Trade secret law and contract law have a complicated relationship. Every subject of commerce is extensively privately regulated by contracts. Intellectual property is distinct from other things of value, because it provides exclusive rights to its owners, and burdens others with corresponding responsibilities to others. Yet unlike trade secret’s intellectual property cousins copyright and trademark, there is no state or federal public register of trade secret interests to give potential infringers notice of a trade secret. What’s more, trade secret rights are relational, that is, liability for disclosure of a trade secret based on the context and expectations of the owner and the discloser. Therefore in trade secret law, unlike other intellectual property, contracts frequently are key evidence of the substance of the trade secret and the standard of behavior required for former employees to avoid infringing trade secrets.
In The Trade Secret-Contract Interface Professor Deepa Varadarajan argues contract law should not be used to undermine the policy reason the law grants companies intellectual property in trade secrets—to promote the progress of science and the useful arts. And yet, as she chronicles in the article, contract law has increasingly been used to do just that in an economy where some of the most valuable assets are trade secrets, including algorithms and databases. She writes: “Contracts’ centrality to trade secret law provides putative owners ample opportunity to define—and overstate—the boundaries of their trade secret rights, particularly to employees. Trade secret’s intersection with contract law poses particular threats to employee mobility—as employee non-competes and non-disclosure provisions can deter employees from starting new jobs and competition enterprises.” (P. 1547.)
Varadarajan identifies two distinct functions that contracts play within trade secret law. First, she describes the “evidentiary function of contracts.” This is the use of contracts as evidence to support the content of the trade secret and the context of a particular employee’s relationship to it. Second, she describes the “evasive function of contracts.” This is the use of contracts, typically by employers in the context of non-compete agreements, to create rights that exceed or conflict with trade secret protections without disclaiming trade secret protection. Some specific examples she discusses are: enlarging trade secret subject matter, avoiding ongoing reasonable secrecy protections, and eliminating the reverse engineering defense.
Concerns about the moment of contract between employer and employee are paramount in Varadarajan’s analysis. She points out: “[f]irms’ trade secret-evasive uses of contract often occur in employee agreements and mass-market consumer licenses—contexts where the restricted party often lacks the capacity to understand, negotiate, and alter terms.” (P. 1573.) What’s more, most trade secret controversies arise out of contracts that were formed in the context she described, rather than out of espionage or some other form of disclosure.
As a result of these formational concerns, Varadarajan calls for what she calls a “reinvigoration” of contract law’s non-enforcement doctrines. Relying on a series of court opinions, she argues that courts can and should limit enforcement of non-disclosure, non-compete, and other trade secret-related contract provisions in light of “public policies that operate to restrict the scope of trade secret protection.” (P. 1589.) She argues that in some circumstances, the “evasive” uses of contract conflict with underlying trade secret policies, such as promoting innovation. She also cites unconscionability as a possible avenue for non-enforcement of some contracts regarding trade secrets.
Both the problem Varadarajan describes and the solution she sketches ultimately sound in contract law. In effect, contract law has allowed individual actors to distort substantive trade secret for their unilateral benefit. So, correspondingly, contract law must correct itself to prevent such an effect in the context of trade secret.
The Trade Secret-Contract Interface is a significant contribution to the contracts literature. It shows how the thin veneer of formal contractual consent is being used to upend not just the expectations of the less powerful contracting party, which is a longstanding and worsening problem in contract law generally, but also settled, established intellectual policy principles. A future agenda for other scholars inspired by Varadarajan’s work may be to examine how contract law consent’s increasing thinness without a corresponding decrease in formal power may be leading to distortionary effects in other sectors of law, society, and the economy.
