Monday, September 16, 2013
The Ninth Circuit's opinion in Murphy v. DirecTV starts in the manner to which we have been accustomed in the past few years. Although Plaintiffs state claims under California consumer protection statutes, and although another California statute declares unenforceable arbitration clauses in consumer contracts that preclude collective or class action proceedings, the Ninth Circuit must uphold DirecTV's arbitration agreement with the plaintiff class and compel arbitration. The Supreme Court's 2011 decision in Concepcion compels this result.
The arbitration provision with its class action waiver also contained a "jettison clause," which reads: “If, however, the law of your state would find this agreement to dispense with class arbitration procedures unenforceable, then this entire [section on dispute resolution] is unenforceable.” Originally, the Distirct Court relied on the jettison clause in denyingDirecTV's motion to compel arbitration, and the Ninth Circuit affirmed. Post-Concepcion, however, the District Court reversed itself and granted the motion to compel and the Ninth Circuit affirmed that grant of the motion to compel.
This confuses me, and I must confess that I do not find the Ninth Circuit's explanation enlightening, despite several pages devoted to distinguishing cases that Plaintiffs thought supported their claim. The Ninth Circuit treats the issue of one of retroactivity. When the Supreme Court interpreted in Federal Arbitration Act (FAA) in Concepcion, it told us what the FAA meant, and it has always meant what it meant in Concepcion. If the FAA preempts state law, then it has always done so, and it can do so with respect to claims that arose before Concepcion was decided. As the Court explains.
A contract cannot be unenforceable under state law if federal law requires its enforcement, because federal law is “the supreme Law of the Land . . . , any Thing in the Constitution or Laws of any State to the Contrary notwithstanding.” U.S. Const. art. VI, cl. 2. Section 9 of the Customer Agreement provides only that the arbitration agreement will be unenforceable if the “law of your state” disallows class waivers, which California law does not—and could not—under the FAA as interpreted in Concepcion.
But the Ninth Circuit also quotes the Supreme Court as saying that the FAA “places arbitration agreements on an equal footing with other contracts, and requires courts to enforce them according to their terms.” Here, the parties have stipulated that their agreement to arbitrate is unenforceable if state law would prohibit it, and there seems to be no doubt that the law of California at the time of the contract prohibited class action waivers in arbitration provisions. If the courts are aiming at giving effect to the intent of the parties, it seems to me that the "jettison clause," rather than Concepcion governs. The FAA is about enforcing arbitration agreements, and here the parties have agreed that, to the extent California law governs, claims cannot be arbitrated. Concepcion should not be construed so broadly as to compel arbitrations to which the parties have not agreed.
But fortunately for Plaintiffs, they also have claims against Best Buy, where they acquired their DirecTV equipment and which is neither a party to the arbitration clause nor a third-party beneficiary of it, according to the Ninth Circuit. The nature of that acquisition is at the heart of Plaintiffs' claims. They allege that Best Buy misled them into thinking that they were purchasing DirecTV equipment when in fact the two companies consider the transaction a lease. Plaintiffs also allege that the lease terms are oppressive and unfair.
The District Court granted Best Buy's motion to compel arbitration based on equitable estoppel. Plaintiffs are suing alleging that the two parties colluded in imposing on them unfair and oppressive terms in a Customer Agreement and Lease Addendum. If it is suing based on that document, the arbitration provision should be in with respect to both defendants. The District Court held that Plaintiffs were estopped to deny Best Buy the benefits of the arbitration provision.
The Ninth Circuit reversed on estoppel. Plaintiffs are suing DirecTV because of unfair and oppressive terms in a lease agreement. They are suing Best Buy because its conduct in the transaction misled Plaintiffs into thinking they were buying equipment when they were in fact only leasing it. In short, the Ninth Circuit concludes that "Plaintiffs’ claims against Best Buy do not rely on, and are not intertwined with, the substance of the DirecTV Customer Agreement or Lease Addendum." In addition, while alleged collusion is another ground for equitable estoppel, and Pliantiffs have alleged collusion, the alleged collusion is unrelated to the contract on which Best Buy would rely in order to compel arbitration.
The Ninth Circuit also rejected Best Buy's claims that it was entitled to benefit from the arbitration provision either under an agency theory or as a third-party beneficiary.
Friday, September 13, 2013
Over the summer, hte UK's National Audit Office presented to the BBC Trust Finance Committee this Report on executive severance payments made to fromer BBC executives. The BBC has reduced its management staff signficantly since 2009. In so doing, it expects savings totalling £92 million. However, the BBC also has made severance payments to the 150 ousted executives totalling £25 million.
According to the Report, the BBC plans changes going forward. From now on severance pay will not exceed 12-months salary or £150,000, whichever is less.
The drama of Parliamentary hearings into the payments is well described here in the UK's The Guardian. The BBC's Director General at the time of the payments was Mark Thompson, who recently moved on to The New York Times, where he is Chief Executive. Thompson defended the payments before Parliament, although they exceeded by £1.4 million (£2 million in The Independent's account) the BBC's contractual obligations to its former executives. The largest single payment was just over £1 million, and it went to Thompson's deputy, Mark Byford. According to the BBC, the investigation into severance payments was triggered by a £450,000 payment to one BBC executive who resigned in connection with a scandal after just 54 days on the job.
From an American perspective, it is a bit hard to see what the fuss is all about. Sure, capping severance for executives at publicly-owned entities is certainly a reasonable policy, but even without the cap, exceeding contractual obligations by something less than 10% while achieving significant savings overall seems pretty tame on the overall scales of both wasteful public-sector spending and executive severance packages. As Brad Pitt's character puts it in Inglorious Bastards, that should just get you a chewing out. But perhaps we have been desensitized by the size of severance packets, even at public corporations, on this side of the pond.
1. It is perhaps telling that the Report begins with three blank pages (after the cover page) followed by two mostly blank pages. Apparently they don't audit their own use of paper.
2. UK usage seems to have completely abandoned the hyphenated compound adjective. Thus, after all the blank pages, the Report begins, "The BBC Trust receives value for money investigations into specific areas of BBC activity." I had to read this sentence three times before I could make any sense of it. That's because "value for money" is a compound adjective rather than two nouns separated by a preposition. To my eyes, the sentence would have been far more readable if it had been written: "The BBC Trust receives value-for-money investigations into specific areas of BBC activity. " Am I the only one? My inquiry also relates to changes going on in Law Review offices in the US, as I have tussled with student editors who have grown hostile to hyphens in recent years. I like the little fellas.
Wednesday, September 11, 2013
This post will conclude our sympoium on the contracts scholarship of Stewart Macaulay. Professor Macaulay has asked us to thank all those who participated in the discussion of his work both on the blog and in the book, Revisiting the Contracts Scholarship of Stewart Macaulay: On the Empirical and the Lyrical (Jean Braucher, John Kidwell, and William C. Whitford, eds., Hart Publishing 2013).
We add our own thanks to Jean Braucher, who put the symposium together for us, and to all of our participants, whom we name below with links to their posts:
And here are links to the introduction to the symposium and the biographies of our contributors:
In many law schools, faculty offices are in a separate part of the law building from class room space and other common spaces that students habitually occupy. In my law school. classrooms are on the first floor; faculty offices are on the second floor. Students -- especially 1Ls -- have a hard time breaking through the ceiling and asking faculty members for help outside of class time. I think part of the problem is that, for some students, the second floor is a strange and alien place. We try to be welcoming, but when students see strange adults rushing about purposefully upstairs, students may feel like they are in the way.
I am doing two things differently this year that have tremendously increased the quantity and quality of my out-of-class interactions with my students. We are now in the fourth week of our seven-week mimimester, about which I have written previously, here, here and here. This week, I am giving the second of three in-class quizzes that will account cumulatively for 20% of my students' grades. After the results of the first quiz, students are taking this very seriously, and many of them are coming to see me to make certain that they grasp the material. So part of the increase in out-of-class interactions with my students is a product of the frequent assessments.
I attribute the other part of the increase to my new habit of eating in our law school cafeteria (pictured) three days a week. I told students that I will be there around noon on Tuesdays, Thursdays and Fridays. I am available to them to talk about contracts, if that is what they want to do, but I am also there just to hang out and get to know them. I used to meet with my first-year students for lunch in small groups. That way, I was assured at least one out-of-class encounter with each student, and I also got to introduce the students to some of the local eateries that they might not discover on their own. But most students did not follow up on the interaction, and some of the lunches were awkward, because not every student is as thrilled by the prospect of lunch with a professor as I would have been. Sometimes it was hard to get a conversation going or a few students dominated the conversation while others sat silently and stared at their food.
But I think my being in their space works a lot better. Students come to me on their terms. Everyone understands that it is a setting in which people come and go. Students pull up a chair, join in a conversation, and take off whenever they need or want to. Sometimes I still eat alone, and that's fine. I have an iPad. The rhythm follows the rhythm of the minimester. When an assessment is imminent, I am surrounded by students. In its wake, I say hi to my students, and they barely look up from their legal research assignment, or whatever other book they have their noses in. Unlike me, they cannot relax between contracts quizzes.
Thursday, September 5, 2013
This is the eighth in a series of posts in our online symposium on the Contracts Scholarship of Stewart Macaulay. More about the online symposium can be found here. More information about this week's guest bloggers can be found here.
