was a first edition bearing the inscription, "I know who John Galt is,  It's you.  Yours, with a passion hot enough to forge Rearden steel, Ayn."  We rush to Goodwill, but we are too late.  The book was snapped up faster than a locomotive powered by an engine that transforms atmospheric static electricity into kinetic electricity.  Did I entrust it to Goodwill?

There is a bit of a discussion of the Kahr case on The Faculty Lounge blog.  

[JT]

Teaching Sales 6: Another Problematic Case

Yesterday, I bellyached about a Ninth Circuit opinion with which I disagree.  Today, I would like to complain about a Second Circuit decision with which I disagree, although not quite so passionately.  The case is Bayway Refining Co. v. Oxygenated Marketing and Trading.  The relevant facts are pretty simple.  Oxygenated Marketing and Trading (OMT) send an order to Bayway Refining Co. (Bayway) for 60,000 barrels of a gasoline blendstock.  Bayway sent a conflirmation that specified all of the relevant terms of the agreement and also included the following language:

Notwithstanding any other provision of this agreement, where not in conflict with the foregoing, the terms and conditions as set forth in Bayway Refining Company's General Terms and Conditions dated March 01, 1994 along with Bayway's Marine Provisions are hereby incorporated in full by reference in this contract.

Bayway's General Terms included a "Tax Clause" that required the purchaser to pay all taxes associated with the transaction.  OMT never asked for and Bayway never sent a copy of its General Terms.  Bayway then sent the blendstock and OMT accepted delivery.  The taxes associated with the transaction came to nearly $500,000.  Bayway paid the tax and then sued OMT to recover.

The Second Circuit correctly saw the outcome of the case as turning on the battle of the forms.  Under UCC § 2- 207(1), Bayway's confirmation constitutes an acceptance of OMT's offer even though it contained additional terms.  Under 2-207(2), because both parties are merchants, the additional terms become part of the contract unless one of three exceptions apply.  The relevant exception in this case is materiality.  The Second Circuit correctly noted that the Tax Clause was not per se material, in that there was no clear legal rule that had already determined such clauses to be material.   So the Court proceeded to determine materiality based on a common law test, under which a clause is material if it causes surprise or (perhaps) hardship.  

The court defined "surprise" as meaning that "under the circumstances, it cannot be presumed that a reasonable merchant would have consented to the additional term."  The court found that no surprise occurred in this case because provisions like the Tax Clause were common (although not universal) in the industry.  New York law is not clear on whether hardship is an element of its materiality analysis for the purposes of the battle of the forms.  The Second Circuit did not reach the issue because it found that OMT could not show hardship in this case.  OMT claimed hardship because "it is a small business dependent on precarious profit margins, and it would suffer a loss it cannot afford."  The Second Circuit was unmoved because "any loss that the Tax Clause imposed on OMT is limited, routine and self-inflicted."  

I have two problems with the Second Circuit's analysis.  First, its discussion of surprise did not address the fact that clause at issue was part of an agreement incorporated by reference and never shared with OMT.  While that fact might not change the outcome in the case, since the court found the evidence of industry practice convincing enough to put OMT on constructive notice, it strikes me as at least worthy of mention in the context of a discussion of surprise.  

Second, I think the court could have treated the Tax Clause as relating to price.  Industry practice suggested that sometimes contracts like the one at issue in the case included language like the Tax Clause, but in other cases the tax was just added to the price of the product.  If OMT's original order included a price term, then Bayway's confirmation containing a price term plus the Tax Clause introduces not an additional term but a different term.  I think the best reading of UCC § 2-207(2) suggests that different terms knock each other out.  We then proceed to § 2-207(3) to enforce a contract consisting of the agreed-upon terms plus any additional terms the UCC can provide.  The court should have been able to then determine the fair market price for the 60,000 barrels of a gasoline blendstock.  Such an approach might have resulted in a Solomonic ruling or it might have made clear that one party or the other was trying to pull a fast one.

[JT]

Teaching Sales 5: White v. Summers and Diamond Fruit Growers

Last week, I taught an infuriating case called Diamond Fruit Growers v. Krack Corp.  The case infuriates me not only because I think the Ninth Circuit bungled the battle of the forms so as to eliminate the UCC's § 2-207's important innovations and replaced them with with a rule unknown in either the code or the common law, but because James White, co-author with Robert Summers of the standard treatise on the Uniform Commercial Code, endorses the opinion.  I can't understand why.  Summers disagrees with his co-author but without the passion or incredulity that I think the context demands.