Every fall, the second day of my Contracts course is spent discussing the Baby M case concerning the enforceability of a surrogacy contract. The students engage in a moot court exercise for which they assume the roles of legal counsel for the Sterns, the biological father and adoptive mother, and Mrs. Whitehead, the surrogate. Students also serve as state supreme court justices with yours truly presiding as Chief Justice. Over the years, I have found this exercise to be a fun, interactive, and collaborative way to ease nervous angst-filled law students into the study and practice of law. It also affords the class the opportunity to consider and discuss important fundamental principles of contract law including freedom of contract and public policy concerns. During the three decades that have passed since the Baby M case, there has been enormous growth in the number of individuals using contractual agreements to help them meet their reproductive goals. This growth has necessitated a closer examination of the enforceability of such agreements, which Professor Deborah Zalesne undertakes in her thought-provoking article, The Intersection of Contract Law, Reproductive Technology, and the Market: Families in the Age of ART.
Professor Zalesne’s article begins with a very thorough discussion of the controversial ethical issues surrounding alternative reproductive technologies (ART). Although she acknowledges critics’ concerns about commodification, exploitation, consent, and access as they relate to reproductive practices such as surrogacy and gamete donation, Professor Zalesne argues that “these concerns are overstated, often rooted in traditional and untested beliefs about the sacredness of motherhood and family, and should give way to the paramount concern of reproductive autonomy.” (P. 427.)
Throughout her discussion of the tension between individual choice and moral values, Professor Zalesne explains the role of contracts in the reproductive arena and argues for their enforceability when freely entered into by the parties. For instance, in the context of surrogacy, she argues that courts’ unwillingness to enforce such agreements incentivizes exploitation not only by surrogate mothers who may “threaten to renege in order to get more money,” but also by intended parents who may “refuse to pay medical costs unless the surrogate acquiesces to unreasonable demands,” thereby “result[ing] in greater cost to both parties.” When discussing critics’ concerns regarding exploitation of surrogates and their perceived lack of voluntary consent, Professor Zalesne cautions against imposing impermissible limitations on women’s autonomy to freely contract. She also reminds us that contract law defenses such as unconscionability, undue influence, and economic duress protect against unfair and exploitative contract terms by helping to determine whether surrogates knowingly and voluntarily entered into their agreements. Professor Zalesne thoughtfully suggests that “[c]onsent must include extensive counseling about the inherent medical and emotional benefits and risks associated with most forms of ART, and participants must participate voluntarily and without coercion or undue influence.” (P. 442.)
When Professor Zalesne turns her attention to the reproductive technology of pre-implantation genetic testing, she confronts the many ethical issues that accompany such technology, particularly as it relates to trait selection. Whether contracting parties select for gender, race, height, complexion, or hair and eye color, Professor Zalesne generally advocates for protecting individual reproductive choices provided that they are “private choices for private purposes” rather than “centralized choices for the state’s purposes.”
Respecting private choices, as long as they are not against public policy, is a core tenet of contract law and one that is central to Professor Zalesne’s discussion regarding the importance of judicially enforced reproductive agreements. According to Professor Zalesne, such enforceability protects parties’ intentions and ensures that their wishes at the time of contracting are honored, particularly in cases concerning embryo disposal when one party’s desires may change some time after executing the agreement. Enforceability of reproductive contracts also avoids “unintended, and sometimes absurd, consequences” that can be life altering for parties involved and their families.
Because legislation can be slow to keep pace with evolving social values and technology in the context of ART, Professor Zalesne makes a compelling case that “[p]eople should be their own lawmakers when it comes to reproduction and their personal relationships,” (P. 486) and that contract law serves as an efficient and effective mechanism through which to govern these arrangements. Although we’ve “come a long way” since the Baby M case (to quote the decades old Virginia Slims ad), there continues to be much disagreement surrounding alternative reproduction. As the debate continues, as it undoubtedly will, I am confident that Professor Zalesne’s well-written article will inform it, particularly as it relates to the enforceability of ART agreements, for years to come.
Cite as: Eboni Nelson, The Role of Contracts in ART
(November 20, 2018) (reviewing Deborah Zalesne, The Intersection of Contract Law, Reproductive Technology, and the Market: Families in the Age of ART
, 51 U. Rich. L. Rev.