Doctrines of Last Resort
Last week I had occasion to re-read “The Path of the Law” by Oliver Wendell Holmes Jr., and I was reminded of my many discussions about contract law with Stewart Macaulay (pictured, below left). During my time teaching at Wisconsin, the Contracts professors held weekly lunches to discuss the materials we were covering in class. These discussions would often turn to the fundamental question that Stewart began to wrestle with in his famous study “Non-Contractual Relations in Business” and that has fascinated him ever since, namely, “What good is contract law?”
In “The Path of the Law,” Holmes offered a well-known and provocative perspective on this question: the purpose of law is to constrain “the bad man.” Whether Holmes actually believed that one who “want[s] to know the law and nothing else … must look at it as a bad man” is the subject of some dispute, but the bad man has become an important starting point for thinking about law for generations of law students and remains a powerful image for legal scholars.
In “Non-Contractual Relations in Business” – and in our lunchtime discussions – Stewart didn’t seem to have much faith in law to constrain the bad man. Mark Suchman deftly summarized the core insight of Stewart’s most famous work: “Legal doctrine and legal recourse often matter very little . . . since most transactions are governed, in practice, by informal community norms, enforced by informal social sanctions.” On more than one occasion, therefore, I pressed Stewart on whether his emphasis on the impotence of contract law undermined our teaching of the course to first-year law students.
But the point for Stewart was never that contract law is irrelevant, only that it is sometimes overemphasized by legal scholars, particularly legal scholars who rely on highly reductionist theories of human behavior. Indeed, in his more recent article, “The Real and the Paper Deal,” Stewart observes, “doctrine can matter.” In my contribution to the book, I focus on a collection of legal doctrines, which I call the “doctrines of last resort,” and I argue that these doctrines matter because they facilitate contract formation.
The doctrines of good faith and fair dealing, fiduciary duty, and unjust enrichment are doctrines of last resort because they are activated only when all other potentially applicable commands from constitutions, statutes, regulations, ordinances, common law decisions and contracts have been exhausted. In these circumstances – where positive law and private ordering are otherwise incomplete – contracting parties rely heavily on informal social sanctions to protect against opportunism, but the doctrines of last resort reinforce these social sanctions. Rather than regulating all of the deviations and adjustments that are common in contractual relationships, doctrines of last resort constrain extreme deviations from social norms, reinforcing agreements precisely in those contexts where informal social sanctions are weakest.
In my essay, I introduce the notion of “boundary enforcement,” arguing that the doctrines of last resort are united by a similar objective: the establishment of boundaries on self-interested behavior to mitigate opportunism. This concept is developed further in my working paper (with Jordan Lee) entitled Discretion, which focuses on the role of the duty of loyalty. Two insights about boundary enforcement are crucial to that paper and not limited to fiduciary law. First, “boundary enforcement” suggests that courts should respect the reasonable exercise of private decision making within the boundaries established by the doctrines of last resort. In contract law, for example, courts should generally respect the deals struck by the parties, even if the courts would have struck a different deal. Second, when boundaries are not established by the contracting parties, courts often turn to industry customs and social norms to establish the limits of self-interested behavior, and this is a sensible way to meet the reasonable expectations of the parties. By establishing the boundaries of opportunism in this way, the doctrines of last resort not only constrain the bad man, but embolden private parties to form contractual relationships, thus servicing another important value in law: the promotion of entrepreneurial action.
[Posted, on Gordon Smith's behalf, by JT]
Wednesday, September 4, 2013
This is the seventh in a series of posts in our online symposium on the Contracts Scholarship of Stewart Macaulay. More about the online symposium can be found here. More information about this week's guest bloggers can be found here.
Peter Linzer is a Professor of Law at the University of Houston Law Center.
Contracts of Adhesion: An Oxymoron?
Contracts of adhesion are a big topic this year, what with Peggy Radin’s Boilerplate, Oren Bar-Gill’s Seduction By Contract and the ALI’s new Restatement Third of Consumer Contracts. I’ve been focusing on the notion of adhesion, so my view of the fine book that Jean Braucher, Bill Whitford and the late John Kidwell have put together in honor of Stewart Macaulay (pictured below left) is tilted in that direction. Macaulay’s 1963 American Sociologicaly Review article referred to non-contractual relations in business, and many of the essays in the Festschrift (Stewart probably finds the term pretentious, but it surely is a celebration of him and his work) are about business contracts. But only three years later, Macaulay wrote Private Legislation and the Duty to Read – Business Run by IBM Machine, the Law of Contract and Credit Cards, 19 Vand. L. Rev. 1051 (1966), which is excerpted in the book.
The reference to IBM machines must sound quaint to younger readers, but like early Kurt Vonnegut stories (“Epicac”) and novels (Player Piano) that saw the problems of technology and people in an era of vacuum tubes, it still rings true. Most of the Vanderbilt article deals with businesses, but in a footnote Macaualay cited Lawrence Friedman’s discussion of how discrete areas such as labor law and occupational licensing have been spun off from general contract jurisprudence, and made reference to his own discussion of automobile franchising. (It’s note 5 on page 22 in the book, and note 18 in the Vanderbilt article.) In a fairly short discussion of consumers, Macaulay considered both case-by-case policing and legislationve regulation of standard terms, as in fire insurance contracts, and didn’t go much beyond that. But in an article not included in the book, but with the happy short title of Bambi Meets Godzilla, 26 Houston L. Rev. 575 (1989), he looked at consumer and deceptive trade practices laws and showed how they should be an integral part of the Contracts course, even though they had frequently been distorted into windfalls for well-informed consumers (often lawyers), rather than as weapons of defense for the little guy.
Others in the book have built on Macaulay (and Ian Macneil) to suggest that consumer transactions should be treated as a separate form of contract law. Bob Scott, whom Bob Gordon seems to describe, with respect, as a neo-formalist relationalist, has put forth a strong argument in that a hands-off policy makes no sense with consumer transactions, even if it does when sophisticated businesses are dealing with each other, while Ethan Leib has argued strongly that relationalists should “fragment consumer form contracts into its own sphere for treatment with the reasonable expectations approach,” but that this will require even more fragmented empirical research “to be useful to courts and regulators.” Ethan Leib, What is the Relational Theory of Consumer Form Contract? Chapter 9, at 284). Chuck Knapp, who has written frequently on adhesion problems, shows in his Is There a ‘Duty to Read’? (Chapter 11), how courts have or should have distinguished consumer transactions, and argues that what he calls a “presumption of knowing assent” should not preclude scrutiny of contracts of adhesion.
I think, however, that the real issue is whether we should treat adhesion contracts as part of contract law at all. I started teaching forty years ago, and from the beginning I had my doubts about the lines among the basic topics of private law: tort, contract and property, or even about how private private law was, and Peggy’s book in particular has led me to doubt that we should call any legal document a contract when it involves no real agreement, no negotiation or bargaining, little understanding of terms by the non-dominant party and no opportunity to change terms, except by walking away. In a previous blog, about Boilerplate, I pointed to the removal of products liability from the law of negligence. There, I pointed out that before the great 1914 Cardozo opinion in MacPherson v. Buick Motor Co., liability for a defective product was based on contract, while the expansion of liability away from the proof of negligence came from the use of implied warranties, which are sort of contractual, until Roger Traynor spoke of strict liability in a res ipsa loquitur case and, half a generation later, the Restatement of Torts Second § 402A took us off to the races.
This is hardly the place to review the immense body of writing about adhesion contracts, but I would like to point out that much of the apology for the dominant party imposing terms seems really to treat the issue as a matter of property law – “It’s my widget (or software) and I can set any terms for your license [a property term] to use it.” In effect, a no trespassing sign. That’s all right, I suppose, but it isn’t contract, and it should be judged by whether an owner of a thing owes a public duty to treat those who wish to use it with some degree of fairness, ultimately a matter of public law, like antitrust.
None of this answers the question of how to deal with what Knapp calls “individual contracts,” not just consumer deals, but franchise, employment and at least some professional service contracts (lawyers, brokers, etc.). We know, as both Stewart Macaulay and Jean Braucher have shown us, that individualized review through litigation, even with a presumption in favor of the little guy, is economically unfeasible in most circumstance, especially with the Supreme Court’s rigid imposition of the Federal Arbitration Act to favor pre-dispute arbitration clauses in contracts of adhesion. Bob Scott points to the European Union’s regulation of consumer contracts through a Council Directive imposing strong rules favoring the consumer, but the EU member states seem more amenable to a regulatory regime than we have been in recent years, though our former colleague and friend, Senator Elizabeth Warren’s Consumer Financial Protection Bureau has begun to make headway.
I think, and have written before, that legislation or administrative regulation forbidding specific terms in various individual adhesion transactions (examples could include choice of a distant forum, mandatory arbitration, limits on consequential damages, waiver of jury trials) is probably the best way. It is an appropriate area for state legislature, and more important, Congressional intervention, particularly because this issue has almost nothing to do with freedom of contract.
In fact, it has almost nothing to do with contract.
[Posted, on Peter Linzer's behalf, by JT]
Tuesday, September 3, 2013
We continue our online symposium inspired by Revisiting the Contracts Scholarship of Stewart Macaulay: On the Empirical and the Lyrical (Jean Braucher, John Kidwell, and William C. Whitford, eds., Hart Publishing 2013) with two more posts this week.
