Teaching Assistants: Sid DeLong on the Difference Between Legal Bribery and Blackmail

I just finished teaching duress.  The Restatement approach to duress requires an improper threat.  As usual, I found it hard to draw the line between offer and threat in a way that helped my students.  Looking for some new material, I came across my co-blogger Sid Delong's article, Coasean Blackmail: Protection Markets and Protection Rackets in the Kansas Law Review. 

In many situations, Sid finds courts' attempts to distinguish offers from threats unhelpful.  As Sid notes, inhibiting threats could inhibit a party's good faith offer to forego a harmful action at a reasonable price.   Sid provides numerous examples illustrating how transactions that lead to identical substantive outcomes can be viewed as either offers or  threats, depending on which party initiated the transaction.  What the law ought to be concerned with is not the line between threats and offers, but whether the transaction results in unjust enrichment. 

Ronald Coase
Image by University Chicago Law School

Applying Coasean theory, Sid argues that we should abandon talk of threats as part of the law of duress in the context of protection schemes.  Lawful bribery occurs when we pay an actor (the "menace") to forbear from engaging in harmful activities.  In The Problem of Social Cost, Coase demonstrated how parties can negotiate efficient solutions to problems raised by externalities without legal regulation.  Sid argues that Coasean theory can help us distinguish protection markets from protection rackets.  If the cost paid to the menace exceeds the potential harm from the activities, then the bribe tips over into extortion and unjustly enriches the menace.  Sid wants a legal system that distinguishes between lawful bribes and illegal extortion on this basis, and we don't have it.  

When bribery tips over into blackmail, the victim ought to be able to recover, not because they were subjected to an improper threat, but because the menace extracted a price in excess of its costs for foregoing engaging in a profitable activity that harms others.  The menace was thereby unjustly enriched, and the victim is entitled to recovery, but only to the extent of the unjust enrichment.  In the context of Coasean bargains, we assume no illegal or tortious conduct.  In such contexts, "the blackmailer is entitled to be compensated for the cost of his forbearance, but he is not entitled to profit from the pain he can cause the victim."

Sid's approach also has value in the context of "secrets" blackmail; that is, contexts in which the menace demands payments to refrain from disclosing information that would be harmful to the victim.  Absent some social utility in disclosure, such demands are always actionable blackmail in Sid's view, because the cost of forbearance is zero.  

Coase did not think legislative solutions could address the problem of externalities, because legislative solutions tend to be sweeping, and the problems caused by externalities vary from instance to instance.  Sid provides greater context in support of Coase's view.  Sid notes that people are better positioned to negotiate reasonable solutions ex ante than ex post.  If you are setting up a beer garden next to a factory, the best time to negotiate an agreement that will protect the beer garden from smoke or fumes from the factory is before both begin operations.  Once they have begun, the beer garden operator has a financial stake in continuing, and the factory owner will extract a higher cost to change its operations.  Ex post negotiations are thus far more likely to result in blackmail.

Manhattan's Worst Eyesore?

Sid illustrates this convincingly in the context of severance packages and non-disclosure agreements.  If a company adds a non-disclosure agreement to its basic employment agreement, the employee will extract no consideration for her silence because she is negotiating in the context of a competitive market.  Absent such a non-disclosure agreement, the company may have to offer consideration in exchange for a release of claims and disclosure of information or face threats of disclosure.  The law would frown on the latter, but that does not mean that the company might not negotiate a severance package that would include a now more pricey non-disclosure agreement negotiated in the context of a bilateral monopoly.  The same is true in agreements among neighbors.  Negotiating ex ante limitations on property uses with spillover effects is far less costly than negotiating the removal of a nuisance or eyesore.  

I would be interested in hearing Sid's response to arguments from Tess-Wilkinson-Ryan and David Hoffman that non-disclosure agreement impose social costs by forestalling discovery of harmful business practices.  I am guessing that Sid's response is that his model simply doesn't apply in the context of ex ante commitments not to expose unlawful conduct.  But I wonder if there are not non-disclosure agreements that cover conduct that is awful but lawful that are foisted upon employees at a time when they are ill-equipped to protect their own interests or the public interest.

Sid's thought-provoking article just begins the work of cataloguing its potential significance.  He notes that parties could negotiate their way out of positive injunctions, and courts could uphold such settlements up to the point at which the payments demanded become extortionate.  The challenging law of substantial performance becomes much easier if we can determine the reasonable ex ante price for completed performance.  From this perspective, the court's requirement of the $60,000 cost of completion in Groves v. John Wunder Co. seems extortionate, given that the value of the land was only $12,000.  I would like to think that Sid would side with Judge Cardozo in Jacobs and Young v. Kent.  But I think Peevyhouse remains a tough case because of the willfulness of the breach of the non-economic value of the property to the Peevyhouses.  I wonder how Sid thinks Alaska Packers should have come out, if we think of that case as involving an improper threat. If the workers had overcome their consideration problem by offering to reduce their take per fish caught in exchange for $100 in base pay, would that have been improper blackmail or lawful bribery?  

As usual, Sid has given me a lot to think about and a lot of novel takes on contracts doctrine that I can share with my students.  Sid is cautious and does not overreach.  He acknowledges that his unjust enrichment approach will not suit every case, and the prohibition on threats might retain some usefulness, despite its over- and under-inclusiveness, in deterring deliberate, knowingly extortionate threats where the costs of forbearance are hard to calculate.