419 (2017)), https://contracts.jotwell.com/the-role-of-contracts-in-art/
David Horton’s Arbitration About Arbitration is a thorough and insightful treatment, with both normative and descriptive elements, of the law’s approach to delegation clauses in contracts calling for arbitration. Delegation clauses assign to arbitrators the question of the validity of an agreement to arbitrate (including defenses such as unconscionability and the like) that would otherwise be decided by courts. A typical delegation clause would go something like this: “Enforceability of the arbitration clause shall be determined by the arbitrator and not by a court” or “[t]he arbitrator[s] shall determine all issues regarding the arbitrability of the dispute.” Horton focuses on delegation clauses in employment and consumer adhesion contracts, where delegation is most troubling.
The article first sets forth a very helpful history detailing the rise of delegation clauses against the backdrop of initial judicial hostility to arbitration, Congress’s enactment of the Federal Arbitration Act (FAA), and the Supreme Court’s recent championing of arbitration, including the enforcement of delegation clauses. As for the latter, in First Options of Chicago, Inc. v. Kaplan, the Supreme Court established that enforcement depends on the parties’ intentions, but the Court required “clea[r] and unmistakabl[e] evidence” of an agreement to delegate. Then in Rent-A-Center, West, Inc. v. Jackson, Justice Scalia diluted the “clear and unmistakable” rule, by observing that courts should enforce delegation clauses if a party merely manifested an intent to delegate. As a result, a court can justify enforcement of a delegation clause by finding that a consumer clicked on an “I agree” button or signed a form contract, even if the consumer never saw or understood the clause. Horton also observes that the treatment of delegation clauses also “rode the wake” of additional Supreme Court decisions, such as AT&T Mobility LLC v. Concepcion, that for practical and legal reasons all but excluded consumers from pursuing rights in court.
Horton is clearly right that the state of the law on delegation clauses in consumer and employee adhesion contracts is problematic. Perhaps most worrisome is the point that arbitrators face what amounts to a conflict of interest when deciding the validity of an agreement to arbitrate. Arbitrators are often paid handsomely for their efforts, so if they decide an agreement to arbitrate is unenforceable, they’ve short circuited their chance for considerable compensation. When this conflict is combined with the common hurdles for consumers and employees in arbitration, such as far-off venues, expenses, and biased arbitrators, a strong argument exists that the threshold issue—whether the case should be arbitrated at all—belongs in a court.
But what is to be done? Horton’s series of solutions is sensible and pragmatic, if somewhat cautious. Despite noting the strong argument that “adhesive delegation clauses never satisfy the ‘clear and unmistakable’ criterion,” (P. 404) he does not go that far. Rather, he calls for treating delegation clauses as “‘lite’ arbitration clauses” (P. 405) that should be “presumptively valid,” (P. 375) but should be subject to various exceptions, including defenses such as unconscionability and “wholly groundless.” Further, despite Section 4 of the FAA’s language that “[t]he court shall hear the parties . . . [i]f the making of arbitration agreement . . . [is] in issue,” Horton finds that the FAA is not “ironclad and unyielding” (P. 403) in part because courts “have insisted for decades that parties can arbitrate arbitrability.” (P. 403.) Instead, the FAA should “exist halfway between inexorable commands and pure background principles,” and its rules should be “hard to draft around.” (P. 403.)
In addition, Horton urges that unconscionability defenses “should have a particularly sharp bite” (P. 406) when the issue is delegation, although Horton points out that a challenger faces a high hurdle to demonstrate unconscionability when the delegation clause alone is the subject of examination. (P. 396.) Finally, although quite critical of the decision, Horton does not argue that Rent-A-Center is simply wrongly decided. Instead, he proposes that courts should read Rent-A-Center narrowly, which would allow a “more nuanced account of delegation clauses.” (P. 399.) Specifically, Horton observes that the “clear and unmistakable” test survives the case, as evidenced by a Scalia footnote. (P. 406.) Further, Horton distinguishes the case on its facts, which he says are atypical and include an unusual delegation clause.