The parties to the contract at issue had been doing business together for ten years.  Metal-Matic provided metal tubing for Krack's air conditioning business.  The parties' practice was that Krack would send Metal-Matic an annual estimate of its needs, and Metal-Matic would send back its own acknowledgment form disclaiming warranties and consequential damages.  Moreover, capitalizing on the langauge of § 2-207(1), Metal Matic's form included the following: "Metal-Matic, Inc.'s acceptance of purchaser's offer or its offer to purchaser is hereby expressly made conditional to purchaser's acceptance of the terms and provisions of the acknowledgment form."

The effect of that language under the UCC should be to make Metal-Matic's response into a counter-offer which would govern the parties' transactions once Krack, having notice of the terms, had accepted delivery.  In this case, we know that Krack had notice of the terms, because it tried to get Metal-Matic to remove the disclaimer of warranties and limitations of damages, and Metal-Matic refused to do so.  Having continued to accept delivery on that basis, Krack should be bound by Metal-Matic's terms.

Krack delivered some air conditioning units to Diamond Fruit Growers, but some of the Metal-Matic tubing failed, causing harm to Diamond Fruit Growers products.  Diamond sued Krack and Krack turned around and filed a third-party complaint againts Metal-Matic.  Metal-Matic's disclaimers and limitations on damages were now in play.

The court noted the important principle of neutrality underlying § 2-207.  In contrast to the common law mirror image rule and last shot rule, the UCC is designed to avoid privileging either the offer or the counter-offer.  Determining that it therefore could not give effect to Metal-Matic's unilaterally imposed terms, it looked to the UCC, as is proper under § 2-207(3), to supply the missing terms of the contract that had been formed by the parties' conduct.  Since the UCC does not provide for limitations of damages and disfavors disclaimers of warranties, the court found that Metal-Matic's terms were out.  

The court was focused on avoiding a return to the common law's last shot rule: 

That result is avoided by requiring a specific and unequivocal expression of assent on the part of the offeror when the offeree conditions its acceptance on assent to additional or different terms. If the offeror does not give specific and unequivocal assent but the parties act as if they have a contract, the provisions of section 2-207(3) apply to fill in the terms of the contract. 

The are numerous problems with this approach.  Most obvsiouly, the UCC does not require a specific and unequivocal expression of assent by the offerer to additional terms.  It certainly could have done so if the framers of the UCC so intended.  More fundamentally, the result at which the court arrives is inconsistent with the principle of neutrality at the heart of the UCC"s approach to the battle of the forms.  Indeed, the court's solution to the problem presented advantages the offeror far more than did the common law.  Under the court's approach, the offeror is not only master of the offer; she is master of the transaction, and the offeree can do nothing through its writings to add terms to the contract.  

The court suggests that allowing Metal-Matic to prevail in this situation would be arbitrary because it would turn only on which party sent the form last.  But that is not so.  Metal-Matic conditioned its acceptance on Krack's assent to its terms.  Krack did not do likewise.  Sticking to the language of the forms at issue in this transaction, Metal-Matic's terms would govern regardless of the order in which the parties exchanged forms.  Here we have two sophisticated parties who knew what they were about.  Metal-Matic insisted on its terms and Krack acquiesced because it needed the tubing.

The outcome of the case thus seems extremely unfair.  Although I don't think it changes the UCC analysis, one might feel differently about the equities in the case if Krack were unaware of the terms and accepted the goods thinking that they were warranted, etc., but that was not the case here.  Krack took the goods knowing the terms on which it accepted them.  The court should not bail out commercial parties in these circustances, and courts do not bail out consumers who are bound by shrink-wrap terms to which they never expressly and unequivocally assent.

But James White, in § 2-13 of the White and Summers Treatise suggests otherwise, apparently on the ground that the UCC does not recognize acceptance by performance in this context.  That's very odd, because the UCC is all about the liberalization of rules, including rules of offer and acceptance.  As Summers points out, even the common law recognizes acceptance by performance and Summers sees no injustice given the parties' conversation about the disputed terms.  White thinks the proper remedy for seller is to refuse to ship until buyer assents to its terms, but since a straight reading of the UCC would give a seller no reason to think such express assent necessary, I do not think Metal-Matic was on notice of that requirement.  