Peter Linzer is a Professor of Law at the University of Houston Law Center, where he has taught since 1984. Before going into teaching, Professor Linzer practiced law both as a Wall Street lawyer and as an Assistant Corporation Counsel for the City of New York. Professor Linzer is a member of the American Law Institute. Professor Linzer has served as the Chair of the Contracts Section of the Association of American Law Schools and is a Board Certified civil appellate specialist. He served for nearly a decade on the Pattern Jury Charge Committee of the State Bar of Texas. His principal academic subjects include Contracts; Constitutional Law; Equal Protection; First Amendment; International Contracting; Transactional Clinic; Contract Negotiation and Drafting; Introduction to American Law (for foreign LL. M. candidates); and Torts. Working with experienced practitioners, he pioneered a transactional course in international contracting that sees students negotiate and draft documents in simulated international deals.
Gordon Smith is Associate Dean and Glen L. Farr Professor of Law at BYU's Reuben Clark Law School. Professor Smith's research focuses on corporate and securities law, with particular emphases on Delaware corporate law and entrepreneurial finance. His work has appeared in many top law reviews, and he has co-authored a popular casebook, Business Organizations: Cases, Problems & Case Studies, with Professor Cynthia Williams of the University of Illinois Law School.
Prior to joining the BYU law faculty, Professor Smith taught law at the University of Wisconsin, where he served as Associate Director of the Initiative for Studies in Technology Entrepreneurship (InSiTE). He also taught at Lewis & Clark Law School and has been a visiting professor of law at Vanderbilt University, Arizona State University and Washington University. He has taught courses at universities in Australia, China, England, Finland, France, Germany, and Hong Kong.
Before entering academe, Professor Smith clerked for Judge W. Eugene Davis in the United States Court of Appeals for the Fifth Circuit and was an associate in the Delaware office of the international law firm Skadden, Arps, Slate, Meagher & Flom.
Some of Professor Smith's publications can be found here.
As I have discussed in previous posts here and here, I am for the first time teaching two, two-credit, seven week courses, called Contracts I and Contracts II. Part of the point of the minimester system (and of our curricular reform generally at Valparaiso University Law School) is to provide students with more frequent assessments so that they know through the term how well they are understanding the material and do not have to go into a final exam with no sense of what the outcome is likely to be.
Frequent assessments also provide throughout the term also help law professors integrate assessments into the learning process. We go over the assessments in class, and alarmed students are encouraged to talk though their difficulties with the material. Early assessments also helps us to identify students who need to be considered for our Academic Success Program.
But that is where anonymous grading comes in. I am all in favor of anonymous grading, but not for the reasons I think students usually favor anonymous grading. I think students want to be graded anonymously because they fear that faculty members will punish troublesome students with bad grades. That may indeed occur, but I favor blind grading because I would find it very hard to give very low grades if I knew who was receiving them. And the last thing I want to do is give a D or an F to a student with whom I have had some sort of conflict (e.g., see picture). It would be much easier to give such a student a higher grade in the hopes that she and I will never again cross paths.
The challenge I now face is negotiate the need to preserve anonymity while maximizing the effectiveness of assessment as a teaching tool. The problem is not acute for now, since, as I mentioned in an earlier post, because I have 140 contracts students this semester, all of my graded assessments during the minimester will be multiple choice. Since there is no danger of my bias affecting the grade of any particular student when the quizzes are graded by scantron, I am having the students use their real names on the quizzes. That way, I can track how they are doing and call them in for talks if I think they are in real danger. When they come to talk to me on their own, they will not be giving away any information (such as their exam numbers) that might influence how I grade final exams. I don't know what I would do if I had to grade written work. If I could not sit down with students and discuss their written work, the benefits of the assessment as a teaching would be greatly reduced.
I welcome suggestions as to how to achieve the goals of early assessment while protecting students' anonymity.
Monday, September 2, 2013
Comedian Dave Chappelle (pictured) is edgy, and people like that about his comedy. His edge is what makes his comedy sophisticated, challenging and -- when it really works -- thrilling. But edgy comedy can easily go awry. Audiences might miss the fact that Mr. Chappelle often plays upon racial stereotypes rather than simply indulging or reenacting them. Edgy comedy makes demands of its audience, and sometimes the audience is not up to the challenge. That is what appears to have happened last week in Hartford, Connecticut. The other theory is that Mr. Chappelle had "a meltdown" in the face of a loud audience that wanted Mr. Chappelle's routine to be more interactive than he intended. Aisha Harris has a balanced report on Slate, including some YouTube videos that might help people judge for themselves which version is accurate.
Apparently, Mr. Chappelle was so disturbed, distracted, annoyed, and frustrated by an audience that would not stop shouting at him -- even though the shouts started as encouragement -- that he decided not to perform. However, people speculate that he felt contractually obligated to remain on the stage for a full 25 minutes, and so he read aloud from a book, smoked a cigarette and variously occupied himself in ways that people have concluded were not his act until the time expired.
The event raises interesting contractual questions whether one believes that Mr. Chappelle himself or Mr. Chappelles audience was to blame for what transpired. Some of those questions run as follows:
- Regardless of Mr. Chappelle's reasons, did he in fact abide by his contract simply by remaining on stage for 25 minutes?
- Is there any argument that could be made that what happend in Hartford was a performance? Could anyone have claimed breach of contract upon witnessing the premiere of John Cage's 4'33?
- If heckling actually motivated a comedian (any comedian) to leave the stage early, would that be a breach of contract?
- But if the shouting at Mr. Chappelle's show was actually intended to be encouraging or simply cries of affection for the comedian, does that change the analysis in the previous question? [The Beatles stopped touring because all that could be heard at their concerts were the screams of their teenaged fans, so if they stopped touring in the middle of a concert, would they be justified?]
- Is there a remedy for individual ticket-holders in such a case, and against whom is their remedy? They were not in privity with Mr. Chappelle, so they might sue the concert organizers who in turn could attempt to recover from Mr. Chappelle.
- But if in fact the dynamic at the show in Hartford replayed the dynamic that motivated Mr. Chappelle to end his television show, is that a legitimate defense? Can an African American comedian defend himself against a breach of contract suit on the ground that too many audience members were laughing at his jokes for the wrong reasons?
Wednesday, August 28, 2013
This is the sixth in a series of posts in our online symposium on the Contracts Scholarship of Stewart Macaulay. More about the online symposium can be found here. More information about this week's guest bloggers can be found here.
Jonathan Lipson is the Harold E. Kohn Professor of Law at Temple University's Beasley School of Law.
Although Stewart Macaulay’s contributions to the literature on relational contracting cannot be overstated—for practical purposes, he invented the field—its insights have been absent from an equally important body of literature that also looks at contracts in action: That of bankruptcy reorganization.
At first glance, the reasons for the disconnect may seem obvious. Relational contracting is concerned with, well, ongoing relationships. Bankruptcy reorganization, by contrast, implies the termination or fundamental alteration of those relationships. Relational contracting imagines a world in which formal law is subordinate to actual custom and practice. Bankruptcy reorganization, again in contrast, is sometimes said to be the “acid test” for the enforceability (or not) of contracts, where there will be pressure to use special (formal) legal powers to avoid or break those that are burdensome to the debtor and less than “perfect” (in both UCC Article 9 and more general respects) in order to increase recoveries for creditors whose contracts do pass muster.
And, yet it seems to me that relational contracting literature has much to offer those who think about bankruptcy reorganization, and corporate reorganization generally (that is, outside of a formal bankruptcy process).
Corporate reorganization is usually the response to a cascade of actual or potential contractual breakdowns—general financial default. In most cases, it would seem that practice follows Macaulay’s observations: creditors do not race to court to enforce broken debt contracts. Instead, as I have discussed elsewhere, the parties—the debtor and its major creditors—usually jawbone. Sometimes (most times, I would venture) they renegotiate the contracts and go on about life. While the original debt contracts may have provided all sorts of elaborate remedies for the creditor, she will ignore them if she receives a satisfactory substitute promise not contemplated by the original agreements.
When that doesn’t work, whether because some of the debtor’s creditors hold out, or the debtor’s management can’t get its act together, or the debtor defaults on the substitute promises, a formal bankruptcy filing under chapter 11 may ensue. Chapter 11 creates a complex environment in which both formal law and informal relationships have high salience. Chapter 11 can be seen as a form of institutional “braiding,” to paraphrase Gilson, Sabel and Scott, in which courts, markets, communities and legislatures (Congress), weave together sets of protocols for rewriting en masse the corporate debtor’s debt (and other) contracts. Relational contracting is vital to the effectiveness of these protocols, even as the larger environment that uses and creates these protocols is undergoing major change. Consider three examples.
First, there is the relational contract among the corporate debtor and its many stakeholders. When Congress enacted chapter 11 in 1978, it probably had an intuitive sense of the relationships it wanted to preserve: Those between workers, managers and corporate stakeholders. Thus, unlike prior law, chapter 11 presumed that management would remain in possession and control of the debtor while it formulated a reorganization plan that would keep the debtor a going concern (and thus its basic relationships intact). If the plan gained sufficient support (evidenced by creditor voting as well as a number of other formal criteria) it could be confirmed by the bankruptcy court. If not, a trustee might replace management and/or the debtor would be liquidated (thus likely terminating the relational contract).
In order to reach a consensual plan, a significant amount of bargaining would have to occur. Reorganization is, per Galanter, a “litigotiation”: constant bargaining on courthouse steps (virtual or actual). A lawyer I knew once referred to chapter 11 as “New York’s largest floating craps game.” This, in turn, bespeaks a second example of relational contracting in chapter 11: that among the lawyers who manage the process.
