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Category: Contract Law & Beyond

[If] you read some fantasy, the magic is omnipresent. In Harry Potter the magic is omnipresent, a primarily magic universe. They got magic for everything there. Every time you turn around there’s a new magic thing that’s popping up. A magic hat or a magic sword or a spell to solve something. Because magic is so omnipresent, you don’t have to [resort] to mundane ways to…solve a murder mystery. “Who murdered Joe? Well we’ll just give him the truth spell and he’ll tell us who murdered Joe,” or “We’ll just cast this other spell and open the veil of time and we’ll be able to see who murdered Joe.” If those options exist then it’s very difficult to write a traditional John Grisham type novel or a detective novel or anything that depends on evidence and all that because there are all these magical ways of getting it.

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Lawyers in Westeros

An uncomfortable chair in a modern partner's office?

An uncomfortable chair in a modern partner’s office?

This is Part 2 of the interview I did with George R. R. Martin in  2007.  For background and part 1, click here.  For the audio file, click here.

 HOFFMAN: Are there lawyers in your books that are just in the wings off stage that haven’t yet appeared?

MARTIN: That’s an interesting question. I hadn’t really considered that until I started reading those links that you sent me. There are certainly laws but are there special classes of advocates who make their living by interpreting those laws? My inclination is probably not because the laws my books are administered by lords. In some ways it’s government as much for men than law. We like to say our government in the United States is a government of laws not men. In some ways the Seven Kingdoms I think is the reverse. There is basis of a law but also a lot depends on who is interpreting it and who is sitting in the Lord’s seat, who is sitting on the Iron Throne and how they settle these disputes.

HOFFMAN: Well those are ultimate questions but I think in two places one could have imagine lawyers and one of them again will be this church trial because there were church lawyers in the ecclesiastical church system there were lawyers who specialized in canon law. And the second one was at least twice I can think of in the books there’re trials by combat. And I don’t really know what the other alternative would be but I assume would be trial by jury – the path that Tyrion did not choose both times. And I was thinking –

MARTIN: Well he does choose in the first…in the second…second of his two trials, he is being tried – it’s not by jury – it’s by lord. There’s no jury of his peers, no twelve people that are randomly picked but there are three lords sitting on his case and hearing the evidence.

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Why the Mirror Image Rule Still Matters

This story, which took the academic world by storm, demonstrates the continued vitality of the mirror image rule:

“[A philosophy tenure track job] candidate . . . sent the following email to search committee members at Nazareth College, in Rochester, N.Y., after receiving a tenure-track job offer in philosophy:

“As you know, I am very enthusiastic about the possibility of coming to Nazareth. Granting some of the following provisions would make my decision easier[:]

1) An increase of my starting salary to $65,000, which is more in line with what assistant professors in philosophy have been getting in the last few years.

2) An official semester of maternity leave.

3) A pre-tenure sabbatical at some point during the bottom half of my tenure clock.

4) No more than three new class preps per year for the first three years.

5) A start date of academic year 2015 so I can complete my postdoc.”

She ended the email by saying “I know that some of these might be easier to grant than others. Let me know what you think.”

In a reply, the search committee said it had reviewed the requests, as had the dean and vice president of academic affairs.

“It was determined that on the whole these provisions indicate an interest in teaching at a research university and not at a college, like ours, that is both teaching and student centered,” the email continues. “Thus, the institution has decided to withdraw its offer of employment to you.”

The search committee ended by thanking the candidate for her “interest” and wishing her “the best in finding a suitable position.”

As many have pointed out, an employment lawyer might be able to make some hay if emails within the department discussed #2 in any detail. (Which they likely did, since academics have no email discipline.)

Why did our subjects sometimes behave like 19th century legal formalists, and other times like realists from the Wisconsin School of relational contract theory?

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Intuitions About Contract Formation

Tess Wilkinson-Ryan and I have a new paper up on SSRN, titled Intuitions About Contract Formation.  In the great Redyip tradition, I thought I’d blog about it. From the abstract:

Legally, much depends on the moment that a negotiation becomes a deal.  Unlike torts or civil procedure or any area of public law, the laws of  promissory exchange only apply to parties who have manifested their assent to be bound. Even so, the moral norms of exchange and promise are quite firmly  entrenched and more broadly applicable than just legal contracts. Norms of promise-keeping and reciprocity, interpersonal courtesy, community reputation—these kinds of intangible goods have real effects on contract behavior. For this reason it is especially surprising that intuitions about formation have gotten so little attention from legal and behavioral scholars. This paper offers five new empirical studies of commonsense approaches to contract formation. The first section of this Article surveys intuitions about what the law of formation is. In a world in which the vast majority of contracts are signed without the advice of counsel, most people have to draw inferences based on their background knowledge and beliefs. It turns out that the colloquial understanding of contract formation is about the formalization of an agreement rather than actual assent.

