Tuesday, February 11, 2014
If you applied for credit, but got turned down with the reason “Your worst bankcard or revolving account status is delinquent or derogatory,” would you understand what that means?
Probably not, at least not for sure. Under the Dodd-Frank Act, lenders are required to send applicants written explanations of why they are denied credit outright or given less favorable terms than those for which they applied. This requirement is aimed at helping consumers understand what they need to do to improve their credit scores. But many of the explanations provided to consumers are drafted by the credit score developers themselves and use confusing terminology or are too short to be useful.
What’s worse: lenders are aware of this problem, but apparently choose to do nothing about it. According to one survey, 75% of lenders “worry” that consumers don’t understand the disclosure notices. Only 10% of lenders said that their customers understand reason codes “well.” This problem is, of course, not isolated to the credit industry, but also prevails in the health care industry and beyond.
Contracts law is not helpful for consumers in this respect either: there is a clear duty to read and understand contracts, even if they are written in a language (typically English) that one does not understand. Perhaps that’s why only 10% of lenders bother to translate documents into Spanish with the effect that many Spanish-speaking monolingual applicants are unable to read the explanations at all.
Some companies offer websites offering “translations” into easier-to-understand and longer explanations of the codes behind credit refusals and what one can do to improve credit. There’s a website for almost anything these days, but for that solution to be sufficiently helpful in the lending context, it must be presumed that these websites are relatively easy to find, free or inexpensive, and easy to use; all quite far from always the case.
As law professors, most of us probably require our students to write in clear, plain English. We don’t take it lightly if they write incomprehensible sentences. The desirability of writing well should be obvious in corporate as well as academic contexts.
Monday, December 2, 2013
We are delighted to introduce the latest of our new contributors, Michael P. Malloy (pictured), Distinguished Professor of Law of the University at the Pacific's McGeorge School of Law. Professor Malloy's posts will generally fall into the rubric "Global K" and will concentrate mainly on transnational contract law, including but not limited to CISG developments (e.g., cases, accessions, interpretations, secondary literature).
An internationally recognized expert on bank regulation and on economic sanctions, Michael P. Malloy received his J.D. from the University of Pennsylvania and his Ph.D. from Georgetown University. SEC enforcer, bank regulator, economic sanctions architect, Dr. Malloy has authored or edited over 100 books and book-length supplements. He is the co-author of Global Issues in Contract Law (West 2007), and the author of Anatomy of a Meltdown (Aspen 2010), a study of the current global financial crisis.
A listing of Professor Malloy's representative publications can be found here.
A more detailed biography can be found here.
Wednesday, November 27, 2013
Today’s mini-review is of Dysfunctional Contracts and the Laws and Practices that Enable Them: An Empirical Analysis, 46 Ind. L. Rev. 797 (2013), by Debra Pogrund Stark, Dr. Jessica M. Choplin, and Eileen Linnabery.
Apparently, many real estate contracts limit buyers’ remedies to return of earnest money, and many courts enforce such limitations. The problem is that if a buyer’s only remedy for breach of contract is the return of earnest money, then the seller hasn’t really bound himself to anything. If the seller doesn’t want to perform, all he has to do is return the earnest money. This encourages the kind of strategic behavior that contracts are supposed to prevent. For example, a seller may agree to sell real estate, but if the property's market value increases, the seller can breach the contract, return the earnest money, and sell the property to a second buyer at a higher price. The seller essentially gets to speculate on the buyer's dime.
Further, many buyers don’t understand the meaning of these limitation of remedy clauses, even if they read them. The authors conducted a study which suggests more than a third of people who read a limitation of remedies clause fail to comprehend that their remedies have been limited. The authors use this finding to challenge some courts’ reasoning that buyers knowingly consent to the limitation of their remedies.
The authors offer several reforms, and two are particularly interesting: (1) enacting legislation that prohibits limiting buyers’ remedies to the return of earnest money, and (2) replacing the exacting standards of unconscionability with a "reasonable limitation of remedy” test similar to that used in evaluating liquidated damages.
This article is state-of-the-art in its use of empirical research to aid legal analysis. It not only provides interesting data, but it also marshals that data against flimsy intuitive arguments still common wherever people talk about contracts.
[Image by thinkpanama]
Sunday, November 24, 2013
In California and a dozen other states, it is becoming increasingly popular to have solar panels installed on private properties to reduce household electric bills. In addition to potentially significant energy savings, solar panels also help private parties mitigate climate change at the very local level. However, solar panels are expensive. Instead of buying them outright (an average-size residential system costs about $35,000), many consumers choose to lease the systems instead. This option typically entails no upfront costs and, as many solar panel providers tout, “low monthly rental fees” that are supposedly offset by utility bills savings and the avoidance of maintenance and upgrading otherwise associated with individually owned systems.
So is this a contractual win-win situation? Not necessarily so. Solar panel leases typically comprise terms that may either surprise the unwary consumer or turn out to be more favorable to the solar panel owners than the homeowners in the long run.