[JT]

Teaching Sales, Issue 3: Distribution Agreements

Whether or not distributorship agreements should be covered under UCC Article 2 as contracts for the sale of goods seems to be a case very similar to that of software contracts.  That is, some courts assume that such contracts are covered under Article 2 without looking very carefully to see whether the contract is predominantly one for the sale of goods.  In the case of software contracts, as discussed yesterday, if the transactions are really about licenses, the assumption that Article 2 applies is not warranted unless the parties have stipulated that they want their agreement to be governed by Article 2, and according to this very helpful comment, they usually stipulate that they do not want the agreement to be governed by Article 2.  

A distribution agreement is more likely to involve the sale of goods, and so it is more like the mixed contracts that we talked about on Tuesday.  That is, a distributorship agreement will often entail both a service agreement and an agreement for the sale of goods.  If so, then the court should analyze the contract under either the predominant purpose test or the gravamen of the action test as discussed in Tuesday's post, depending on the jurisdiction.  But it seems that some courts do not do that, either mistaking precedents in which distributorship agreements are treated as governed by Article 2 as establishing a blanket rule or preferring a bright line rule in which all distributorships are governed by Article 2.  

[JT]

 

Teaching Sales, Issue 2: When Is Software a Good and What of the Cloud?

This is the second in a series of posts on issues that arise in a Sales course.  

As Holly K. Towle lays it out in, Enough Already: It Is Time to Acknowledge that UCC Article 2 Does not Apply to Software and Other Information, 52 S. Tex. L. Rev. 531 (2011), many courts simply apply Article 2 to software licenses without much consideration of the law of licenses  Others apply the law of licenses, which she thinks is appropriate.  Her approach makes sense when we're talking about mass-marketed software provided to consumers through licenses.  In fact, courts ought to take notice of the fact that all U.S. jursdictions have now clarified the status of software as a "general intangible" and not a good through the revisions to UCC Article 9 adopted in all fifty states.  

But what of custom-made software that may not be licensed but sold to the client who will be its exclusive user?  My impression from the limited caselaw I have reviewed on the subject suggests that courts recognized early on that software consists of both tangible and intangible elements.  They seem to have assumed that the intangible elements (the services provided in developing software, for example) could be easily separated from the tangible elements (the disks, drives or hardware associated with the delivery of the software).  On this line of reasoning, only the latter are goods.  That distinction strikes me as artificial.  Unless the deal involves a lot of hardware, the cost of the "goods" is trivial compared to the costs of software development, and in fact, with digital downloads and cloud computing, there may not be a good at issue at all.  That is, my office used to be cluttered with the boxes that held the disks on which my software came to me.  I may have naively thought of software as a good then because those boxes made software look like a good.  Now, my software either comes pre-loaded or I download it without the aid of a disk or external drive.   Now it looks much less good-like, but of course, how it looks should not matter.

Towle draws on IP law to argue that software is really "information" and information ought to be treated differently from tangible goods.  I'm not sure I understand why that distinction matters if we are dealing with a sale rather than a license.  A lot of things that we consider goods are really just information, in the sense that Towle uses it.  Books are just information, but a sale of books is a sale of goods (although she is correct that you cannot return a lousy novel based on a breach of the implied warranty of merchantability).  There are lots of other items that we buy about which is could be said that the costs of development constitute a large part of the costs of the good, but the UCC does not ask about cost breakdowns; it just asks if the subject of the transaction is moveable at the time that it is identified to the contract.  Electricity has been held to be a good because it moves.  So does information.  More particularly, custom-made software, White & Summers point out, does not really seem much different from any other specially-manufactured good, which the UCC treats as a good for the purposes of Article 2.  

I recommend Towle's article.  She has persuaded me that courts err in trying to apply Article 2 to software licensing transactions, but when it comes to custom-designed software that is actually sold, rather than licensed, to the end user, I think a strong case can be made for applying Article 2.  

I do not know if the software design companies agree to flat out sell the software they develop.  It might be safer for them to license it so that they can re-use the code for other businesses that might need similar software designed for their specific needs.  If that's the way these deals are done, it follows from Towle's reasoning that licensing law, rather than Article 2 should apply to those transactions as well.

[JT]

Teaching Sales, Issue 1: Mixed Contracts Under the UCC

As indicated in Monday's post, I am teaching Sales for the first time this semester, and this is the first in what I hope will be a series of posts in which I highlight but do not resolve tricky issues addressed in the course.