In the second part of the Article, we tease out the intuitive relationship between formation and obligation. The law of contracts is very clear that  parties’ obligations to one another turn entirely on whether or not they have mutually manifested assent to be bound. And, in fact, we find that behavioral results suggest that legal (or legalistic) formation does enhance commitment to a deal irrespective of its power to impose sanctions; it seems that the law has freestanding normative force. However, we also find that the subjective sense of obligation is not as black or white as the law would predict. Parties are influenced by the natural, informal obligations to one another that build over the course of a transaction, increasing their commitment to the partnership in stages rather than all at once at the moment of formation.

To set the paper up a bit, Tess and I had previously found that when subjects are told they are in legally binding contracts, they lower their guard against exploitation & treat contracting parties like partners.  This raised a question that Intuitions tries to answer:  what are subjects’ naive views about formation?  We show that they differ systematically from the operative doctrinal rules, which creates a window for exploitation — when consumers believe themselves to be in contracts but aren’t. For example, individuals think that payment is contract, not agreement.  In one experiment, for example, we asked:

“Peter is ordering new custom speakers from Audionuts, a mail-order sound system retailer. Peter calls the company and speaks at length to a customer service representative, hashing out the details of his order, which include speakers for his main media unit (TV and stereo system) as well as his portable devices (phone and iPad). Peter and the customer service representative arrive at a final product specification, including a price and delivery date. Peter gives the rep his credit card number, and the charge is immediately posted to his account. Eight days later, Peter receives his speakers in the mail. Inside the box is a piece of paper headed “Terms and Conditions.” The Terms and Conditions sheet includes information about the duration of the warranty (90 days), the dispute resolution process (mandatory arbitration) and the return policy (return within 14 days for full refund for any reason). The Terms and Conditions sheet states at the bottom, “If you do not agree to these terms and conditions, please return the product within 14 days for a full refund.” Peter uses the speakers with no problems for two months.”

graph2

Note: payment & acceptance without return dominate over the oral agreement, or reading terms.  (Other experiments replicate this finding on payment, and expand it to signature.)

At the same time, we find that, in the absence of information about law or legal rules, individuals tend to begin to act like partners significantly earlier than the moment where they’ve concluded a deal.  Indeed, a mere offer appears to motivate feelings of reciprocity by the offeree. Why did our subjects sometimes behave like 19th century legal formalists, and other times like realists from the Wisconsin School of relational contract theory? Our tentative conclusion is that subjects themselves draw a distinction between legal and moral obligations. They view their legal obligations as heavily dependent on formal manifestation of assent via signature. But their moral obligations are attendant to both legal formalism and also to more fine-grained moral norms. This is an interesting case in which we see some evidence of a legal context, contract, in which moral norms are not entirely determined by legal norms. But when subjects are told that they are in a contract, in a sense it makes it so.

 

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Some Rather Good Advice

rasberry martiniFrom the 6th edition of the Summers/White/Hillman Treatise on the UCC, section 2:20.

“Under the present state of the law we believe that there is no language that a lawyer can put on a form that will always assure the client of forming a contract on the client’s own terms . . . If a seller must have a term to reduce its liability but cannot strike a bargain for it, the only answer may be to raise the price, buy insurance, or, as a last resort, have an extra martini every evening and not capitalize the corporation too heavily.”

This is exactly correct, though I can’t recommend martinis.

 

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The End of the ABA

The American Basketball Association, that is.  The NBA has finally negotiated a buyout of their crazy contract with the Silna brothers (which I’ve posted about before) that gave these former owners of the St. Louis Spirits a share of the league’s TV revenue in perpetuity.  How much will the buyout cost?  At least $500 million (on top of the money the NBA has shelled out since 1976).

Read those contracts carefully folks.