For example, state or federal tax benefits, renewable energy credits sold to companies to offset carbon emissions, and state or utility cash incentives go to the solar panel owners and thus not the leasing homeowners. Some contracts contain escalator clauses increasing the initially low lease payments over time. What is also often left unsaid, at least upon initial conversations with solar panel providers, is that if a household already has low electricity bills, leases structured as is often typically the case may not pay at all or be financially beneficial enough to justify the risks inherently involved in transactions between consumers and sophisticated energy company for something as new and technologically risky as solar electric panels. This risk is enhanced by the fact that the contract duration used by many California solar panel providers is no less than twenty years. Much could happen over two decades in relation to both the technical and financial aspects of these types of contracts: technology could (and likely will) change so that in the years to come, more effective systems are developed that could have produced even greater benefits for homeowners then tied to contracts for “old” technology. Utilities could reduce their electric rates so that the leases are not as commercially viable anymore. State and federal subsidies and other rules could change the entire energy field. Could consumers down the road prevail on an argument that imposing contracts of such durations in field so rapidly evolving is sufficiently draconian to be unconscionable? Probably not.
In California as in many - if not most - other states, unconscionability consists of both procedural and substantive elements and are evaluated on a sliding scale. The procedural element addresses the circumstances of contract negotiation and formation, focusing on oppression or surprise due to, among other factors, unequal bargaining power and the lack of meaningful choice. Substantive unconscionability pertains to the fairness of the actual terms of an agreement and to assessments of whether these terms are overly harsh or one-sided. However, substantive unconscionability “turns not only on a ‘one-sided’ result, but also on an absence of ‘justification’ for it.” Several problems thus abound for consumers attempting this argument. First, no reasonable argument can be made that leasing solar panels rises to the level of “needed services” or “life necessities” that even perceivably liberal California courts have called for in connection with the lack-of-choice prong. Second, consumer choice does exist here: homeowners could, for example, simply not rent the panels if not sure of the ultimate advantageousness of the deal. They could buy the systems outright instead, or ask their utility providers if it is possible to increase the percentage of household power purchased from renewable sources if interested in acting on climate change. Substantively, twenty years is a long time, but far from uncommon in contractual contexts. Finally, the solar panel companies have an arguably justified cause for requiring a twenty-year duration, namely installing the equipment at no upfront payment, servicing it over years, and the chance to recover a good return on it.
Solar power is one of many solutions that could prove viable in mitigating climate change. In a nation with as much annual sunshine as the United States, solar power will hopefully quickly become much more prevalent than is currently the case and help us as a nation become more energy independent. Consumers may be well able to obtain current and significant energy savings if operating solar systems on their properties. But consumers should realize that twenty-year leases constitute a significant legal commitment that will be difficult, if not impossible, to avoid if better technological solutions should be discovered in the next years to come.
Myanna Dellinger, JD, MA, Assistant Professor of Law, Western State College of Law
I want to thank all the experts who participated in last week's symposium on WRAP CONTRACTS: FOUNDATIONS AND RAMIFICATIONS . They raised a variety of issues and their insights were thoughtful, varied and very much appreciated. I also want to thank Jeremy Telman for organizing the symposium and inviting the participants.
Today, I’d like to respond to the posts by Michael Rustad, Eric Zacks and Theresa Amato. Eric Zacks emphasizes the effect that form has on users, namely that the form discourages users from reviewing terms. Zack notes that contract form may be used to appeal to the adjudicator rather than simply to elicit desired conduct from the user and that forms that elicit express assent - such as “click” agreements - help the drafter by aiding “counterfactual analysis surrounding the ‘explicit assent’” issue. In other words, drafters may use contract forms to manipulate adjudicator’s decisionmaking and not necessarily to get users to act a certain way. (This is a topic with which Zachs is familiar, having just written a terrific article on the different ways that drafters use form and wording to manipulate adjudicators’ cognitive biases).
Both Michael Rustad and Theresa Amato focus, not on form, but on the substance of wrap contracts – the rights deleting terms that contract form hides so well. Amato comes up with an alternative term to wrap contracts – online asbestos – to highlight the not-immediately-visible damage caused by these terms. As a consumer advocate and an expert on how to get messages to the general public, Amato understands the need to overcome the inertia of the masses by communicating the harms in a way that can drown out the siren call of the corporate marketing masters. So yes, a stronger term may be required to jolt consumers out of their complacency although the real challenge will be getting heard and beating the marketing masters at their own game.
Michael Rustad notes that my doctrinal solutions fall short of resolving the problem of predispute mandatory arbitration and anti-class action waivers. He’s right, of course, although I think reconceptualizing unconscionability in the way I propose (by presuming unconscionability with certain terms unless alternative terms exist or the legislature expressly permits the term) would reduce the prevalence of undesirable terms including mandatory arbitration and class-action waivers. Rustad, who has considerable expertise on this subject, mentions that many European countries are further along than we are in dealing with unfair terms. Many of those jurisdictions, however, also have legislation which limits class actions, tort suits or damages awards. In addition, they don’t have the same culture of litigation that we do in this country. Wrap contracts have their legitimate uses, such as deterring opportunistic consumer behavior and enabling companies to assess and limit business risks. In order to succeed, any proposal barring contract terms or the enforceability of wrap contracts must also consider those legitimate uses.