The situation is quite common.  A contract involves the provision of both services and goods: a construction contract covers both building supplies and labor costs; a medical contract covers both the costs of the surgery and the prosthetic device to be inserted in toto the body; a software company will both design and maintain the software, while also providing computer hardware to run it. Are these transactions covered under Article 2?

Most courts seem to favor a version of the "predominant purpose" test, although it goes by various names. In such cases, the court's analysis aims to determine whether the contract is predominantly one for goods or one for services.  But what does it mean to have services of goods predominate?  It could mean that the parties thought of the contract as one for good or as one for services, in which case the inquiry will largely turn on the parties' testimony, although if the contract is named "Sercies Agreement" or "Purchase Agreement" that might help.  Or the court might have to look to which component counted for a larger portion of the contract price.  

Contracts scholar and FOB (Friend of the Blog) Steven Feldman (pictured) has provided a more detailed account of the predominant purpose test including a list of factors that courts (in his example in Tennessee) weigh in appyling that test:  

Where a contract has a mix of goods and services, relevant criteria for determining whether the UCC will control a contract will include the contract language, the nature of the seller's business, the reason for entering the contract, and the amounts charged under the contract for the goods and services.

Fleet Business Credit, LLC v. Grindstaff, Inc., 2008 WL 2579231 (Tenn. Ct. App. 2008).  But the fact that the test is multi-factor and nuanced only renders it more problemmatic in my view, on which more below.

Other courts use the gravamen of the action test.  They look not to what the contract as a whole was about but to whether the issues in the case relate to faulty service or faulty goods.  So, for example, I am using the Whaley & McJohn casebook on sales, which includes a Maryland case about a faulty diving board installed as part of the installation of an in-ground pool.  The case related not to the installation of the pool but to the design of the board, which was slippery on the end.  The court applied the gravamen of the action test and found that the UCC applied.  

The gravamen of the action test seems right to me, and I'm surprised that more states have not adopted it.  Predominant purpose is vague and hard to apply, and it seems artibtrary that whether or not a contractor's work should be covered on a warranty should turn on whether 45% of 55% of the cost was related to the provision of goods.  Moreover, the fact that a party sold a good as part of a services contract should not affect the warranties that run with the sale of a good.  And on the other side, if there was a failure in the services provided in connection with a provision of goods, then the warranties that relate to the goods should not be relevant in an assessment of whether or not the service provider was at fault. 

The gravamen rule also seems better to me in terms of putting the parties on notice of potential liabilities in store.  Faced with a multi-factor test like the predominant purpose test, parties to mixed contracts cannot know in advance whether their contract will be governed by the UCC or not.  If the gravamen rule applies, parties should always know that the UCC will apply to the goods portion of the contract.  And if a service provider wants to protect itself from liability relating to the goods it installs, that legal certainty can be very valuable.

[JT]

Holiday Blog Round Up

We have been relatively quiet these past few days as we focus on digestion and other festive activities.  But other law bloggers have been busy.

Over at Prawfsblawg, Jeff Lipshaw (pictured, left) has an extended discussion of "legal realism" and contracts pedagogy, and a few other prawfs jump in with interesting comments.

Meanwhile, over at Concurring Opinions, Gaia Bernstein (pictured right) has a post on legislative prohibitions on egg and sperm donor anonymity and the impact of such prohibitions on surrogacy.  According to Bernstein, such prohibitions are common abroad and are gaining ground in the U.S.  She has an article on the subject, which can be found here.

Also at Concurring Opinions, Dave Hoffman has this short post about a provision in credit agreements providing that collection calls are not to be treated as "unsolicited."  Dave suggests that screening calls from one's bank might then be construed as a breach of contract, but a comment suggests that the provision only protects the bank against any allegation that it has violated "do not call" list regulations.

[JT]

Thoughts on the Instagram Kerfuffle

Stop me if you've heard this one before - Facebook changes its Terms in a way that its users find offensive and invasive of their privacy.  Uproar ensues and Facebook promises that the changes are harmless and everyone is just overreacting.  Facebook backs off, a little, and then pushes the boundaries a little further next time, regaining even more ground against its users.  Sound familiar? 

When Facebook bought Instagram for (approximately) $750 million dollars, we should have known the time was coming when Instagram would piss off its users, too.  Well, that time is here.  Instagram posted changes to its Terms of Use this week which made users concerned that the company could use their content (i.e. photos) in advertisements.  So that lovely picture you took of your sweet grandmother could be used in an ad for Depends. The media was all over it, and you can read about it here, and here, and here. 