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Contracts Casebook Survey Results

The frightful stress gripping legal education is one reason why all law professors may be interested in the newly-released results of the Washington Law Review survey of law teachers of Contracts conducted in mid-2013.

Available here, the results from 138 respondents consist of numerical summaries of multiple choice questions and synthesis of their written comments that I culled.  A sampling from the latter appears below.

The results are of inherent interest to those teaching Contracts and speak to broader questions of legal pedagogy of value to others, including the allocation of time in the first year, the utility of the case method of instruction, and desire for change versus the tug of tradition.

(The survey was done in connection with a symposium inspired by my recent book, Contracts in the Real World, which has also just been published, here, featuring contributions from Aditi Bagchi, Brian Bix, Larry DiMatteo, Erik Gerding, Charles Knapp, Jake Linford, and Jennifer Taub.)

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Stipulated Damages, Exculpatory Clauses and Unconscionability

On re-reading Discover Bank v. Superior Court (Cal. 2005) I found myself getting hung up on a conceptual problem you might be able to help me with.  The Discover Bank court considered the validity of class action arbitration waivers. Holding such waivers unconscionable as a matter of law, the court halted (that is, until Concepcion) arbitration’s inexorable conquest of consumer litigation.  The court reasoned was that such waivers presented issues of both procedural and substantive unconscionability.  Procedural, the waivers were default-forcing “bill stuffers” and consequently not meaningfully chosen.  Substantively, “they may operate effectively as exculpatory contract clauses . . . because . . . damages in consumer cases are often small . . and the class action is often the only effective way to halt and redress [wrongdoing.]“

The question I have is what distinguishes “exculpatory clauses” – typically thought to be against public policy – from ordinary “stipulated damages” clauses, which are subject to reasonableness review. I unaware of any scholarship that tries to define exactly what stipulated damages are (and are not). Consider two possibilities:

  • To the extent that stipulated clauses are broadly defined, so as, for example, to include bespoke procedure, courts’ permissive treatment of stipulated damage clauses would seem to then imply vastly more private-party control over remedies than the traditionally-narrow scope that the term stipulated damage implies.
  • But perhaps such clauses are narrowly defined – that is, the stipulation must relate only to damages flowing from the contract (i.e., a term that limited parties’ ability to seek specific performance would not count as a stipulated damages clause, nor would a waiver of damages for a tort). In that case the Discover Bank court’s categorical move is more defensible, but it’s not obvious that the line between damage and remedy makes sense analytically.

A third possibility is that stipulate damage reasonableness review is limited to scenarios where some remedies remain on the table, regardless of whether the remedy arises out of a claim related to the contract or not; the categorical public policy bar from Discover Bank applies when all remedies are precluded.  Discover Bank is, again, a bad case for that claim, since not all contract remedies were precluded, only those which would deter future harms.

Anyway, it’s a puzzle.  Thoughts?

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Individuals & Teams, Carrots & Sticks

I promised Victor Fleisher to return to his reflections on team production. Vic raised the issue of team production and the challenge of monitoring individual performance. In Talent Wants to Be Free I discuss some of these challenges in the connection to my argument that much of what firms try to achieve through restrictive covenants could be achieved through positive incentives:

“Stock options, bonuses, and profit-sharing programs induce loyalty and identification with the company without the negative effects of over-surveillance or over-restriction. Performance-based rewards increase employees’ stake in the company and increase their commitment to the success of the firm. These rewards (and the employee’s personal investment in the firm that is generated by them) can also motivate workers to monitor their co-workers. We now have evidence that companies that use such bonus structures and pay employees stock options outperform comparable companies .”

 But I also warn:

 “[W]hile stock options and bonuses reward hard work, these pay structures also present challenges. Measuring employee performance in innovative settings is a difficult task. One of the risks is that compensation schemes may inadvertently emphasize observable over unobservable outputs. Another risk is that when collaborative efforts are crucial, differential pay based on individual contribution will be counterproductive and impede teamwork, as workers will want to shine individually. Individual compensation incentives might lead employees to hoard information, divert their efforts from the team, and reduce team output. In other words, performance-based pay in some settings risks creating perverse incentives, driving individuals to spend too much time on solo inventions and not enough time collaborating. Even more worrisome is the fear that employees competing for bonus awards will have incentives to actively sabotage one another’s efforts.