I believe there is a place for wrap contracts and boilerplate generally but their legitimate uses are currently outweighed by illegitimate abuses of powers. Wrap contract doctrine has moved too far away from the primary objective of contract law – to enforce the reasonable expectations of the parties-- and my solutions were an attempt to move the train back on track. My focus was on doctrinal solutions but the problems raised by wrap contracts are complex and my solutions do not foreclose or reject legislative ones. I’m a contracts prof, so my focus naturally will be on contract law solutions (if you have a hammer, everything looks like a nail, I guess). Doctrinal responses have the advantage of flexibility and may be better adapted to dynamic environments than legislation which can be quickly outdated when it comes to technology or business practices borne in a global marketplace.
Admittedly, when it comes to wrap contracts, doctrinal flexibility hasn’t really worked in favor of consumers, but that only makes it more important to keep trying to sway judicial opinion. I know there are those who question whether judges read legal scholarship, but I know that there are many judges (and clerks) who do. The case law in this area has spiraled out of control so that it makes no sense to the average “reasonable person” and has opened the door to the use of wrap contracts that exploit consumer vulnerabilities.
My book was not intended as a clarion call to rid the world of all wrap contracts; rather, it was intended to point out how much damage wrap contracts have done, how much more they can do, and to provide suggestions on how to rein them in and use them in a socially beneficial manner.
I’m grateful to have had the opportunity to hear the insightful comments of last week’s highly respected line-up of experts and to share my thoughts with blog readers.
Thursday, November 21, 2013
It’s my pleasure to respond to Tuesday’s posts from Juliet Moringiello and Woodrow Hartzog. Juliet Moringiello asks whether wrap contracts are different enough to warrant different terminology. Moringiello’s knowledge in this area of law is both wide and deep and her article (Signals, Assent and Internet Contracting, 57 Rutgers L. Rev. 1307) greatly informed my thinking on the signaling effects of wrap contracts. The early electronic contracting cases involved old- school clickwraps where the terms were presented alongside the check box and their signaling effects were much stronger than browsewraps. Nowadays, the more common form of ‘wrap is the “multi-wrap,” such as that employed by Facebook and Google with a check or click required to manifest consent but the terms visible only by clicking on a hyperlink. Because they are everywhere, and have become seamlessly integrated onto websites, consumers don’t even see them. Moringiello writes that today’s 25-year old is more accustomed to clicking agree than signing a contract. I think that’s true and it’s that ubiquity which diminishes their signaling effects. Because we are all clicking constantly, we fail to realize the significance of doing so. It’s not the act alone that should matter, but the awareness of what the act means. I’m willing to bet that even among the savvy readers of this blog, none has read or even noticed every wrap agreement agreed to in the past week alone. I wouldn’t have made such a bold statement eight years ago.
Woodrow Hartzog provides a different angle on the wrap contract mess by looking at how they control and regulate online speech. With a few exceptions, most online speech happens on private websites that are governed by “codes of conduct.” In my book, I note that the power that drafting companies have over the way they present their contracts should create a responsibility to exercise that power reasonably. Hartzog expands upon this idea and provides terrific examples of how companies might indicate “specific assent” which underscore just how much more companies could be doing to heighten user awareness. For example, he explains how a website’s privacy settings (e.g. “only friends” or authorized “followers”) could be used to enable a user to specifically assent to certain uses. (His example is a much more creative way to elicit specific assent than the example of multiple clicking which I use in my book which is not surprising given his previous work in this area).
Hartzog also explains how wrap contracts that incorporate community guidelines may also benefit users by encouraging civil behavior and providing the company with a way to regulate conduct and curb hate speech and revenge porn. I made a similar point in this article. I am, however, skeptical that community guidelines will be used in this way without some legal carrot or stick, such as tort or contract liability. (Generally, these types of policies are viewed in a one-sided manner, enforceable as contracts against the user but not binding against the company). On the contrary, the law – in the form of the Communications Decency Act, section 230- provides website with immunity from liability for content posted by third parties. Some companies, such as Facebook, Twitter or Google, have a public image to maintain and will use their discretionary power under these policies to protect that image. But the sites where bad stuff really happens– the revenge porn and trash talking sites – have no reason to curb bad behavior since their livelihood depends upon it. And in some cases, the company uses the discretionary power that a wrap contract allocates to it to stifle speech or conduct that the website doesn’t like. A recent example involves Yelp, the online consumer review company that is suing a user for posting positive reviews about itself. Yelp claims that the positive reviews are fake and is suing the user because posting fake reviews violates its wrap contract. What’s troubling about the lawsuit, however, is that (i) Yelp almost never sues its users, even those who post fake bad reviews, and (ii) the user it is suing is a law firm that earlier, had sued Yelp in small claims court for coercing it into buying advertising. To make matters worse, the law firm’s initial victory against Yelp (where the court compared Yelp’s sales tactics to extortion by the Mafia) for $2,700 was overturned on appeal. The reason? Under the terms of Yelp’s wrap contract, the law firm was required to arbitrate all claims. The law firm claims that arbitration would cost it from $4,000-$5,000.
I agree with Hartzog that wrap contracts have the potential to shape behavior in ways that benefit users, but most companies will need some sort of legal incentive or prod to actually employ them in that way.