An important goal of the 1978 Bankruptcy Code (which is still in effect) was to remove the stigma associated with bankruptcy practice. Large law firms were quick to recognize that this practice could be lucrative. A sophisticated bar of bankruptcy practitioners in high profile cases emerged in New York and Delaware. This community creates bargaining networks in which repeat players seem to have both a strong sense of formal (e.g., bankruptcy and commercial) law and the capacity and temperament to compromise in order to produce a plan if possible, and to resolve the case otherwise (e.g., through liquidation) if not.
Yet, even as Congress may have imagined that reorganization would preserve a certain class of long-term relationships involving the corporate debtor and its stakeholders, change was afoot. At about the time the current Bankruptcy Code was coming into force, a market in “claims trading” was beginning to develop. “Claims trading” is the practice whereby “distress investors” (often private equity or hedge funds) will purchase claims against debtors.
You might wonder why anyone would want to purchase defaulted debt. The answer, in most cases, is to make money, either on the spread between what the claims trader buys the claim for and what it ends up being worth in the bankruptcy, or because the trader ends up with a controlling position in the debtor’s bankruptcy (as noted above, claimants often get to vote on the chapter 11 plan).
Claims trading began as an obscure corner of chapter 11, but has now become very important. Billions of dollars in claims trade regularly. It seems safe to say that professional claims traders take significant positions in most large corporate reorganizations.
What does claims trading have to do with relational contracting? The world of distress investors is small, insular and bespoke, a club of sophisticated players in what I have characterized elsewhere as an unregulated secondary securities market. While little is known about the actual contracting (or extra-contractual, promissory) practices of claims traders, it would appear that they are by and large repeat players. Their relationships increasingly influence the formal and informal contracts that determine the outcome of the chapter 11 process.
This transformation bespeaks a third example of relational contracting in reorganization: professional distress investors bound by complex ties, tensions, and loyalties in contracts of varying degrees of formality. Increasingly, and to some disturbingly, the incentives of this group are to dismantle or auction the debtor rather than to reorganize it internally, as Congress seems to have envisioned in 1978. The relational contract of distress investors effectively replaces the relational contract of the debtor, its employees, and other stakeholders.
This third relational contract also suggests that lawyers may play an increasingly subordinate role, executing investors’ strategies, but not necessarily devising or negotiating them. That many claims traders were once bankruptcy lawyers may in part explain this shift: even if they have become “clients,” distress investors often know as much formal (and informal) law as their lawyers.
The relational contract in reorganization is, like all other contracting environments, neither purely formal nor purely informal. That this literature has not influenced the large—and frequently “contractual”—literature on reorganization is not a knock on Macaulay’s contribution or the subject of this Symposium, Revisiting the Contracts Scholarship of Stewart Macaulay: On the Empirical and the Lyrical.
Rather, my goal here is to suggest ways to use his work, and that of the excellent contributions to Revisiting, in a related and important context. Although Stewart Macaulay’s work has not yet been formally introduced to the world of corporate reorganization, it seems to me it could be the basis of a beautiful relationship.
[Posted, on Jonathan Lipson's behalf, by JT]
Tuesday, August 27, 2013
This is the fifth in a series of posts in our online symposium on the Contracts Scholarship of Stewart Macaulay. More about the online symposium can be found here. More information about this week's guest bloggers can be found here.
Gillian K. Hadfield is the Richard L. and Antoinette Schamoi Kirtland professor of law and professor of economics at the University of Southern California.
Maybe Contract Law Isn't Dead After All
In 1963 Stewart Macaulay asked: what good is contract law? His interviews with business(men) in a range of companies—including giants like General Electric, S.C. Johnson and Harley-Davidson—suggested the answer was “not much.” He was repeatedly told that in practice, formal contracts were rarely drawn up for transactions (and that the boilerplate purchase orders and acknowledgements that might be exchanged weren’t really even seen as “contracts”.) Any formal contracts that did come into existence were largely ignored, almost never pulled out of the drawer to help resolve transactional problems that might occur along the way. And the idea of litigating, or even threatening to litigate, to resolve a dispute was dismissed almost entirely.
A dramatic set of findings. They earned Stewart (pictured), in Grant Gilmore’s famous formulation, the title of “Lord High Executioner” of contract law, sounding the death knell of lawyers’ taken-for-granted assumption that they were essential to doing business. Economists—introduced to the article fifteen years after it was published in two of the seminal papers in transaction cost economics, Klein, Crawford and Alchian (1978) and Williamson (1979)—were energized. A great flood of work, much of it game-theoretic, soon followed to explain the puzzle of how business deals were held together without law. Soon we had a standard distinction in the economics literature: between formal—court-enforceable—contracts and informal ones—those enforced only by threats of the loss of a valuable long-term relationship or reputational standing.
Given how important Macaulay’s work has been to economists, my co-author Iva Bozovic and I were surprised to find out that almost no-one has attempted to replicate Stewart’s self-styled “preliminary study.” So we decided to try. So much had changed in industry since the early 1960s when Stewart did his research (Mad Men anyone?) we wondered whether contract law still was as irrelevant to contracting as it seemed to be back then. We were particularly interested in the impact of a much more innovation-oriented economy on contracting. And it was hard to predict how Macaulay’s findings might carry over. On the one hand, in relationships that are focused on innovation—think collaboration between Facebook and Skype to integrate video chat and social networking, for example—so much is changing so rapidly that often the parties don’t have much of a clue how their relationship is going to develop. That implies it’s really hard to write complete contracts that can be easily enforced in court. On the other hand, there is so much novelty that there is almost no time for industry standards to stabilize giving parties guidance about how gaps in contracts are to be filled in. This is a part of Macaulay’s findings often overlooked among economists (although it is dear to the heart of law and society folks): in Macaulay’s study, the parties didn’t need well-drafted contracts because they had well-established industry norms to look to for guidance on how problems should be dealt with. Breach of those norms was bad for business in a stable environment with lots of alternative contracting partners.
So if parties to high-velocity innovative business relationships don’t have established industry norms to look to and it’s so hard to write relatively complete court-enforceable contracts, what do they do?
We set out to study this question by interviewing companies in the San Francisco Bay Area and Los Angeles about their use of contracts. We first asked our respondents—all of whom were senior level executives, almost all of whom were not lawyers—whether they considered their business to be innovative in any way. Perhaps surprisingly, in our initial random sample of firms, many answered “no”. We then supplemented our sample with firms we were pretty sure were innovative. In the end we spoke with 30 companies—12 who identified as ‘not innovative’ and 18 who identified as ‘innovative.’ We asked the innovators to talk to us about a relationship with another firm that was important to them for innovation. We asked the non-innovators to talk to us about a relationship with another firm that was important to them for business success.
Here’s what we found out. The non-innovators told us essentially what Macaulay’s respondents told him: we don’t draft formal contracts, we ignore any that do get drafted, and we never look to litigation as a threat or source of enforcement. The fascinating twist was from the innovators; only one of Macaulay’s findings held up. Yes, we spend a lot of time and lawyer money on drafting formal contracts. Yes, we haul the contracts out of the drawer to consult when trying to resolve transactional problems along the way. BUT: no, we never look to litigation as a threat or source of enforcement. This isn’t because they settle their disputes in the shadow of the law. It is because a litigation threat is just not credible: it’s too expensive, takes too long, is too unpredictable and kills precious reputation.
Our sample, like Macaulay’s “preliminary study,” is small. It’s not necessarily representative. But, like Macaulay, we have unearthed a fascinating puzzle: why draft and consult formal contracts if you have no expectation of ever enforcing contracts in court? According to the relational contracting literature that economists produced in response to Macaulay’s puzzle (if not contract, then what?), the only reason to write a formal contract is to get the benefit of formal court enforcement.
Our answer, drawing on work I’ve done with Barry Weingast (see here and here) about the function of law, is that formal contracting serves to coordinate beliefs about what constitutes a breach of a highly ambiguous set of obligations. This makes relational enforcement mechanisms—loss of a valuable relationship, bad reputation—more effective than they would have been in the absence of a shared template for interpreting events. We call this scaffolding: formal contract law and reasoning—implemented by lawyers who share similar interpretation methods and materials that are common knowledge among them—helps to span the (large) gaps in relational mechanisms that arise when ambiguity is high. It’s not that formal legal reasoning from a formal contract to decide whether a contracting partner is in “breach” is open-and-shut in these settings—there’s still lots of ambiguity to go around. But our point is that the extent of ambiguity when the parties have at least designated a common methodology for classifying conduct as breach or not is much less than it would be otherwise. We think the reason law gets singled out to play this role is because it is, as my work with Weingast emphasizes, expressly designed to perform this kind of an ambiguity-reducing and coordinating role—with its emphasis on comprehensive coverage, clarity and the presence of an authoritative steward (eg. courts) that is recognized as the final word on interpretation.
Our paper (which we wanted to work on more after the conference so it does not appear in the book whose publication this Symposium celebrates) provides lots of quotes from the businesspeople with whom we talked to support our analysis. It’s hardly the last word on the subject—there’s that “preliminary” again—but it moves our understanding of the role of contract law a little further down the field on which Stewart first called the game—what good is contract law? Our answer: quite a bit actually, even if almost nobody plans on going to court.
[Posted, on Gillian Hadfield's behalf, by JT]
Monday, August 26, 2013
We continue our online symposium inspired by Revisiting the Contracts Scholarship of Stewart Macaulay: On the Empirical and the Lyrical (Jean Braucher, John Kidwell, and William C. Whitford, eds., Hart Publishing 2013) with two posts this week. All of this made possible through the organizational genius of Jean Braucher, who recruited the participants in this symposium. So we at the blog are all very grateful to her.