A related potential pitfall of providing bonuses for performance and innovative activities is the creation of jealousy and a perception of unfairness among employees. Employees, as all of us do in most aspects of our lives, tend to overestimate their own abilities and efforts. When a select few employees are rewarded unevenly in a large workplace setting, employers risk demoralizing others. Such unintended consequences will vary in corporate and industry cultures across time and place, but they may explain why many companies decide to operate under wage compression structures with relatively narrow variance between their employees’ paychecks. For all of these concerns, the highly innovative software company Atlassian recently replaced individual performance bonuses with higher salaries, an organizational bonus, and stock options, believing that too much of a focus on immediate individual rewards depleted team effort.

Still, despite these risks, for many businesses the carrots of performance-based pay and profit sharing schemes have effectively replaced the sticks of controls. But there is a catch! Cleverly, sticks can be disguised as carrots. The infamous “golden handcuffs”- stock options and deferred compensation with punitive early exit trigger – can operate as de facto restrictive contracts….”

 All this is in line with what Vic is saying about the advantages of organizational forms that encourage longer term attachment. But the fundamental point is that stickiness (or what Vic refers to as soft control) is already quite strong through the firm form itself, along with status quo biases, risk aversion, and search lags. The stickiness has benefits but it also has heavy costs when it is compounded and infused with legal threats.

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Input Knowledge, Output Information, and the Irony of Under the Radar Expansion of IP

Peter Lee’s thoughtful review of Talent Wants to Be Free goes straight to the heart of the issues. Peter describes a “central irony about information” – so many aspects of our knowledge cannot lend themselves to traditional monopolization through patents and copyright that their appropriation is done under the radar,  through the more dispersed and covert regimes of talent wars rather than the more visible IP wars. We’ve always understood intellectual property law as a bargain: through patents and copyright, we allow monopolization of information for a limited time as a means to the end of encouraging progress in science and art. We understand the costs however and we strive as a society to draw the scope of these exclusive rights very carefully. and deliberately. We have heated public debates about the optimal delineation of patents, and we are witnessing new legislative reforms and significant numbers of recent SCOTUS cases addressing these tradeoffs. But patents are only a sliver of all the information that is needed to sustain innovative industries and creative ventures. Without much debate, the monopolization of knowledge has expanded far beyond the bargain struck in Article I, Section 8 of the Constitution.  Through contractual and regulatory law, human capital – people themselves - their skills and tacit knowledge, their social connections and professional ties, and their creative capacities and inventive potential are all the subject to market attempts, aided by public enforcement, of monopolization. Peter refers to these as tacit versus codified knowledge; I think about inputs, human inventive powers versus outputs – the more tangible iterations of intangible assets – the traditional core IP, which qualifies patentability to items reduced to practice (rather than abstraction) and copyrightable art to expressions (rather than ideas). Cognitive property versus intellectual property, if you will.

Lee is absolutely correct that university tech transfer and its challenges and often discontent is highly revealing in this context of drawing fences around ideas and knowledge. Lee writes “in subtle ways, Orly’s work thus offers a cogent exposition of the limits of patent law and formal technology transfer.” Lee’s recent work on tech transfer Transcending the Tacit Dimension: Patents, Relationships, and Organizational Integration in Technology Transfer, California Law Review 2012 is a must read. Lee shows that “effective technology transfer often involves long-term personal relationships rather than discrete market exchanges. In particular, it explores the significant role of tacit, uncodified knowledge in effectively exploiting patented academic inventions. Markets, patents, and licenses are ill-suited to transferring such tacit knowledge, leading licensees to seek direct relationships with academic inventors themselves.” And Lee’s article also uses the lens of the theory of the firm, the subject of the exchanges here, to illuminate the role of organizational integration in transferring university technologies to the private sector. I think that in both of our works, trade secrets are an elephant in the room. And I hope we continue to think more about how can trade secrets, which have been called the step child of intellectual property, be better analyzed and defined.

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CELS VII: Data is Revealing Part 2

 

Shouldn't it be "data are revealing?"

Shouldn’t it be “data are revealing?”

[This is part 2 of my recap of the Penn edition of CELS, promised here. For Part 1, click here.  For previous installments in the CELS recap series, see CELS IIIIVV, and VIVII.]

Where were we?  I know: throwing stink-bombs at a civil procedure panel!