Wednesday, November 20, 2013
I’m thrilled to have the opportunity this week to engage with an outstanding line-up of scholars on the topic of wrap contracts. In today’s post, I will respond to posts by Ryan Calo and Miriam Cherry.
Miriam Cherry observes that wrap contracts raise much of the same issues raised by contracts of adhesion and my book canvasses those similarities. But they also raise different issues, primarily because their digital form makes it easier for companies to abuse and for consumers to ignore and also because courts don’t adequately recognize how form affects the behavior of both parties. The difference in form leads to a difference of degree so that it’s virtually impossible (pun intended) to engage in any online activity without agreeing to the terms of an unreadable wrap contract. My proposals aim to respond to the ways in which form affects perception to get us closer to the underlying objective of contract law – to fulfill the reasonable expectations of the parties. The form of wrap contracts raises issues that are unique to them and consequently, call for different solutions - solutions that respond to the problem of form.
Ryan Calo focuses on the role of technological design in contract formation and enforcement which is not surprising given his extensive expertise and research in this area regarding effective notice. The way that technological design of contracts affects parties’ behavior is underappreciated in the literature on contracts of adhesion. Calo observes that the potential for mischief through the use of standard terms is even worse than the examples I give in my book (this is a great relief since I am often accused of exaggerating the dangers of wrap contracts). As Calo notes here and elsewhere, the digital contracting environment has made it easier for companies to understand the consumer and so manipulate the consumer’s perceptions and behavior. I agree and would like to respond to his wish that I had addressed the argument made by Scott Peppet and others (who I’ll call “digital solutionists”) who claim that this very environment might aid the consumer and that increased digitalization could ameliorate the limits of freedom of contract. I agree with the first part, but disagree with the second. Greater access to information and the digital landscape may, in many cases, aid consumers who can research products, announce their “likes” and dislikes, and tweet their dissatisfaction to attract the customer service departments of large companies. This shouldn’t, however, influence the discussion regarding freedom of contract. There is a distinction to be made between the product or service that is the subject of the contract and the terms of the contract itself. The former is salient to consumers and they will often research that information before they act. For a variety of reasons, including cognitive biases but also tricky design employed by companies, the latter is not. Anyway, comparing terms does no good if the terms are all the same – it’s the old fiction about “shopping for terms” reincarnated in digital form.
Even assuming that the current state of affairs changes and there is awareness and competition for contract terms, the consumer is already inundated with too much information online. Are we really going to impose a requirement or an expectation that they read through online reviews or download an app simply in order to understand the contract terms? Even if the reviews exist (which they may not for some products or companies) and even if they are accurate (which they may not be), they add a layer of complexity to consumer transactions which may hamper effective decision-making and aggravate cognitive biases. How much research is a consumer expected to do simply to be able to buy a product, bank or communicate online? And is that something we want as a society – wouldn’t this negatively impact productivity, increase transaction costs for the consumer, and muck up the wheels of commerce (and isn’t this why we tolerate standard form contracts in the first place, to improve productivity, reduce transaction costs and grease the wheels of commerce)?
Drafting companies have all the power in the digital contracting environment – they have the bargaining power of old school drafters of adhesive contracts but they also have the power to present the terms in a multitude of ways. They decide whether and how to attract user attention. They determine whether to use clickwraps, browsewraps, multi-wraps, graphics or sounds. They exercise that power in a way that meets very minimal legal requirements of notice. The onus is on the consumer to ferret out terms, chase down hyperlinks, understand dense legalese and reconcile conflicting language. Are we going to require even more of consumers, expecting them to “go beyond” the contract by reading online contract reviews and downloading the “compare contracts” app (assuming one exists)? Maybe digitalization or augmented reality will make it easier for consumers to compare terms --but it will likely make it more complicated especially when those terms are constantly changing thanks to modification at will provisions. Doesn’t it make more sense to require the company to draft the terms so they are easy to find and understand? There’s more to say about the digital solutionist view but I will leave that for another forum. For now, my response is that the digital solutionist view is actually part of the problem, rather than the solution because it, like wrap contract doctrine, demands nothing from drafting companies and creates more work for consumers, exacerbating the lopsided balance of burdens that currently exists.
Monday, November 18, 2013
A screwdriver can be used for turning screws and opening cans of paint. Or it can be used as a dagger in mortal prison combat. Likewise, a contract can “facilitate an efficient private ordering of society,” but it can also be “a means of social dominance and oppression.” Law professors should be quicker to tell new students about the shank-side of contracts.
That’s the gist of Teaching Contract Law: Introducing Students to a Critical Perspective Through Indentured Servitude and Sharecropper Contracts, 66 SMU L. Rev. 341 (2013), by Dr. Gregory Scott Crespi.
Crespi provides a sample lecture in which he tells of homeless English people becoming indentured servants and former slaves becoming sharecroppers. In both cases, contracts were used to bind people to functional slavery.
Crespi gives this lecture around the third class of the semester. He believes that informing students of such abusive contracts early in their legal educations allows them to bring a critical perspective to subsequent doctrinal studies and to consider the law’s context and unintended social consequences.