I think the public backlash is a very good thing since it reminds companies that there are at least some people who are reading their online agreements.  Unfortunately, they are usually only reading the terms of companies that already have a monopoly in the marketplace.  It's not easy for unhappy Facebookers, Googlers or Instagramers to pick up their content and go elsewhere - where would they go? 

What makes my skin crawl, however, is the misleading reassurances doled out by companies when they are called on their online agreements.  Instagram, for example, states on its blog that users shouldn't fear, because it respects them, really it does:

"Instagram users own their content and Instagram does not claim any ownership rights over your photos. Nothing about this has changed. We respect that there are creative artists and hobbyists alike that pour their heart into creating beautiful photos, and we respect that your photos are your photos. Period.

I always want you to feel comfortable sharing your photos on Instagram and we will always work hard to foster and respect our community and go out of our way to support its rights."

While it may be true that Instagram users own their content, Instagram does take a pretty broad license from its users:

"Instead, you hereby grant to Instagram a non-exclusive, fully paid and royalty-free, transferable, sub-licensable, worldwide license to use the Content that you post on or through the Service, except that you can control who can view certain of your Content and activities on the Service as described in the Service's Privacy Policy, available here: http://instagram.com/legal/privacy/."

As Instagram knows, it doesn't need to own your content in order to use it as if it owned it.  All it needs is a broad license, like the one it has.  Note that it has the right to "use" the content - and doesn't define what that means or restrict that use very much.

The Privacy Policy states that Instagram may use the information to in the following ways:

• "provide personalized content and information to you and others, which could include online ads or other forms of marketing
• provide, improve, test, and monitor the effectiveness of our Service
• develop and test new products and features
• monitor metrics such as total number of visitors, traffic, and demographic patterns"

I found this sentence particularly sneaky:

"We will not rent or sell your information to third parties outside Instagram (or the group of companies of which Instagram is a part) without your consent, except as noted in this Policy"

Did you like the "except as noted in this Policy" ?  And, as Contracts profs know, "consent" means something other than what a layperson might think - it can mean just using a website in many cases.  There is similar broad language here:

"We may also share certain information such as cookie data with third-party advertising partners. This information would allow third-party ad networks to, among other things, deliver targeted advertisements that they believe will be of most interest to you." 

I'm not as concerned about the targeted advertisements (which doesn't mean I'm not concerned at all) as I am about the "such as" and "among other things."

And remember, the Terms do expressly state:

"Some or all of the Service may be supported by advertising revenue. To help us deliver interesting paid or sponsored content or promotions, you agree that a business or other entity may pay us to display your username, likeness, photos (along with any associated metadata), and/or actions you take, in connection with paid or sponsored content or promotions, without any compensation to you."

The company reassures its users, on its blog that it is not their "intention" to "sell" user photos.  The company says it is working on language to make that clear.  Let's hope so, but my guess is that they are probably going to use more mealy language like "at the moment" or "sell as a good defined under the UCC," or something that leaves wide open the possibility that it can make money off user photos by selling them to third party advertisers. 

I'd suggest you save Granny some embarrassment and delete that photo now.

[Nancy Kim]

 

On Legal Ed Reform, Elephants and 800-Pound Gorillas

Jeremy has been writing thoughtfully on these pages about curricular reform.  Those interested in the subject (and/or metaphors about elephants and 800 pound gorillas) may want to read the comment that my extraordinary colleague (and contractsprof) Jack Graves and I submitted to the ABA Task Force ont he Future of Legal Education.  Here's the link.

[Meredith R. Miller]

Thoughts on Curricular Reform VI: Preparing the Academically Adrift for Practice

The title of this post references Richard Arum and Josipa Roksa's influential 2011 book, Academically Adrift: Limited Learning on College Campuses.  For the sake of argument, let's assume that this book accurately reflects the state of higher education.  That is, let us assume the following:

• Undergraduates attending U.S. colleges and universities report that learning is not their top priority;
• Students make alarmingly little academic progress, especially in terms of critical thinking, complex reasoning and writing, during their four years of undergraduate education;
• The gap between students who get a lot out of their undergraduate educations and those who get little is at least persistent and perhaps growing;

In addition, let us adopt the hypothesis that our students are not adults, but emerging adults.  That is, let us assume that our students are not fully formed, cognitively or emotionally.  They are beginning to accept the responsibiltiies of adulthood, but they are not really there yet.  