Perhaps, in light of the Supreme Court’s strong sponsorship of arbitration, combined with general contract law’s rather permissive attitude towards assent issues in boilerplate adhesion contracts, Horton’s careful analysis is the best solution. Nevertheless, it is not crazy to argue that, in the context of consumer and employee adhesion contracts, businesses should not have the power to use contracts to avoid the rights of challengers to have courts determine the validity of agreements to arbitrate. Personally, I am most moved by the argument that arbitrators have a strong economic incentive to allow arbitration to proceed. Therefore, delegation clauses in this context should be presumptively unenforceable, not the other way around.
In sum, Arbitration About Arbitration is an excellent article that should be a “must read” for anyone interested in the current treatment of arbitration clauses in the context of adhesion contracts. Though no fault of Horton’s, however, consumers and employee advocates will come away with some trepidation about the state of the law in this area and its future.
Josh Mitts, I Promise to Pay
, available at SSRN
What is the point of signing on the dotted line? In days of yore (i.e., before the E-Signature Act), signing your name with a pen was thought to caution, evidence, and channel promissory behavior. But of late, the dotted line has gotten a bad rap. In April 2018, one of the last domains of contractually-related autographs—credit cards—gave up the ghost. It seems likely that the next generation of contracting parties will never sign a physical contract. Sic transit gloria Montblanc.
Apart from pen manufacturers, should anyone care about the loss? As it turns out, there’s a body of scholarship that shows that being present at a contract’s inception—and personally marking your assent—makes later breach less likely. Several recent experimental studies have found that signing a contract has meaning—it induces caution and retards promise-breaking. Now, in an interesting draft paper, Joshua Mitts has shown that borrowers who do not personally attend their mortgage closing are much (40%!) more likely to default than buyers who are in the room where it happened. That’s true even though borrowers who skip the closing and use a power of attorney (POA) to close, are no more likely to initially show signs of financial distress.
Mitts’ first herculean task in the draft paper is to amass a dataset capable of making the claim and describe that process without benumbing the reader. He does so by combining multiple large, unwieldy databases from New York City and the Federal Government. Some of those databases must be linked through probabilistic matching (because they lacked personally identifiable information), some require OCR and pattern recognition to extract terms from mortgage contracts, while others must be hand-inspected. The result is an excess of a million mortgage/property/borrower records, mostly from the mid to late aughts. (I will admit to being slightly concerned by how easy Mitts makes it seem to match shrouded borrower data to properties.)
The paper’s central analytical challenge is to convince the reader that the sort of people who use a POA at their closings aren’t also those who breach their contracts for other reasons. Given that these are observational data, it’s not a problem that admits of an easy solution. His response is to triangulate from linear regression results: borrowers with POAs aren’t statistically more likely to be house-flippers, aren’t frequent-fliers, don’t have meaningfully different demographic characteristics, aren’t taking on different sorts of loans, aren’t more savvy, etc. (In a revision—which Mitts is working on—he’s trying to deal with the worry that POA borrowers might be more likely to be old/ill, which could be driving defaults and could be uncorrelated to other measures of wealth.)
Having chased down the selection story on borrower characteristics, Mitts interprets the results as being about selection on enhanced commitment to promise-keeping. He does so largely through an estimation showing that loans which remain with their originators are less likely to be breached—here, the POA effect “disappears entirely.” He concludes that “this evidence suggests that repeated contact between lender and borrower enhances promise-keeping, which is consistent with the hypothesis that personal promising leads to a greater sense of personal responsibility and a more salient commitment.” (P. 27.)
This is plausible, and it is consistent with experimental evidence from the contract literature (which Mitts could better use to motivate his story) that assigned contracts/mortgages are more likely to be breached. However, Mitts might have done more to try to tease out the ongoing reputational/relational story with one about commitment at the moment of the bargain. If it’s true that there is no POA effect when you control for the borrower’s ongoing relationship (if one exists), how should we think about the results?