Dr. Crespi has done us several services by publishing this piece: (1) he has given us a brilliant lecture to use if we don’t feel like doing our own critical research; (2) he has kept it short, six printed pages, excluding footnotes; and (3) he has told us some important stories about abusive contracts.
But I wonder if Crespi’s approach is like teaching students to play tennis without a net? Does the first-semester 1L understand the intended consequences of the law well enough to opine on the unintended consequences? Students arrive at law school fluent in cynicism, but they have difficulty describing the relationship between well-established doctrines and the common good. So perhaps students should be encouraged to develop a critical perspective later, rather than sooner.
Using Crespi’s screwdriver analogy, imagine a master carpenter saying to his new apprentice, “The first thing about a screwdriver is that it turns screws. The second thing is that it can open a can of paint. The third thing is that it can be sharpened into a dagger and used to kill a man.” It’s a fascinating narrative, but is it apt for the apprentice? I’m inclined to think students need to know doctrine before they can criticize it and that giving new students the critical perspective too early might cause them to develop a distorted view of Contracts and the world.
Query the right view of Contracts and the world. If the professor think it’s more shanks than screwdrivers, perhaps the critical lesson should come early. I probably won’t be giving that lesson until at least class number four.
[Image by Xeni Jardin]
Sunday, November 17, 2013
The symposium marks the publication of Nancy Kim's Wrap Contracts: Foundations and Ramifications (Oxford UP 2013). Next wek, this blog will publish posts by experts from around the country commenting on Nancy's work. Here is Oxford's bullet point summary of the book's virtues:
- Explains why wrap contracts were created, how they have developed, and what this means for society
- Uses hypotheticals, cases, and real world examples
- Discusses court decisions with summary critiques
- Provides doctrinal solutions grounded in law and policy
- Defines and distinguishes different types of contract terms
- Includes actual wrap contract terms, flow charts, checklists and other visual aids to explain legal concepts
The following people will be adding their own thoughts and comments on the blog next week:
Ryan Calo is an assistant professor at the University of Washington School of Law. He researches the intersection of law and emerging technology, with an emphasis on robotics and the Internet. His work on drones, driverless cars, privacy, and other topics has appeared in law reviews and major news outlets, including the New York Times, the Wall Street Journal, and National Public Radio. Professor Calo has also testified before the full Judiciary Committee of the United States Senate.
Professor Calo serves on numerous advisory boards, including the Electronic Privacy Information Center (EPIC), the Electronic Frontier Foundation (EFF), the Future of Privacy Forum, and National Robotics Week. Professor Calo co-chairs the Robotics and Artificial Intelligence committee of the American Bar Association and is a member of the Executive Committee of the American Association of Law Schools (AALS) Section on Internet and Computer Law.
Professor Calo previously served as a director at the Stanford Law School Center for Internet and Society (CIS) where he remains an Affiliate Scholar. He also worked as an associate in the Washington, D.C. office of Covington & Burling LLP and clerked for the Honorable R. Guy Cole on the U.S. Court of Appeals for the Sixth Circuit. Prior to law school at the University of Michigan, Professor Calo investigated allegations of police misconduct in New York City.
Miriam A. Cherry is a visiting professor at the University of Missouri School of Law and a tneured professor law at Saint Louis University. Her scholarship is interdisciplinary and focuses on the intersection of technology and globalization with business, contract and employment law topics. In her recent work, Professor Cherry analyzes crowdfunding, markets for corporate social responsibility, virtual work and social entrepreneurship. Her articles will appear or have appeared in the Northwestern Law Review, Minnesota Law Review, Washington Law Review, Illinois Law Review,Georgia Law Review, Alabama Law Review, Maryland Law Review, and the Tulane Law Review, and U.C. Davis Law Review, among others.
Professor Cherry attended Dartmouth College and Harvard Law School, where she was a research assistant to Professor Martha Minow, the present dean. After graduation from law school, she clerked for Justice Roderick Ireland of the Supreme Judicial Court of Massachusetts and then for Judge Gerald Heaney of the U. S. Court of Appeals for the Eighth Circuit. In 2001, a transition to the private sector took Professor Cherry to the Boston firm of Foley Hoag LLP, where she practiced corporate law with an emphasis on mergers and acquisitions, securities compliance filings, venture capital and private debt financing. She was also associated with the firm of Berman, DeValerio & Pease, where she was involved in litigating several accounting fraud cases including those against former telecom giant WorldCom and Symbol Technologies, which resulted in a $139 million settlement.
Professor Cherry has been on the faculty or visited at a number of law schools, including the University of Georgia, University of the Pacific-McGeorge School of Law and Cumberland School of Law. In 2008, she was elected a member of the American Law Institute.
You can read some of Professor Cherry's scholarship on SSRN.
Woodrow Hartzog is an Assistant Professor at Samford University's Cumberland School of Law, which he has taught since 2011. Professor Hartzog writes in the area of privacy law, online communication, human-computer interaction, robotics, and contracts. His work has been or is scheduled to be published in scholarly publications such as the Columbia Law Review, California Law Review, and Michigan Law Review and popular publications such as The Atlantic and The Nation.