If all of these things are true, what is an appropriate curriculum for 21st-century law students?  

For those of you who have been following this series of posts, the answer might not be surprising.  Students are not learning the skills that a liberal arts education used to provide.  One way to make certain that they develop those skills is by providing a liberal arts education in law school.  It would not be a traditional liberal arts education but a liberal arts education designed to meet the needs of twenty-somethings rather than teens, and clearly oriented towards arriving at practical, professional goals.  As I suggested before, for most law schools, the model should be small, cloistered liberal arts education, at least in the first year, rather than the research university model.  In some ways, designing this curriculum is easy and a lot of fun, because we already know what our students want to do career-wise.  We don't have to design a one-size, fits-all curriculum that would be appropriate for both English majors and engineers and everything in between.  Whether our law students are English majors or engineers, they still need the same package of professional skills necessary for the legal profession.

While tuition pressures and student impatience and immaturity are pushing reform towards a shorter law school curriculum, our students really need a longer and more intense learning experience in law school.  Most but not all law schools would benefit from a first year designed to get students' critical thinking, complex reasoning and writing skills to the level that, twenty years ago, was presumptively already achieved after college.  That means they need to take a lot of small, writing-intensive courses while also learning professional skills and training for an ethically challenging, client-centered practice.  

Finding a way to deliver such an education without greatly increasing our students' debt-load is of course the great challenge.  One option would be to create a hybrid model in which the first two years of legal education focus on the sort of liberal arts cognitive and ethical skills development that I discussed above, combined with the sort of integrated doctrinal education that has been subject of previous posts.  The second two years (yes, the second two years) should be underwritten by prospective employers who work collaboratively with law schools to develop a curriculum that is part apprenticeship, part law clinic and part bar preparation.  So, while law school now takes four years, students only pay for two of them, with the firms or businesses covering remaining tuition costs in lieu of salaries for their apprentices.  In principle, all four years of such a legal education could be rewarding and challenging for the students, and they would emerge far better prepared for practice that they are under the current system.

This is just one idea for addressing our students' needs, if in fact the assumptions that inform this design are accurate.  I am agnostic on the question of whether undergraduates really are academically adrift and are emerging rather than fully matured adults.  Like everyone in the academy, I have my own views, but I admit that they are anecdotal and unscientific.  I have chosen these assumptions because they seem to be informing a lot of the ideas for change that are driving the movement for curricular reform at law schools today.  But I think there is a disconnect between the problem and the solution.  

Law schools are playing a game of "Can You Top This?" by touting their clinical and skills training programs, because that seems to be what the students and the market are demanding.  But if students lack basic cognitive skills, as well as maturity, what is the rush to get them into practice?  We all need to slow down.  If the assumptions listed above are informing calls for change, we need to wait for our students to become adults before we force them to deal with adult problems.  We can't expect them to magically develop critical thinking, complex reasoning and writing skills by simply throwing them into practice.  We also should not give up on their cognitive development because, if the emerging adulthood literature is right, our students are still capable of intellectual growth of a kind that our adult brains cannot match.

As educators, our main concern is providing our students with the training they need so that they can succeed in the profession of their choosing.  But as legal educators, we also have to consider the needs of our students' future clients.  The fact that our students want to serve clients as soon as possible is not a sufficient reason to let them do so before they are ready both in terms of their cognitive development and their maturity.  

I should add that my thoughts in this area have been influenced by the work of two of my colleagues, Susan Stuart (right) and Ruth Vance (left), who are engaged in a scholarly project devoted to working out the long-term consequences for legal education of the latest research into the preparedness and cognitive development of the current generation of law students.  My thoughts here only scratch the surface of the subject matter.  And those interested in the topic should look for Ruth and Susan's work, which we all hope will be coming to a law journal near you in the near future.

[JT]

Thoughts on Curricular Reform V: A Coordinated Curriculum and Academic Freedom

As I have mentioned in previous posts. one way to make it possible to integrate real, concentrated skills training across the curriculum without hiring a score of new legal writing and skills training instructors is to have doctrinal faculty and legal writing and skills training faculty work with doctrinal faculty to build a coordinated curriculum.  I think a consequence of this decision would have to be the eventual development of custom-made teaching materials and the rejection of traditional, subject-based casebooks.  My own experience in putting together my own materials for many of the courses I teach is that one can save the students 70-80% of the costs associated with buying course materials by simply putting together materials using legal materials in the pubic domain and exercises of one's own design.