Gillian K. Hadfield is the Richard L. and Antoinette Schamoi Kirtland professor of law and professor of economics at the University of Southern California. She studies the design of legal and dispute resolution systems; contracting; and the performance and regulation of legal markets and the legal profession.
Her recent publications include “What is Law: A Coordination Model of the Characteristics of Legal Order” (with Barry Weingast, Journal of Legal Analysis 2012); "The Dynamic Quality of Law: Judicial Incentives, Legal Human Capital and the Adaptation of Law (Journal of Economic Behavior and Organization 2011); "Legal Infrastructure for the New Economy” (I/S: Journal of Law and Policy for the Information Society 2012) and "Higher Demand, Lower Supply? A Comparative Assessment of the Legal Resource Landscape for Ordinary Americans" (Fordham Urban Law Journal 2010).
Professor Hadfield holds a B.A.H. from Queen’s University, a J.D. from Stanford Law School and Ph.D. in economics from Stanford University. She served as clerk to Chief Judge Patricia Wald on the U.S. Court of Appeals, D.C. Circuit. She has been a visiting professor at Harvard, Columbia and NYU law schools, a fellow of the Center for Advanced Study in the Behavioral Sciences at Stanford, and a National Fellow at the Hoover Institution. She is a member of the American Law Institute, director of the American Law and Economics Association and the International Society for New Institutional Economics and past president of the Canadian Law and Economics Association. She serves on advisory boards for the Hague Institute for the Internationalisation of Law, LegalZoom, Pearl.com, and Educating Tomorrow’s Lawyers, and on the Editorial Committee of the Annual Review of Law and Social Science.
More of Professor Hadfield's publications can be found here.
Jonathan Lipson is the Harold E. Kohn Professor of Law at Temple University's Beasley School of Law. Professor Lipson teaches commercial, corporate and bankruptcy law courses, including a deal-based simulation. From 2010-2012, he was the Foley & Lardner Professor of Law at the University of Wisconsin Law School.
His research focuses on business failure systems, with a particular emphasis on the role that information forcing rules play in influencing outcomes. He has written a number of articles about the informational aspects of the U.S. secured credit system, the bankruptcy system, and the role that lawyers play in designing and implementing transactions under the risk of financial failure. He is an occasional empiricist, having authored the first qualitative empirical study of lawyers’ practice of writing third-party closing opinions (which was selected for presentation at the 2005 Yale/Stanford Junior Faculty Forum). He has also developed a unique data set on the use of examiners in large Chapter 11 bankruptcy cases.
He has a side expertise on constitutional issues in bankruptcy. He has authored papers on, among other things, the Catholic diocese bankruptcies, sovereign immunity defenses in bankruptcy, and the larger structural questions presented by the Bankruptcy Clause of the United States Constitution.
His work has appeared in, among others, the UCLA Law Review, the Boston University Law Review, the Notre Dame Law Review, the Business Lawyer, the University of Southern California Law Review, the Washington University Law Review, the Minnesota Law Review and the Wisconsin Law Review .
More of Professor Lipson's publications can be found here.
Below are links to last week's posts:
We look forward to another lively week of contributions.
Friday's New York Times included this story that might be of interest to Hurly v. Eddingfield fans. As readers of this blog should recall, Hurley is a case about a doctor who refused to see his deathly ill patient, giving no reason and despite a proffer of payment and having no excuse for his refusal. We have blogged about the case previously here and here. The point of the case is that the doctor is not contractually obligated to come to the aid of his patient, and the law will not impose on him an obligation to enter into such a contractual obligation unwillingly.
As many of my students find it a bad state of affairs if a doctor cannot be compelled to treat her patient, when she is the only doctor available and she has no reason for refusing to do so, I assure them that there are non-contractual mechanisms -- state or professional codes -- for that may address Hurley's facts. Friday's story in the Times illustrates how this can work.
Vanessa Willock (Willock) contacted Elane Photography, LLC (Elane), to determine whether Elane would be available to photograph her commitment ceremony/wedding to another woman. (New Mexico's Supreme Court explains that although Willock at first referred to the ceremony as a commitment ceremony, the parties also referred to the event as a wedding, and the court used the terms interchangeably.) Elane's lead photographer is opposed to same-sex marriage and will not photoraph events that violate her religious beliefs.
Represented by the Washington-based Alliance Defending Freedom, Willock sued, citing New Mexico's constitutional Human Rights Act, which was revised in 1972 to prohibit discrimination on the basis of sexual orientation. Elane claimed that forcing it to photograph Willock's commitment ceremony/wedding violated its First Amendment Rights. Eugene Volokh has blogged extensively on the case (e.g., here), and he filed an amicus brief in the case. Volokh characterized his position and that of his fellow amici as follows: "All the signers of the brief support same-sex marriage rights; our objection is not to same-sex marriages, but to compelling photographers and other speakers works that they don’t want to create."
New Mexico's Supreme Court (and all other courts that heard the case) ruled in favor of Willock. Willock sought only a declaratory judgment that Elane had violated New Mexico's Human Rights Act. Willock sought no other remedy. We leave the constitutional issues to Volokh and others with greater claims of expertise. We note, however, that the effect of the ruling is that New Mexico's constitutional interest in prohibiting discrimination trumps the common law contractual principle of freedom of contract. Unlike the doctor in Hurley, Elane's must contract with people with whom it does not want to contract, even though, also unlike doctor in Hurley, Elane's has grounds for its unwillingness to contract sounding in constitutional principles of freedom of speech and freedom of religion.
The Times provides the full text of the case, Elane Photograhpy, LLC v. Willock.
Thursday, August 22, 2013
This is the fourth in a series of posts in our online symposium on the Contracts Scholarship of Stewart Macaulay. More about the online symposium can be found here. More information about this week's guest bloggers can be found here.
One Contracts Professor’s Preference for State Court Decisions
In the essay that I contributed to Revisiting the Scholarship of Stewart Macaulay: On the Empirical and the Lyrical, I gave vent to the frustration I experienced over the years reading decisions written by the 7th Circuit Judges Richard Posner and Frank Easterbrook. Stewart wrote to me recently and in two sentences, appropriately lyrical, summed up the source of my frustration: “In theory, of course, the court applies state law in a diversity situation. About the one thing that you can expect is that Judges Posner and Easterbrook will be off on a frolic of their own.”
I have a healthy respect these days, and a strong preference for, the decisions of state courts. I try to use the best of these to teach contract law to my students. I admire the tenacity of state courts that insist, for example, that the commentary to the UCC matters in interpreting that statute. See e.g. Simcala Inc. v. American Coal Trade, Inc. 821 So.2d 197 (Ala. 2001) (the word “center” in comment 3 to UCC section 2-306 means something when used to describe the way a stated estimate limits the “intended elasticity” of an output or requirements contract).
I am particularly gratified by the persistence of courts that have used the unconscionability doctrine to invalidate boilerplate arbitration clauses. Implicit in these cases is a duality. Oppression exists on two levels. The terms of the transactions are oppressive and unconscionable, and the terms of the arbitration agreement are oppressive. Two cases I discussed previously at the 8th Annual International Contracts Conference at Texas A & M University Law School.
In Brewer v. Missouri Title Loans, 364 S.W.3d 486 (Mo. 2012), the Missouri Supreme Court describes the terms of a loan agreement. Ms. Brewer borrowed $2,215 and paid back $2000, at which point she had reduced the principal balance on the loan by $.06. The interest rate on that loan was 300%. Ms. Brewer brought suit under the Missouri consumer protection statute, the Missouri Merchandising Practices Statute.
In Tillman v. Commercial Credit Loans Inc., 655 S.E.2d 362 (N.C. 2008), Ms. Tillman and Ms. Richardson, the named plaintiffs in a class action, purchased single premium credit insurance from a lender. Within a year the North Carolina legislature made this species of loan illegal, but the statute was not retroactive. Ms. Tillman and Ms. Richardson sued under the North Carolina Unfair and Deceptive Trade Practices Act. The North Carolina Supreme Court found the arbitration clause in the contract, which barred class actions, unconscionable in a 3-2-2 decision.
When the United States Supreme
Court vacated the decision in the Brewer
case and remanded it to the Missouri court for reconsideration in light of A.T.& T. Mobility LLC v. Concepcion,
131 S. Ct. 1740 (2011), Chief Justice Richard Teitelman
, responded that
the unconscionability doctrine in Missouri law was not an “obstacle to the
accomplishment of the act’s objectives.”
The arbitration agreement was unconscionable because there was expert
testimony that no consumer would pursue a claim against the Title Company. The cost was too high. The Tillman
court made much the same point. Of the
68,000 loans that Citifinancial made in North Carolina, no borrower ever
pursued arbitration of a claim.
Citifinancial on the other hand, had reserved its right to go to court
and had exercised that privilege over 3,000 times in civil suits and
foreclosure actions. The Tillman court also provided information
about the actual cost of arbitration, a factual discussion that is missing in a
lot of these cases. It turns out that
arbitration is cost prohibitive for most low income consumers.