Before joining the faculty at Cumberland, Professor Hartzog worked as a trademark attorney at the United States Patent and Trademark Office in Alexandria, Virginia and as an associate attorney at Burr & Forman LLP in Birmingham, Alabama. He has also served as a clerk for the Electronic Privacy Information Center in Washington D.C. and was a Roy H. Park Fellow at the School of Journalism and Mass Communication at the University of North Carolina at Chapel Hill.
Professor Hartzog holds a Ph.D. in mass communication from the University of North Carolina at Chapel Hill, an LL.M. in intellectual property from the George Washington University Law School, a J.D. from the Cumberland School of Law at Samford University, and a B.A. from Samford University. He is an Affiliate Scholar at the Center for Internet and Society at Stanford Law School.
Recent and Forthcoming publications include:
Juliet Moringiello is a Professor at Widener University School of Law, where she regularly teaches Property, Sales, Secured Transactions, and Bankruptcy, and has taught seminars on Cities in Crisis and Electronic Commerce. From 2004 – 2010, she was the co-author, with William L. Reynolds, of the annual survey of electronic contracting law published in The Business Lawyer. She has recently published articles in the Maryland Law Review, the Wisconsin Law Review, the Fordham Law Review, and the Tulane Law Review. Prof. Moringiello has held several leadership positions in the American Bar Association Business Law Section, most recently in its Cyberspace Law Committee, and she is co-chair of the Uniform Commercial Code Committee of the Pennsylvania Bar Association Business Law Section.
Recent Publications Include:
- From Lord Coke to Internet Privacy: The Past, Present and Future of the Law of Electronic Contracting, 72 Maryland Law Review 452 (2013) (co-authored w/ William L Reynolds).
- (Mis)use of State Law in Bankruptcy: The Hanging Paragraph Story, 2012 Wisconsin Law Review 963 (2012).
- Specific Authorization to File Under Chapter 9: Lessons from Harrisburg, 32 California Bankruptcy Journal 237 (2012).
- Mortgage Modification, Equitable Subordination, and the Honest But Unfortunate Creditor, 79 Fordham L. Rev. 1599 (2011)
Recent Publications Include:
- SOFTWARE LICENSES: PRINCIPLES & PRACTICAL STRATEGIES (Oxford University Press, 2d ed., forthcoming 2013 )
- GLOBAL INTERNET LAW (HORNBOOK SERIES) (forthcoming 2013 )
- GLOBAL INTERNET LAW IN A NUTSHELL (2d ed., 2013)
- The Myth of A Value-Free Injury Law: Constitutive Injury Law as a Cultural Battleground, 107 NW. U. L. REV. (forthcoming 2013) (Book Review Esay of Marshall Shapo's An Injury Constitution, Oxford University Press 2012)
- Twenty-First Century Tort Theories: The Internalist/Externalist Debate, 88 INDIANA L.J. 419 (2013) (Fall 2012, Special Symposium Issue on Civil Recourse & Twenty-First Century Tort Theories with Posner, Calabresi, Goldberg, Zipursky, Chamallas and Robinette)
- Restorative Justice to Supplement Deterrence-Based Punishment: An Empirical Study and Theoretical Reconceptualization of the EPA's Power Plant Enforcement Initiative, 2000-2011, 65 OKLA. L. REV. 427 (2013)
Eric Zacks is an assistant professor of law at Wayne State University Law School. His recent scholarship focuses on the relevance of behavioral sciences to contract formation, breach, and enforcement. His work has been published in the University of Cincinnati Law Review, the University of Pennsylvania Journal of Business Law, and the Penn State Law Review, and his forthcoming article, Shame, Regret, and Contract Design, will be published in the Marquette Law Review.
In 2012 and 2013, Professor Zacks was voted Professor of the Year by the second- and third-year law students at Wayne. He teaches a variety of business law courses, including Corporate Finance, Mergers and Acquisitions, Securities Regulation, and Corporations, as well as a first-year Contracts course.
Prior to joining Wayne State, Professor Zacks was a partner in the corporate and securities department of Honigman Miller Schwartz and Cohn LLP, a Detroit law firm, with a practice focus on complex acquisitions and divestitures, debt and equity financings, and other aspects of corporate transactions. He received his J.D., magna cum laude, from Harvard Law School and his B.A., with high distinction, from the University of Michigan.
Recent Publications Include:
- "Shame, Regret, and Contract Design," 97 Marq. L. Rev. __ (forthcoming, 2013)
- "Contracting Blame," 15 U. Pa. J. Bus. L.. 169 (2012)
- "Unstacking the Deck? Contract Manipulation and Credit Card Accountability,"78 U. Cin. L. Rev. 1471 (2011)
- "Dismissing the Class: A Practical Approach to the Class Action Restriction on the Legal Services Corporation," 110 Penn St. L. Rev. 1 (2005) (with Joshua D. Blank) reprinted in Class Action Litigation and Limitations (Icfai University Press, 2008).
Monday, November 11, 2013
The ContractsProf Blog is delighted to welcome the following new contributors!
Professor Kenneth Ching (left) joined the faculty of the Regent University School of Law in 2011 and teaches Contracts and UCC 1. He was selected as the 2011-2012 1L Professor of the Year and the 2013 Law Faculty Scholar of the Year. Professor Ching’s scholarship focuses on legal theory. He has also published creative essays, poetry, and fiction.