This is a difficult task, and as the third post in this series suggested, part of the costs of such change would be those of re-training a faculty hired to teach a traditional curriculum so that they could become effective teachers of an integrated curriculum.  But there is another potential problem.  What of academic freedom?  What if the faculty members don't want to change?

One option would be the whipping post and the pillory (pictured).

According to the AAUP Statement of Principles on Academic Freedom, instructors are "entitled to freedom in the classroom in discussing their subject, but they should be careful not to introduce into their teaching controversial matter which has no relation to their subject."  Read broadly, as I believe it should be, this means that an instructors' determination about how best to deliver her material to her students need not bow to an institutional curriculum with which she does not agree.  The reason for this braod construction of academic freedom is that, if tenured faculty could be disciplined or terminated for not teaching in a certain way, their perceived departure from institutional pedagogical norms could become the purported grounds for a termination that is in fact motivated by other, impermissible considerations, such as political views, dogged opposition to the law school or university administration, age, race, sexual preference, etc.  A new curriculum cannot become the means by which the law school rids itself of inconvenient colleagues.

Ideally, with adequate faculty vetting, discussion, participation and buy-in, the transition from a traditional curriculum to an integrated curriculum could go smoothly.  In many institutions that attempt to transformation, however, the transition to a new curriculum will likely have to take place slowly, perhaps piece-meal.  If only the torts professors are willing to coordinate with the legal writing and skills training programs, then only that part of the curriculum will be coordinated.  If the program is clearly a success and the students clamor for greater integration, then perhaps the more recalcitrant professors can slowly be won over.  

[JT]

Thoughts on Curricular Reform IV: The Place of Scholarship in the 21st Century Legal Academy

I am going to invoke a name that heightens the blood pressure of many legal academics.

Brian Tamanaha (pictured).  

I admit that I have not read Professor Tamanaha's book cover-to-cover, but I've read a number of his blog posts and a lot of commentary about his book, so I think I have a fairly good handle on his main points and without endorsing the book in its entirety, I think that much of what he says in Failing Law Schools is relevant to on-going discussions on curricular reform.  That is, I agree with Tamanaha's argument (as I understand it) to the extent that he faults law schools for modeling themsevles on research universities in which faculty members are rewarded for high-profile, cutting-edge research with reduced administrative responsibilities and lighter teaching loads.

But, as I argued in a previous post, the solution is not to turn the clock back to a pre-Langdellian era in which law schools were simply glorified apprenticeships, and instructors were practitioners who taught part-time.  Instead, some law schools should models themselves not on great research universities but on great liberal arts colleges.  The professors at great liberal arts colleges engage in scholarly research, often at a very high level, but their primary allegience is to their own community.  

When I was a doctoral student, I was befriended by an emeritus professor who had taught at that institution for nearly seventy years.  He was a historian of international reknown in his field.  He had also chaired the department, been actively engaged in university administration and was the first chair of the Ivy League athletic eligibility committee. In addition, he had served for thirty-two years as the Mayor of the small town abutting the university.  

When I came to know him, he was at work on a history of the university.  He told me that the most important change that he had experienced during his career, which spanned most of the 20th century, was that the department had changed from one in which what mattered most was the esteem in which one was held by one's colleagues and students to one in which what mattered most was the esteem in which one was held by professors at other universities.  The change saddened him.  It diminished the place's sense of itself as a community defined by a spirit of collegiality and common purpose. 

I would like to see some law schools abandon the hope of being imitatio Harvards in favor of becoming imitatio Haverfords (or Oberlins or Grinnells, etc.).  Moreover, such a change is what our students need.  Increasingly, our students come to us without the benefit of a traditional liberal arts education that prepares them for the challenges of legal practice.  Legal education needs to provide that grounding in basic reasoning, professional development, and writing skills before we throw them into the world of practice.

Unfortunately, it is not what our students want, or at least I don't think it is what they want.  Like a lot of law professors, I introduce a lot of theoretical and interdisciplinary perspectives into my courses.  This time of year, when students finally avail themselves of my office hours, they often ask whether "any of that theory that we talked about in class" will be covered on the exam.  They clearly hope that the answer will be no, and when the answer is yes, I can almost see them doing the mental calculation to try to deremine how well they will have to do on the rest of the exam to make up for their complete inability or unwillingness to wrestle with what seems terribly impractical to them.  They shouldn't worry, since I grade on a curve and they are mostly in the same boat.  