One hypothesis (building on the signature work above) would be to try to disentangle signing a contract from the closing ceremony. The data Mitts has gathered contains some mortgages that were digitally signed and others than were signed with pens: could he test whether signing (versus clicking) has an effect? If so, then I think we could feel more comfortable with the interpretation he advanced.
In either event, Mitts is right to identify the important real-world consequences that flow from his results. This is the sort of paper that will daunt contract professors who thought that empirical work in our field required nothing more than looking at a few hundred EDGAR-coded contracts, or reading some number of appellate cases and discerning patterns. But it’s a major project that shows the continuing vitality of contractual ceremonies. I like it lots!
Aditi Bagchi, Contract and the Problem of Fickle People
, 53 Wake Forest L. Rev
. ___ (forthcoming), available at SSRN
Whether by design or by accident (or both), the world rewards people who are stable—who have reliable desires, low discount rates, and long-term plans. Young children who pass the marshmallow test appear to do well on achievement tests ten years later. “Commitment” and “follow-through” are often prized cultural values, and focus and single-mindedness often correlate with success. We link consistency with rationality; economists often don’t even know what to do with people who don’t have consistent preferences.
As Aditi Bagchi suggests in Contract and the Problem of Fickle People, maybe the law inappropriately helps to enshrine this state of affairs. Even if stability contributes to productivity—we can’t build skyscrapers or microprocessors if we’re changing our minds all the time—perhaps arguments routinely made about the private law artificially and accidentally overvalue stubbornness, rigidity, and resistance to change.
As Professor Bagchi observes, different people might assign different meanings to the ability to change beliefs and moral commitments over time. “Some people pride themselves on being constant and only reluctantly let go of beliefs and values as they prove untenable. They call it personal stability,” she writes. “Others pride themselves on self-reinvention, shedding identities often. They call it personal growth.” Apart from concerns about how one person’s fickleness may harm others—which the law should clearly consider—Professor Bagchi asks whether it is appropriate for contract law to favor one approach to personal development over the other.
Her argument is mainly a challenge to theories of contract law that rest on the morality of promises alone—and particularly on a view of that morality that rests, in turn, on a traditional understanding of personal autonomy. “Our moral interest in changing our minds does not generate a right to harm others,” she argues, “but it does generate a reason not to have courts hold us to our commitments for our own sake.” Promises may promote a particular type of personal autonomy, grounded in a view of humans as stable creatures. Many people may value this conception of human morality. But Professor Bagchi’s point is that it’s not obviously desirable in all circumstances, and it’s not necessarily valued by everyone. After all, while we prize stability, we also value open-mindedness; we admire moral conviction, but we also seek to change and to grow. Holding us to a past promise just because we once made it does give a new sort of capability to stable people, but maybe it also discourages us from reevaluating our priorities; after all, on its face, a set of moral rules that prioritize our past priorities over our current ones seems, at the very least, a bit stagnant.
Of course, none of this means that promises generally shouldn’t be enforced. After all, while personal growth might encourage us to try to get out of a past commitment, so might cynical self-interest. Professor Bagchi’s point is just that while the morality of promises alone may justify the legal enforcement of promises in some cases, for some types of people, its justification is not necessarily as universal or persuasive as philosophers often take it to be. “It is surprising,” she observes, “that the philosophical literature on promise has rallied so completely around the value to one’s autonomy of being bound.”
So, instead of grounding contract law exclusively on a traditional conception of promissory morality, contract law should rest on other bases as well. As Professor Bagchi reminds us, contract law has no single justification—or as Mel Eisenberg once put it, “law generally, and contract law specifically, have too many rooms to unlock with one key.”