Prior to teaching, Professor Ching practiced law in the areas of commercial litigation, trusts and estates litigation, and employment law. He has also litigated constitutional law issues.
His publications include:
Jeffrey L. Harrison (right) holds the Stephen C. O'Connell Chair at the University of Florida's Levin School of Law, where he has taught since 1983. He previously taught law at the University of Houston and economics at the University of North Carolina-Greensboro. He has held visiting position of the Universite du Pantheon-Sorbonne, the University of Texas, Leiden University and the University of North Carolina. Professor Harrison is the author of about a dozen books on monopsony, antitrust law, commercial regulation and deregulation and law and economics, as well as dozens of articles on everything from socioeconomic theory to French New Wave cinema.
Some of Professor Harrison's work is available on SSRN.
We welcome you both to the blog, and we look forward to seeing your posts!
Stay tuned, readers, we expect to introduce a few more new contributors in the coming weeks.
Wednesday, November 6, 2013
On Monday, the Distrct Court for the Southern of New York issued its opinion in Beastie Boys v. Monster Energy Company, 12 Civ. 6065 (PAE) (S.D.N.Y. November 4, 2013). The issue in the case was whether DJ Z-Trip had authorized Monster Energy to use a remix and video Z-Trip (Mr. Z-Trip?) had made of Beastie Boys songs. Z-Trip wrote to Monster Energy saying, "Dope!" in the context of series of exchanges with Monster Energy over use of of the remix, and Monster Energy construed that word as consent.
Friday, October 18, 2013
Reconstructing Contracts: The Contracts Scholarship of Douglas Baird
A panel of leading scholars discuss Douglas Baird's pathbreaking work on Contract Law published in his new book "Reconstructing Contracts."
- Avery Katz, Vice Dean and Milton Handler Professor of Law, Columbia Law School
- Stewart Macaulay, Malcolm Pitman Sharp Professor & Theodore W. Brazeau Professor, University of Wisconsin Madison Law School
- Ariel Porat, The Alain Poher Chair in Private Law, Faculty of Law, Tel Avivi University
Moderated by Omri Ben-Shahar, Leo and Eileen Herzel Professor of Law and Economics and Kearney Director of the Coase-Sandor Institute for Law & Economics, University of Chicago Law School
Lunch will be provided.
Friday, September 20, 2013
Professor Epstein (pictured) recently joined the faculty at the DePaul University School of Law. Her article, Contract Theory and the Failures of Public-Private Contracting, has just been published in 34 Cardozo L. Rev. 2211 (2013).
Her article is all the more timely as, in the wake of this week’s tragic Navy shooting, government contracting failures are again in the news. The U.S. Department of Defense audit just released includes a scathing report confirming that the Navy’s efforts to reduce costs through contractors ended up not only weakening security but also increasing long-term costs.
She has provided a little summary below
In the Article, she discusses why certain types of government outsourcing contracts are systematically biased to cut cost at the expense of service quality. Approaching the problem through a law and economics lens, her theory is that particularly where there is a limited competitive market for services, tasks are difficult to specify and monitor, and the service is intended to benefit disenfranchised portions of the population, the contracting parties will often impose a negative externality on service recipients in the form of poor service that the contracting parties are not forced to internalize. Essentially, then, the cost of such contracts is higher than it would appear (if one figures in the negative externality, the added cost of the poor service). The Article suggests that because these contracts really reflect market failures, that a mandatory contract rule might be justified to protect non-parties to the contract who cannot adequately protect themselves. The mandatory rule would force the transacting parties to bear the cost of the negative externality.
Wednesday, September 18, 2013
At the annual International Conference on Contracts coming up in February in Miami, the assembled contracts profs will be be honoring Linda Rusch.
Linda J. Rusch is a retired professor of law as of August 2012. She was the inaugural holder of the Frederick N. and Barbara T. Curley Professor in Commercial Law at the Gonzaga University School fo Law from 2005-2010. She was also a co-director of the Law School’s Commercial Law Center. She graduated from the University of Iowa College of Law with highest distinction and was elected to the Order of the Coif.
Prior to joining Gonzaga, she was a professor of law teaching in the area of commercial law at Hamline University School of Law in St. Paul, Minnesota. Prior to joining the Hamline faculty in 1992, she practiced commercial law and bankruptcy as an associate with the Minneapolis firm of Faegre & Benson, and clerked for the Honorable Milton I. Shadur, United States District Court, Northern District of Illinois.
Over the course of several years, Professor Rusch has been involved in the revision of the Uniform Commercial Code. From 1996-99, she served as the Associate Reporter for the Uniform Law Commission and the American Law Institute Drafting Committee to Revise Article 2 of the UCC. From 2000 to 2003, she served as a co-reporter for and member of the ULC-ALI Drafting Committee to revise UCC Article 7. She also was the Reporter for the ULC Study Committee on Payment Issues from 2008 to 2011. She currently serves as a member of the Permanent Editorial Board of the UCC, and is on the Executive Committee for the PEB,
Professor Rusch is actively involved in many national and local bar groups. She has filled many leadership roles in the American Bar Association Business Law Section, including as a Chair of the Section from 2011-12, as a chair of the Committee on the UCC from 1999-2003. In addition, Prof. Rusch is a past President of the American College of Commercial Finance Lawyers. She is also a member of the American Law Institute and the American College of Bankruptcy. As a member of the American Law Institute, she has participated in the Members Consultative Groups on the development of the Restatement of Restitution, the Principles of Software Contracting, and the Restatement of Torts (Third): Economic Losses.