Many law students come from unsatisfying experiences in the world of work.  It is completely understandable if their attitude is, "Look, I got a college degree, and it didn't qualify me to have a career.  I came to law school to learn practical skills, not to waste more tuition dollars on 'academics.'"

It is understandable that they think that, but in many cases, students were not able to find satisfying work before law school because they lack the cognitive abilities, reasoning and writing skills that they would need to succeed.  And they won't succeed after law school without those abiliites skills either.

And so, I still believe that law professors need to be teacher/scholars, actively engaged in scholarship and in the lives of their communities and in their students' intellectual development.  As for scholarship itself, Brian Leiter was here a few weeks ago to deliver our annual Seegers Lecture on Jurisprudence.  In response to a question about the value of scholarship, he said something very close to my view.  Most of what gets published is a dead end.  But a certain percentage of it is very valuable, and there is no way of telling ex ante which scholarship is going to move the ball in a meaningful way.  That's why we need lots of people doing their best to move the ball and why we need to continue to support faculty scholarship. 

In addition, as I have noted in a different context, I think our students need to be part of the academic enterprise.  The very best training I received in my law school happened at my journal, when I first engaged in meaningful research, not of my own choosing, with something (albeit just the sources for claims made in law review articles) at stake.

[JT]

 

Thoughts On Curricular Reform III: The Costs of Change

Some of my colleagues think that the costs of change pale in comparaison to the costs of carrying on as if nothing has changed in the legal profession.  "Change or die," or something like that, is the slogan.  If those are my only options, then change it is!

Actually, even if our backs are not exactly up against the wall, it is certainly healthy for law schools to think in a fundamental way about what it is we are doing.  Are we serving our students well?  Are we serving the legal profession well?  Are we serving the consumers of legal services well?  Where does legal scholarship fit in with the overall mission of legal education?  It is possible to get intp a professional groove that can then develop into a rut.  In the process, one can lose sight of these questions.

That said, carrying out the sorts of reforms that the Carnegie Report has called for in the current economic climate raises certain challenges.  Reformers almost universally call for more of an emphasis on practical skills training in law schools and for a reduction in the costs of legal education.  It is hard to imagine how to do both simultaneously.  Skills training is simply more expensive than doctrinal teaching.  It is hard to do legal writing courses well when the class size exceeds 25, and really class sizes around 15 are optimal.  Few law schools have the resources to achieve that sort of faculty/student ratio in all legal writing courses.  Law clinics should have no more than ten students per faculty member.  

One could cut the costs of law schools by relying more on adjuncts or even on lawyers who might volunteer to oversee extended externships and apprenticeship programs.  One could rely more on online education.  But these solutions might impose unacceptable costs in terms of the quality of legal education.  In order for legal education to progress, we should develop a post-Langdellian model, rather than revert to pedagogical practices abandoned with good reason at the turn of the 20th century.

The other cost of change has to do with use of faculty resources to best advantage.  A law school that hired faculty members based on one model of legal education must consider the serious challenges the school must overcome in order to use the same faculty to deliver a completely different currciulum.  It may be necessary to re-train the faculty to teach a different way, but training might not help if the faculty members do not entirely buy in to the need for fundamental change.  

At our law school, we are exploring teaching skills across the curriculum as a way to introduce skills training into doctrinal courses without have to hire twenty new faculty members.  In a previous post, I suggested that this might require us to jettison existing course materials, because the approach entails coordination of instruction across courses.  Lawyering exercises are to be designed that will relate to what is being taught in multiple doctrinal courses, and instructors in those courses will be involved in simulations, problems, and other forms of assesment.  The burdens of actually doing the assessment, actually giving feedback to students, would presumably be more evenly distributed that they currently are, among doctrinal and skills instructors.

As the comments on the last post in this series suggested, there are already casebooks designed to address the recommendations of the Carnegie Report.  But if the aim is not only the integration of skills and ethical lawyering training into doctrinal courses but also the coordination of doctinal courses with a lawyering program, existing course materials may not be up to the task, because existing course materials are still designed with traditional doctrinal divisions (contracts, civil procedure, torts, property, criminal law, etc.) in mind and may not integrate (for example) exercises in contracts and civil procedure or torts and property.   And if the aim is to structure the learning environment in a way that makes sense across the curriculum, that is hard to do in the traditional law school environment in which each faculty members develops her course in splendid isolation.

[JT]