Exploitive or predatory contracts saturate the market for credit, housing, furniture for the least well off in our society. The Montana Supreme Court recently held a payday loan and its arbitration provision unconscionable. Kelker v. Geneva-Roth Ventures, Inc., 303 P.3d 777 ( Mont. 2013)(780% APR was violation of Montana Consumer Loan Act) If the U.S. Supreme Court grants certiorari in Kelker, the decision in that payday loan case will probably meet the fate of its progenitors, Casarotto v. Lombardi, 886 P.2d 931 (Mont. 1994)(Casarotto I) and Casarotto v. Lombardi, 901 P.2d 596 (Mont. 1995)(Casarotto II). Justice Trieweiler maintained in Casarotto I that the Federal Arbitration Act had not pre-empted state laws addressing arbitration because the federal statute had not addressed every aspect or possibility with respect to arbitration agreements. In Casarotto II he argued that the U.S. Supreme Court’s decision to strike down an Alabama statute that made pre-dispute arbitration agreements unenforceable was irrelevant to the decision in Casarotto I. He was reversed in an opinion written by none other than Justice Ginsberg.
Justice Terry N. Trieweiler, the twice rebuked but unrepentant Montana Supreme Court jurist, actually wrote three Casarotto opinions. He penned a special concurring opinion in Casarotto I to address “those federal judges who consider forced arbitration as the panacea for their “heavy caseloads” and to single out for criticism Judge Bruce M. Selya, First Circuit Court of Appeals, who called the prevalence in state courts of “traditional notions of fairness” an “anachronism.” 886 P.2d at 940. Justice Trieweiler’s rejoinder was that some federal judges are arrogant. I think of it as hubris.
The number of cases challenging arbitration agreements has not diminished over time. I can think of at least two reasons for this phenomenon. One is ever expanding disparity in wealth and power in the United States in this post-industrial society. There are very few ways individuals can challenge those who have power over them or expose what they feel to be an injustice that has been done to them. We are conditioned to believe that there is “equal justice under the law” and to believe that a citizen may seek redress in court. The second reason is the failure of federal courts to recognize that the FAA is indefensible when it is applied in consumer cases. That was the subject of the last series of blog posts discussing Margaret Radin’s book, Boilerplate. The FAA is a statute frozen in time, applied to transactions almost ninety years after Congress held those hearings on the resistance of state courts to arbitration and used to enforce arbitration “agreements” in contracts that were not even dreamed of when the FAA was passed -- online, clickwrap contracts such as the contract in Kelker. Contract defenses that police agreements where there is no real consent and no real bargaining are rendered impotent by the FAA. It does not matter if Certiorari is denied in Kelker, because the 9th Circuit has already used a pre-emption argument to defeat the Montana court’s use of “reasonable expectations” and unconscionability doctrines to invalidate arbitration provisions. Mortensen v. Bresnen Communications, LLC, 2013 U.S. App. Lexis 14211.
This past weekend I had the pleasure of meeting the judge who wrote the plurality opinion in the Tillman case, Justice Patricia Timmons-Goodson (pictured), who retired from the North Carolina Supreme Court in December 2012. I did not plan this meeting. It was completely serendipitous. I was looking for the meeting room where the Task Force on the Future of Legal Education was discussing the end of law school as we know it. I asked her for directions, and then I glanced at her name tag. It took me a moment to realize who she was. I was told by Judge James Wynn, who is now on the 4th Circuit U.S. Court of Appeals, but who once served with Judge Timmons-Goodson on the North Carolina Court of Appeals and the Supreme Court, that she was a recent recipient of the Legend in the Law award at Charlotte School of Law.
I knew that Justice Timmons-Goodson was a black woman. I looked for background information when I decided to write about the case. I knew, courtesy of North Carolina’s Lawyers Weekly, that two lawyers from Raleigh, John Alan Jones and G. Christopher Olson, obtained a judgment in Tillman and two companion cases in the amount of $81.25 million. Of the borrowers represented in the Tillman case, 759 received approximately $31,291 each. Another 9,670 received $544 each.
Taking the admonition of Stewart Macaulay seriously, striving to do something that looks like empirical research, I asked Justice Timmons-Goodson if she would consent to an interview. She hasn’t agreed yet, but I hope she will. I would like to know more about the process that she used to reach a decision in the Tillman case; how she persuaded enough of her colleagues to agree that the contract and the arbitration clause were unconscionable, even if two of them relied on a “totality of the circumstances” analysis that they thought sufficiently different from her opinion to merit a separate concurring opinion. Two justices signed her opinion relying on substantive unconscionability; two joined in finding the arbitration clause unconscionable but stressed the importance of deference to the fact-finding of the trial judge under a “totality of the circumstances” approach, and two justices dissented.
The Justice writing the dissenting opinion, appears to believe that the unconscionabiity doctrine is somehow illegitimate. He noted that it had never been used in North Carolina to invalidate a contract or a term in a contract. If I do interview Justice Timmons-Goodman, I will ask her about her reaction to the most recent U. S. Supreme Court decisions. She has herself written about the importance of state court judges at every level, particularly in the trial courts.
I am not sure that she would call her own acts as a justice on the Supreme Court “resistance.” She might simply say that logic and adherence to an ethic of principled decision-making impelled her to write the decision in Tillman as she did. I cannot be sure that she believes, as I do, that the drafters of the FAA never intended to completely pre-empt state law, especially those contract doctrines that are designed to control avarice and unscrupulous behavior. I do think, however, she will enjoy discussing the decisions of Justice Trieweiler.
[Posted, on Deborah Post's behalf, by JT]
Wednesday, August 21, 2013
This is the third in a series of posts in our online symposium on the Contracts Scholarship of Stewart Macaulay. More about the online symposium can be found here. More information about this week's guest bloggers can be found here.
Kate O'Neill's is Professor of Law at the University of Washington School of Law. Her principal interests are contracts, copyright, legal rhetoric, and law school teaching.
These essays present enlightening, provocative, and well-written analyses of relational contract theory, contract doctrine, legal practice, and social justice. The editors have sequenced and grouped them skillfully so that the reader can clearly see how the authors’ ideas intersect and diverge. As a result, the collection is more than its parts.
I want to draw readers’ attention to a problem the collection suggests but doesn’t address directly. What are we going to do about the contracts course in law school?
Several essays suggest, and Robert Scott’s expressly argues for, an emerging consensus that Macaulay’s original insights remain valid and are foundational for both law & economics and law & society theorists and that these warring camps may have more in common than either has yet recognized. If Scott and Macaulay are right, then I would wager that most contract courses not only fail to reflect the consensus but camouflage its most promising lessons.
The consensus seems to include two major points of agreement. First, unmessy doctrine can be handy (“Messy,” of course, was Macaulay’s description of much contract doctrine). Some “sophisticated” contracting parties should be able to make binding commitments on precisely the terms that they negotiate and, in case of dispute, they should be able to limit a judge’s interpretative discretion to alter their allocations of risk. In particular, they should be able to preclude the judge from resorting to “context” to alter the (presumably) plain meaning of the terms.
Second, consumers and employees should not necessarily be bound by all of the commitments purportedly imposed upon them by adhesion documents. Here, we can see fruit borne from Macaulay’s distinction between the real deal and the paper deal. Terms that are reasonable, typical, or expected are part of the deal; terms that are not are not. The expected nature of the relationship dictates the real contract terms; the paper contract terms do not necessarily govern the relationship. We are freed from the mutually exclusive and entirely fictional alternatives that either a contract was formed on the paper terms or it was not formed at all.
On the other hand, the collection makes clear that a fundamental policy issue remains contested especially in the consumer context – how much contract law should intervene in the market. The familiar alternatives are reflected: 1) let the market discipline bad actors even if there are a few casualties before the market works its magic because there is no agency more capable than the market in determining best (read, efficient?) practices; 2) let judges intervene to strike down bad terms – especially those that limit access to courts and class actions – because doing so will hasten market discipline of bad actors and will also relieve hardship in at least a few cases; or 3) regulate certain kinds of terms out of existence.
All the authors think that empirical data could help resolve the policy dispute. Edward Rubin, in particular, suggests that we think of contract law as a management tool. If we were to focus on whether the tool works well to achieve whatever objectives we set, then the legal system could essentially be taught to treat empirical evidence as intrinsic to the development of law. This is encouraging stuff. A systemic devotion to empiricism within the legal system might enable us, and the body politic, to clarify debates about what laws are fair and efficacious.
So far, so good, but here is the question that keeps troubling me. If we all are relationists and empiricists now, and we could use data to make contracting law and practice both fairer and more efficient (or whatever other goals we might conceivably agree upon), what and how we should teach law students?
Macaulay has taught us that contract law has relatively little explanatory power for many of the actual practices involved in the formation, performance, and modification of exchanges, or even the practices involved in resolving disputes. Serious attention to the nature of exchange relationships makes it hard to characterize contract law as unified, coherent and consistent or if it is unified theoretically, the unity operates at such a high level of abstraction that will matter little to judges or practitioners.
We praise these and other insights from empiricism both for what they tell us about law and society now and what they might teach us about alternatives. Yet most lawyers and judges plod on, oblivious or dismissive. Are we in part responsible? Look at our casebooks, listen to our classroom discussions! Traditional doctrinal analysis is alive, well, and I suspect dominant. Economic analysis “lite” has crept in, but attention to empirical methods, much less data on context or consequences, is scant. I suspect that even those of us who assign “law & society” contracts casebooks, like the ones edited by Macaulay and Deborah Post, still devote the bulk of class time to doctrinal analysis.
Perhaps this must be. Perhaps doctrinal analysis is our discipline’s unique identifier and must be taught first because it is foundational; perhaps we need to train litigators to understand the elements of a claim for breach; perhaps there is some utility in using the same basic case method in all 1L courses; or perhaps we are simply boxed in by student expectations, bar examiners, tradition, or confusion about what else to do?
Although there certainly are barriers to changing what and how we teach, I wonder if the core problem is that the work that needs to be done is profoundly interdisciplinary, challenging, and time-consuming. Many of us lack the skills to do it alone, and the scholarship, promotion standards, and instructional traditions at many law schools still make collaborations difficult.