At the crack of dawn saturday I stumbled into the Contracts II panel. Up first was Ian Ayres, presenting Remedies for the No Read Problem in Consumer Contracting, co-authored with Alan Schwartz.  Florencia Marotta-Wurgler provided comments.  The gist of Ayres’ paper is that consumers are optimistic about only a few hidden terms in standard-form contracts. For most terms, they guess the content right. Ayres argued that should be concerned only when consumers believe that terms are better than they actually are.  The paper  proposes that firms make such terms more salient with a disclosure box, after requiring firms to learn about consumer’s knowledge on a regular basis. Basically: Schumer’s box, psychologically-calibrated, for everyone.  Florencia M-W commented that since standard-form contracts evolve rapidly, such a calibrated disclosure duty might be much more administratively complex than Ayres/Schwartz would’ve thought.  A commentator in the crowd pointed out that since the proposal relies on individuals’ perceptions of what terms are standard, in effect it creates a one-way ratchet. The more people learn about terms through the Ayres/Schwartz box, the weaker the need for disclosure. I liked this point, though it appears to assume that contract terms react fairly predictably to market forces. Is that true?  Here are some reasons to doubt it.

Zev Eigen then presented An Experimental Test of the Effectiveness of Terms & Conditions.  Ridiculously fun experiment — the subjects were recruited to do a presidential poll. The setup technically permitted them to take the poll multiple times, getting paid each time.  Some subjects were exhorted not to cheat in this way; others told that the experimenters trusted them not to cheat; others were given terms and conditions forbidding cheating. Subjects exhorted not to cheat and trusted not to cheat both took the opportunity to game the system significantly less often than those presented with terms and conditions. Assuming external validity, this raises a bit of a puzzle: why do firms attempt to control user behavior through T&Cs? Maybe T&Cs aren’t actually intended to control behavior at all! I wondered, but didn’t ask, if T&Cs that wrapped up with different formalities (a scan of your fingerprint; a blank box requiring you to actually try to sign with your mouse) would get to a different result.  Maybe T&Cs now signal “bad terms that I don’t care to read” instead of “contract-promise.”  That is, is it possible to turn online T&Cs back into real contracts?

Next, I went to Law and Psych to see “It All Happened So Slow!”: The Impact of Action Speed on Assessments of Intentionality by Zachary C. Burns and Eugene M. Caruso. Bottom line: prosecutors should use slow motion if they want to prove intent. Second bottom line: I need to find a way to do cultural cognition experiments that involving filming friends jousting on a bike. I then hopped on over to International Law, where Adam Chilton presented an experimental paper on the effect of international law rules on public opinion. He used a mTurk sample.  I was a concern troll, and said something like “Dan Kahan would be very sad were he here.” Adam had a good set of responses, which boiled down to “mTurk is a good value proposition!”  Which it is.

After lunch it was off to a blockbuster session on Legal Education. There was a small little paper on the value of law degrees. And then,  Ghazala Azmat and Rosa Ferrer presented  Gender Gaps in Performance: Evidence from Young Lawyers. They found that holding all else equal, young women lawyers tend to bill somewhat fewer hours than men, a difference attributable to being less likely to report being highly interested in becoming partners while spending more time on child care.  What was noteworthy was the way they were able to mine the After the JD dataset. What seemed somewhat more troubling was the use of hours billed as a measure of performance, since completely controlling for selection in assignments appeared to me to be impossible given the IVs available.  Next, Dan Ho and Mark Kelman presented Does Class Size Reduce the Gender Gap? A Natural Experiment in Law. Ho and Kelman found that switching to small classes significantly increases the GPA of female law students (eliminating the gap between men and women). This is a powerful finding – obviously,it would be worth it to see if it is replicable at other schools.

The papers I regret having missed include How to Lie with Rape Statistics by Corey Yung (cities are lying with rape statistics); Employment Conditions and Judge Performance: Evidence from State Supreme Courts by Elliott Ash and W. Bentley MacLeod (judges respond to job incentives);  and Judging the Goring Ox: Retribution Directed Towards Animals by Geoffrey Goodwin and Adam Benforado.  I also feel terrible having missed Bill James, who I hear was inspirational, in his own way.

Overall, it was a tightly organized conference – kudos to Dave Abrams, Ted Ruger, and Tess Wilkinson-Ryan.  There could’ve been more law & psych, but that seems to be an evergreen complaint. Basically, it was a great two days.  I just wish there were more Twiqbal papers.