That is, modern contract law isn’t a simple implementation of analytical moral philosophy, much less particular views of human autonomy. Simple donative promises are, of course, not enforceable merely for the reason that a promise has been made. Many contract rules—principles of mitigation, Hadley v. Baxendale, and so on—end up splitting losses among the parties in various ways, rather than letting damages serve exclusively as a way to right the moral wrong of breach. Some legal rules exist just because they make the law more administrable. Professor Bagchi’s nice questioning of the broad application of a single type of philosophical argument is a reminder that contract law is not—and should not be—easily reduced to one clean, theoretical framework.
About fifteen years ago, Bruce Mann’s Republic of Debtors offered an intriguing narrative about the origins of American bankruptcy law. Among other claims, Mann suggested that debt became respectable when respectable people found themselves in debt. When debt moved in from the fringe, our legal treatment of debt softened.
Anne Fleming tells a related story in our treatment of debt, but her focus is on poor debtors in New York City. Although the small sum loans that she studies may be on the fringe of finance, her account makes clear that the debtors who have relied and continue to rely on fringe finance are many, and together constitute a large, struggling class of workers. They are not outliers to our economic model but an integral part of it. We rely on their low wage labor and their debt-fueled consumption. And we have not devised any alternative to debt, no large-scale method by which low-income people can survive adverse events—at least not one that imposes lighter costs than perpetual debt.
While early reformers and policymakers may have been as critical of debtors for irresponsible behavior as of their creditors, most of Fleming’s story, which starts almost a century after Mann’s, takes place in a time when debtor, creditor and regulator have all ceased to regard debt in the severe moralistic terms in which it was regarded at the dawn of the republic. Debtors seem to know that they are dealing with unscrupulous lenders and regard their debt as well as its evasion as unfortunate aspects of their economic position. Creditors are the bad guys, if there are any; lenders are not in a position to moralize about debt. Regulators too understand that the working class poor often have no choice but to take out loans in order to tide themselves over when there is an unexpected expense or an interruption in earnings. The system is designed that way, or at least, it has not been designed to avoid the phenomenon of small sum, high-interest loans.
The history of how cities, especially policy leaders like New York City, have dealt with the small-sum lending industry is an illuminating but frustrating lesson in how we can (try to) regulate contracts that are oppressive but unavoidable for a segment of the population without better options. It may be true of most contracts that a choice to optimize regulation of the transaction for the median consumer comes at the expense of those with minority preferences, or outlier circumstances. But small loans pose a still deeper challenge because most borrowers both need the loans and face serious risks from them. A regulation that operates to the benefit of a borrower at one time will operate against the interests of that same borrower at a different time. Target borrowers for these loans cannot borrow without risk, but they are ill-equipped to bear those risks.
Fleming conveys the difficulties in regulating these loans. She describes the industry’s tactics of creative regulatory evasion. For example, loans were sometimes structured as salary purchases rather than debt contracts; debtors granted power of attorney to creditors in order to move transactions out of New York state, and; creditors purported to charge fees rather than interest in order to avoid usury laws. Fleming also explores the dynamics of regulation in a federal system, with states at once learning from and impeding each other, and the federal government slowly and inconsistently intervening in the industry. Although most of the action is in the executive and legislative branches, because lenders avoided going to court to collect, there are a few court cases in which courts are surprisingly solicitous of regulation even in the Lochner era. They seem to understand very early the hard choices surrounding small loans. The early consensus that the industry must be regulated makes it one of the oldest “regulated industries.”
One of the most interesting and surprising aspects of Fleming’s narrative is the political economy of regulation. Employers like Erie Railroad Corporation and Gimbel Brothers played a critical role in the courts and behind the scenes in resisting attachments on their employees’ wages. Relatively reputable lenders sided with regulators and favored uniform laws across states in order to disadvantage more fringe lenders. Reform entities like the Russel Sage Foundation aligned with the industry in favor of a uniform small loan law. Reformers’ support for weak regulation made them suspect in the eyes of those, like Fiorello La Guardia, who continued to see the industry as wholly nefarious.