Prof. Rusch has published numerous articles and books on the Uniform Commercial Code and bankruptcy, and is a frequent lecturer on those topics.
We are looking forward to joining our colleagues in honoring Linda Rusch.
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:
Thursday, September 5, 2013
University of Utah Law Prof Debora Threedy (left) has introduced us to a new resource for first year Contracts classes. The Center for Innovation in Legal Education at the University of Utah has produced 37 online videos dealing with topics from the Restatement of Contracts 2d.
The goal of this project is to reduce the amount of in-class time spent on conveying doctrine so that more time can be devoted to active learning activities, such as group exercises or skills development. The Utah crew aimed to have short videos ready for viewing one week ahead of the class session during which that material was covered. The students could watch the videos, which were usually less than ten minutes long, and then come to class with a working knowledge of the concepts covered in the next class session. The ultimate goal is to reduce the amount of in-class time spent on conveying doctrine so that more time can be devoted to active learning activities, such as group exercises or skills development.
Professor Threedy's colleague, Aaron Dewald (right), has blogged about the University of Utah's experience with the videos, which you can read here. Here is his bullet-point summary of student survey responses to the project:
Of the 101 students that took the class, 69 of them responded to the survey. They were split virtually even with 34 females and 35 males replying. Here are some very interesting results that came out of the survey:
Regarding video questions
- Roughly 97% of respondents agreed or strongly agreed that the modules made the Restatement content easy to understand.
- 10% of respondents agreed or strongly agreed that the length (8:30 on average) was too long. 40% were neutral. This answered our hypothesis that most students would be ok with a length lower than 10 minutes. A few students noted in their qualitative feedback that some of them were too long.
- Students were mostly neutral (37%) or agreed (36.2%) when we asked if there was desire to have a way to clarify questions after watching the module. We asked this in anticipation of a message board or discussion forum or something. This conflicts a little bit with a more direct question later.
Module use in class
- Students typically watched the modules before class time (49%). Unfortunately, due to unforeseen scheduling (one professor was ahead of the other), the modules were sometimes released very closely to class, if not after.
- The previous point was supported by the fact that nearly 85% of the students reported wanting more time with the modules prior to class.
- Students also reported using the modules as a review after class (70%)
- Not surprisingly, 42% of the students agreed or strongly agreed that they would rather watch the videos than read about the restatements. 29% were neutral.
- 50% of the students agreed or strongly agreed that the videos allowed them to pay better attention in class. 31% were neutral. We were very satisfied with this response, because it speaks to the idea that moving the non-interactive content outside of the classroom can facilitate a better learning experience in the classroom.
- Nearly 60% of the students wish they had a way to assess their knowledge after watching the videos. This question was asked in anticipation of administering the videos with a formative assessment to allow students some idea of their comprehension.
- Interestingly, over half of the students reported that they wouldn’t have used an online discussion board to talk about the content in the videos.
- Several questions asked the students if they used the videos as asubstitute for outlines or note taking in class, overwhelmingly the students replied. “No.”
- Finally, students would choose a class that implemented videos over one that does not (85%)
There were a few common threads through all of these:
- Contrary to what multimedia theory says, the students wanted me to read the text of the restatements. They hated the silent time I gave them to read to themselves. Confused? There’s a multimedia principle called the Redundancy principle. Basically, it says that if you have a bunch of text on a screen, and you read it to the viewer, they spend more cognitive energy reconciling what you’re reading out loud to what’s printed on screen. The unfortunate side effect is they aren’t reading to comprehend, they’re reading to reconcile.This was probably the most surprising to me… and I’m willing to admit that I was wrong. Just proof that what is proved in a “lab” may not be the best thing in real life. If you’re interested in reading more about it, you can pick up the book on Amazon. I think anyone who uses technology to create learning environments, especially multimedia ones like videos, animations, or the like, should understand the principles in this book.
- As stated in the survey, many wanted them far ahead of time. This was strongly emphasized in the feedback. Having already made the videos and a better understanding of their use, etc… this shouldn’t be an issue for future iterations, but this is something to keep in mind if we want to do new courses in the future. We definitely need more lead time.
- A funny one: Students were tired of “widgets”. A few feedback statements and some verbal feedback (given to me in Torts class) told me they wanted real examples and not theoretical “widgets” as part of the examples. There must be something too theoretical about a widget… something lacking in their prior knowledge. Next time, we’ll use something like iPhones or paintbrushes. Maybe we can make some money with product placement! Just kidding…
- The students really, really liked the videos, and found them extremely helpful. They noticed towards the end of the semester when we were a little rushed to get them all out… but I thought we still stayed on a pretty good release schedule considering the amount of time that went into them.
- Captioning or script availability – this is a feature on YouTube and might just need to be mentioned in class.
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]
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.
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.