Contracts teachers may alert law students to Macaulay’s insights, but I don’t think we give students sufficient tools to help clients and or work effectively on big systemic problems. Stewart might say that’s because we kinda like the mess the way it is.
[Posted, on Kate O'Neill's behalf, by JT]
Tuesday, August 20, 2013
This is the second in a series of posts in our online symposium on the Contracts Scholarship of Stewart Macaulay. More about the online symposium can be found here. More information about this week's guest bloggers can be found here.
Alan Hyde is Distinguished Professor and Sidney Reitman Scholar at Rutgers University School of Law, Newark, where he writes mostly about labor, employment, and immigration law.
Stewart Macaulay, System Builder
I’ve often wondered whether Stewart Macaulay would have had even more influence if he had used his social science research into business practice to construct theories and systems. In most of his writing, Stewart used empirical research to debunk. Often, there is a specific target. For example, Stewart will take on the idea that business professionals want to be sure that the documents they sign constitute contracts that will be enforceable as such in court. As everyone knows (I hope), Stewart’s research showed, so long ago, that people who did deals cared little about formal enforceability. My impression is that most American contracts teachers know this, and ignore it in their actual teaching practice. The typical contracts class probably spends as much time today on the line between unenforceable agreement, and enforceable contract, as it did before Stewart began writing, or was born.
As a public service, I have synthesized the following Counterstatement (First) of Actual US Contract Law in Action, as Given by the Dealmakers of the US, Under the Interpretation of Stewart Macaulay (Tentative Draft No.1). Casebooks may now cite it—I grant permission-- as an alternative approach (though with precisely the same claim to legal authority as the product of that Institute in Philadelphia, the name of which I do not choose to recall, that is so often treated by contracts teachers today as if it were the Civil Code). Authors can argue with it. For sometimes it takes a system to beat a system. For convenience, I will synthesize this Counterstatement from Stewart’s fabulous casebook (with Kidwell, Whitford, Braucher, and sometimes others), Contracts: Law in Action, because I teach from it every year and thus get the benefit of hearing Stewart’s voice in my head as I teach.
Counterstatement (First) of Actual US Contract Law . . .
Chapter One: Remedies. [Since this is a Stewart Macaulay Counterstatement of Actual US Contract Law, it naturally begins with Remedies]
Section 1: Remedies expected and demanded for failures to meet promises shall reflect the expectations of the parties based on the norms of their industry, and their sense of fairness. Remedies shall not depend on technicalities of formal enforceability as discussed in Chapter Two of this Counterstatement, and in no case shall refer to decisions of courts of law except insofar as these have been incorporated into business norms, which, if parties are rational, would be never. For example, if a machine sold doesn’t work, “this is not something any lawyer could handle without putting you [Seller] out of business. This must be handled on a business basis by a salesperson and the person who bought the machine. We don’t look for legal loopholes to avoid obligations like this. After all, you are selling reliability and your reputation gets around.”
Section 2: Buyer’s cancellation of an order
- A Buyer under a formal or informal arrangement for the sale of goods, whether or not a law court would find it to be a “contract,” may cancel an order when its needs have changed.
- In such a case, the Buyer shall be liable to the Seller for cancellation costs, defined as expenses incurred by the Seller that have been turned to waste by Buyer’s cancellation. Such expenses include completed product scrapped or unsellable after Buyer’s cancellation, and raw materials purchased in order to fulfill Buyer’s order but that cannot be salvaged.
- A seller that sues a cancelling Buyer for profits it thinks it would have made from Buyer’s purchase is probably nuts, especially where that Buyer is a consumer. Such a Seller that sues for lost profits can hardly expect people to continue to deal with it.
- Lawyers can call cancellation of an order “breach of contract,” if they like, but that doesn’t mean that their clients will agree with this characterization.
- On notification by Seller that it is unable to fulfill Buyer’s order, Buyer may purchase any reasonable substitute and bill Seller for the difference.
- If Seller is going to be late, it should try to work things out with the Buyer. If Buyer had enough notice that the Seller would be late, and didn’t do anything to protect itself, nobody is going to give Buyer any damages.
Section 4: Miscellaneous remedies
- All parties understand that failure to keep your word in business is likely to result in people saying bad things about your reputation.
- When things go wrong, try to work things out with your contractual partner. This probably means keeping the lawyers out. “If business had to be done by lawyers as buyers and sellers, the economy would stop. No one would buy or sell anything; they’d just negotiate forever.”
- The party that drafts the documents will probably disclaim any liability, in vague, illegible gobbledy-gook, and courts that are there to protect wealth and privilege will probably let them get away with it, so really all this study of remedies is somewhat beside the point.
Chapter Two: Enforceability [like you care, anyway]
Section 5: Enforceability of promises and arrangements made in family settings
Courts should not hesitate to enforce promises made by one family member to another, if the situation permits the court to play a useful role in sorting things out and restoring harmony, which is rare.
Section 6: Contract formation in general
- Honest people keep their promises without worrying about any technicalities of contract formation. The so-called law of offer-and-acceptance is just a bunch of loopholes that lawyers use to get people out from promises that they plainly made but now feel like getting out of.
- When the parties’ documents do not appear to create what courts think is an enforceable contract, for example by reserving in one party such freedom of action as to raise the question whether it is even committing to anything, try to imagine that maybe they didn’t intend judicial enforcement, preferring to work things out.
- The idea that people have no commitments to each other, and then, after one magic moment (called contract formation), do, is just magical thinking. People should act like moral adults and work out the issues between them, without taking refuge in legal mumbo-jumbo, which is nearly always a very hostile step to take and interpreted by others as such.
Section 7: Consideration
There is no such doctrine. A plaintiff who seeks specific performance of a contract to sell valuable real estate in consideration of one peppercorn (tendered) has a great deal of explaining to do.
Section 8. Excuse.
If you owe $50,000 to a bank, and can’t pay, you are in trouble. But if you owe $50 million to a bank, and can’t pay, the bank is in trouble.
You get the idea, anyway. It’s time for Stewart Macaulay fans to move beyond mere debunking. That Institute in Philadelphia should support the Counterstatement (First) of Actual US Contract Law in Action, as Given by the Dealmakers of the US, Under the Interpretation of Stewart Macaulay. But who should be Chief Reporter?
[Posted, on Alan Hyde's behalf, by JT]
Monday, August 19, 2013
This is the first in a series of posts in our online symposium on the Contracts Scholarship of Stewart Macaulay. More about the online symposium can be found here. More information about this week's guest bloggers can be found here.
Jay Feinman is Distinguished Professor of Law at Rutgers School of Law‒Camden.
My contribution to Revisiting the Contracts Scholarship of Stewart Macaulay: On the Empirical and the Lyrical is a chapter entitled “Ambition and Humility in Contract Law.” The chapter focuses on several of Macaulay’s articles in the 1960s in which he presented an organization of the fundamental policies underlying contract law, the structures through which contract law acts, and some policies of the legal system that influence the fundamental and structural policies. The organization encapsulates in a remarkable 2x2 matrix the essential issues of contract law.
Here is the matrix, which separates the substantive policies that contract law serves (market and other-than-market goals) from the ways in which the legal system can realize those goals (through rules or case-by-case adjudication). (As Macaulay recognizes, the elements of the matrix are actually ends of continua rather than discrete categories.)
Generalizing approach (‘rules’)
social (or economic) planning policy
Particularizing approach (‘case-by-case’)
Macaulay’s organization clearly and powerfully expresses the underpinnings and operations of the field. For mainstream scholars, the identification of policies and approaches provides a framework that clarifies analysis in legislation, adjudication, and scholarship. But the matrix also contains the seeds of a critique that demonstrated that contract law is at best badly confused and at worst incoherent and largely ineffective. In that way, Macaulay’s work contributed to critical legal studies’ account of private law through its influence on Duncan Kennedy’s monumental “Form and Substance In Private Law Adjudication,” 89 Harv. L. Rev. 1685 (1976) and other works.
For contract law, the market is the primary social institution, so market goals predominate. Macaulay’s framing of market-promoting goals as primary and market-correcting goals as secondary correctly states the customary objectives of contract law as ambition tempered with humility. But that framing makes apparent why contract law needs to temper its ambition of serving the market with a large dose of humility.
First, the conflicting market and non-market goals need to be balanced, and the measures for doing so are controversial. The case law and literature offer a variety of mechanisms for carrying out this balancing. Courts employ different tropes including avoidance by doctrinal formalism, casual policy analysis, and ad hoc paternalism. The Restatement Second frequently lists factors to be balanced without specifying the techniques of balancing. Economic analysis aims for efficient results, variously defined and sought. In his later reflections on the systematic presentation of contract law policies, Macaulay recognized the inadequacy of these efforts and the difficulty, perhaps impossibility of this balancing process. There he entitles the matrix “The Contradictions of Contract Law” and comments that contract law “inconsistently rests on policies that both promote the market and those that attempt to blunt it.” Macaulay, “Klein and the Contradictions of Corporate Law, 2 Berkeley Bus. L. J. 119 (2005).
Second, the hierarchy and separation between market and non-market goals needs to be established in practice. Consider the choice between a rule-oriented market functioning policy and a case-by-case transactional policy. One of the substantive contract policies Macaulay identifies is self-reliance. In the conception of the market as private, individual, and self-actuating, self-reliance is crucial. Macaulay writes of promoting self-reliance by encouraging or requiring parties to look out for themselves, in a world in which the law will rigidly enforce apparent bargains they have made, through a market-functioning or transactional policy.
But implicit in this construction is the illogic of simply promoting the market by promoting self-reliance through a body of contract law that rewards initiative and punishes dependence. Instead, the law can further self-reliance in either of two opposite ways—by creating a minimal body of contract law that puts parties at risk or an aggressively interventionist body of law that provides parties with security. A body of contract that provides relief from one’s ill-informed or ill-fated promises encourages self-reliant action by assuring that the consequences of action will not be too severe. The risk of intervention or non-intervention in this way protects all economic actors, as all are potentially subject to bad decisions or bad luck, although the weak probably more so than the strong.
Third, as the theoretical conflict about self-reliance illustrates, it is problematic even to attempt to define market and non-market goals as separate. Inherent in the separation is the conception that market goals involve the facilitation of private activity, a process that is distinct from the imposition of public values such as redressing inequality. Private activity is fundamentally individual, whereas public goals are collective. Courts in private law cases are primarily a forum for the adjudication of private disputes; legislatures are the arena in which public goals are primarily enunciated. And so on.
But these dichotomies are exaggerated. There is no institution of the market separate from and preexisting non-market activity, just as there is no private law not constituted by public values. The exchange of goods may be a private activity, but the exchange of goods that the law has made the subject of property and which exchange is enforceable by law is an essentially public activity. Law constitutes the market for reasons of the public good, so supporting the market through contract law is only another way of advancing the public good, and not a particularly distinct way at that.
Because the market is not distinctively private, the hierarchy of market goals and the need for self-reliance in the service of those goals are not evident. The justification for contract law and its rules must rest elsewhere than on a claim that the market is distinctive and distinctively important. And that is a claim that is assumed but seldom justified in the case law or literature. Part of the power of Macaulay’s organization is the way in which it makes clear the great defects of contract law’s ambition.
[Posted, on Jay Feinman's behalf, by JT]
When I started graduate school in 1986, people were saying that the early 90s were going to be a great time for newly minted history Ph.D.s. Universities had exploded in the 60s, and a lot of tenured faculty members were due to retire. There were going to be a lot of openings in a lot of fields. And of course, none of us graduate students were worried in any case because we were young and indestructable -- all brilliant and all certain to continue to be at the top of our fields.
But the people who were hired in the 60s didn't retire, and many of those who did retire were not replaced or were replaced in non-traditional fields. The year I got my Ph.D. (1993) ended up being pretty dismal for newly minted Ph.D.s, and I never found a tenure-track job in history. I never came close. I was on the market for five years and never even got an on-campus interview for a tenure track job at any of the hundreds of universities, colleges, technical colleges and private high schools to which I applied.
When I tried repeatedly and failed repeatedly to get a job teaching history, there were structural problems with gradaute programs in history. Lots of programs were admitting far too many students. They were doing so because gradaute students were a cheap labor supply for teaching (or T.A.ing) undergraduate courses and because faculty members wanted to have graduate students to work with. History departments wanted to develop their Ph.D. programs because that enhanced the reputation of the program and of the university. But there weren't enough jobs, and history programs were not really training people to get jobs, since graduate students were either taking obscure upper-level courses or were working on their far more obscure dissertations that they were hoping to publish as scholarly monographs that only libraries would buy and only other professional historians in their narrow sub-field would read. That remains the model for doctoral programs in history, and the model remains broken. I have no idea why the typical history doctoral student in this country spends at least five years working on a book that almost nobody will read when they could just as easily devote their time to writing 3-5 historical essays of publishable quality which, when published, will eventually be in a database where they will be full-text searchable and actually of use to other scholars and laypeople alike. Harumph!
Contrast that with the feverish if not frenzied innovation that is currently underway in the legal academy. Schools are experimenting in every imaginable way -- reducing faculty and administrative staff, decreasing class size, and most importantly, adjusting the curriculum to better prepare today's students so that they can pass the bar and also be ready to start practice in a legal environment where more seasoned lawyers have very little time to train new attorneys. Those who criticize law schools for being slow to react to the new market for attorneys need some context. The legal academy has been incredibly responsive, and the only questions are whether they have resopnded in the right ways and whether they have correctly identified as either long-term or merely cyclical the problems in the market for attorneys.
My Law School (Valparaiso) is no different, but it is unique. That is, we have been scrambling to figure out better ways to serve our students (just like everyone else), but we have come up with a new curriculum that is unlike any other that I have heard about. On the blog, I just want to talk about how we are transforming the contracts course, but there is a lot more to our new curriculum.
I have already blogged about our LibGuide, which is being curated by our librarian, Jesse Bowman (pictured). I will have a great deal more to say about the LibGuide as it continues to develop, but today I want to talk about our new seven-week minimesters.
Today is the first day of our first minimester. We will be teaching a two-credit Contracts I course for seven weeks. We will then have a break for exams, to be followed by another two-credit, seven-week course, Contracts II. One purpose of the minimester system is to enable us to assess our students and give them meaningful feedback as early as possible in the course of their legal education. So, rather than having a huge exam at the end of the semester, with very little sense of their chances of success on the exam, our students will have frequent assessment throughout the minimester and an exam at the end. The final exam will still be important, but it will only account for part of their grade in a two-credit course, and they should have some notice, based on assessment throughout the semester of where they likely will fall relative to their peers. Since no minimester course counts for more than two-credits, we will not have the phenomenon that sometimes occurs at schools where Property or Civ. Pro are five-credit, one-semester courses, and students neglect other courses in favor of hunting the semester's big game.
At the same time, my doctrinal colleagues and I are working closely with our skills faculty (and there is a great deal of overlap) to coordinate exercises and assessments in doctrinal courses with the subject-matter of our skills courses. Those too have been re-conceived and re-configured from the ground up based on our assessment of where our students are in terms of their preparation for law school and what they need to get them ready for practice.
I will be blogging throughout the semester about the LibGuide and the minimester system. I am really excited about this experiment and eager to see how it works for our students.
Thursday, August 15, 2013
The WSJ had an interesting article about the effects of noncompete agreements on entrepreneurship. The article quotes contracts prof Alan Hyde of Rutgers University School of Law who notes that while non-competes benefit employers, jurisdictions that enforce them have "slower growth, fewer start-ups, fewer patents and the loss of brains to jurisdictions that don't enforce" them. In California, these non-competes are generally not enforceable unless they are in conjunction with the sale of a business or partnership. Confidentiality agreements, on the other hand, are enforceable. That's why it's puzzling that those who favor noncompetes argue that they are necessary to protect valuable trade secrets. Since most employees have to sign confidentiality agreements anyway as part of their employment - and would likely be prevented from using company trade secrets under state law even if they didn't - it seems that noncompetes are providing a different function which is to make sure that employees, well, don't compete. It's not surprise then that non-competes would have an adverse effect on innovation and entrepreneurship. Most would-be entrepreneurs don't relish the thought of an expensive lawsuit with a former employer. The article states that employers are less likely to bring trade secret misappropriation claims than they are non-compete ones because they are more costly. I think their "costliness" is why confidentiality agreements are a more desirable mechanism for protecting trade secrets than non-competes. Many believe that one of the reasons Silicon Valley exists in California - and not Florida, for example - is because non-competes are not enforceable. I think this is definitely one factor (other reasons include the awesome computer science and engineering departments at UC Berkeley and Stanford, immigration, proximity to the Pacific Rim, the less formal cultural environment in California generally, and a type of historical path dependence).
Friday, August 9, 2013
This year, my colleauges at the Valparaiso University Law School and I, with the help of our librarian, Jeese Bowman (pictured), are teaching with the aid of this LibGuide. The LibGuide contains all of the cases that we will use in our courses, plus links to Restatement, UCC and CISG sections, as well as tabs through which students can find links to excercises, past exams and model answers, study guides, blog posts and other information that might prove useful to our students.
The move to the LibGuide was motivated by a number of considerations. First, we have all used different casebooks and find a great deal to praise and admire in all of them. However, no single casebook can be perfect for each contracts professor's individual needs. I have a roster of cases that I think work best for the material I want to convey to my students. No single casebook includes all of the cases I want to use, and the casebook authors sometimes edit their cases slightly differently than how I would edit them. My colleagues and I edited the cases posted on the LibGuide to suit our teaching needs, and if we differ, we can always put up multiple versions.
Second, even if I could find the perfect casebook that had every single case I want to teach and all the relevant ancillary materials, I still could not justify the expense to my students. Casebook prices are simply too high, since we can deliver the same materials through the LibGuides. I should note that, because I ban laptops and other technology from my classroom, I do require that the students buy xeroxed copies of the edited cases. That will run them $10 a piece for the first seven-week minimester.
Yup! That's not a typo! We are teaching contracts in two, two-credit, seven-week "minimesters," a topic about which I will have a lot to say in future posts.
The LibGuide is still a work in progress. Each week, I send Jesse more materials to add to the LibGuide. This is another advantage of the LibGuide over print course materials. It is easily expanded; easily revised; easily updated.
The final advantage of the LibGuide is (dare I say it?) . . . LibGuides are fun. Ask any librarian! And believe you me, librarians know how to have fun. They are fun for the same reason that this blog is fun. You can follow links that interest you, and they often take you to unexpected and illuminating places. We hope that our LibGuide will grow and prosper and that it will provide a portal through which our students can wander cautiously, tentatively until [whoosh!] they fall down a rabbit hole and emerge in the Wonderland of contract law.