Fleming ably guides us through the vicissitudes of regulating the small loan industry. We do not emerge with any clear sense of a regulatory solution. Instead, we learn the limits of bettering a transaction by way of contractual limitations. Neither regulations tailored to the transaction-type nor judicial application of general contract principles are sufficient to make small loans savory. Some debt contracts cannot be made better without giving borrowers better options altogether.
Stephen C. Mouritsen, Contract Interpretation with Corpus Linguistics
(Nov. 4, 2017), available at SSRN
Interpretation of contractual text may be the most important task courts perform in contract disputes. It is also the least predictable. Courts fall back on archaic canons of interpretation and employ poorly defined and spongy concepts for eliciting the meaning of words. They sometimes use textual approaches, and other times admit extrinsic evidence to understand the context. As a result, contract interpretation is erratic, and the resolution of contract disputes becomes complex and costly.
Despite murmurs of judicial skepticism and mountains of academic criticism, the most commonly used criterion in contract interpretation is the “Plain Meaning Rule”—the idea that if the language is clear and unambiguous courts should not consider any extrinsic evidence. But how to tell if a word is susceptible to a single plain meaning? Is it enough to look at dictionaries or to invoke judicial imagination to determine the unambiguous plain meaning?
In my own work and teachings, I have been advocating for a shift towards a data-driven search for plain meaning. My recent article with Lior Strahilevitz proposed one such empirical interpretive method: using large surveys. Now, a major new contribution to this timely enterprise of data-driven interpretation is being proposed by Stephen Mouritsen. In an original and provocative article, Mouritsen introduces a method of interpretation based on empirical linguistics, and demonstrates—quite dramatically—the improvements it delivers relative to existing methods.
Consider the following example, taken from Mouritsen’s article. An insurance contract covers bodily injuries, but explicitly excludes injuries arising from participation in “any sports.” If the injury is a result of recreational snorkeling, does the exclusion apply? Is snorkeling a “sport”?
A federal court said no. The judge looked at Webster’s Dictionary and found that the definition of “sport” is “rule-based athletic competition.” Since snorkeling is not governed by any traditional set of rules and it is not competitive, the judge concluded that it is not a “sport” and thus injuries occurring from it are not excluded from coverage under the contract.
That analysis, Mourtisen shows, is deeply flawed. The same dictionaries used by the court to define “sport” as a rule-based competition also provide a second meaning for “sport”: a “physical activity that gives enjoyment or recreation.” Snorkeling is surely a physical recreation! It turns out that the court’s own methodology to prove a single plain meaning—consulting leading dictionaries—supports each of the two opposing interpretations advocated by the parties. And when a text is susceptible to two plausible interpretations, the plain meaning rule could no longer be invoked—and should not have been relied on—to resolve the dispute.
But the exciting contribution of this article is not in showing that a word is susceptible to more than one meaning—this is old news. The breakthrough is in applying an empirical method known as corpus linguistics to choose the more appropriate meaning among the two competing dictionary definitions. The method Mouritsen applies does not require the usual messy investigation into the contract’s surrounding context. It applies, instead, a quantitative and objective analysis to determine how the word is typically used in natural language.
The technical application of corpus linguistics to contract interpretation is quite simple, not much more exacting than learning how to use Westlaw. A digital search for the disputed word or phrase is made in a large corpus—a database of texts that represent the language used by the parties. An appropriate database for many contract disputes is the freely available Corpus of Contemporary American English (“COCA”). The search results can then be sorted according to the most common words that typically co-occur with the word in question. Each of these frequent accompanying words provide a qualitative sense of context. Since there are many such frequently co-occurring words, a simple quantitative test can then determine which meaning and context are more common.
What does the corpus linguistics method tell us about “sport”? Mouritsen searched COCA and found the common words that most co-occur with “sport”—words like professional, teams, fans, pro, Olympic. He looked at the 100 most common contexts in which the word “sport” co-occurs and found, strikingly, that in only one case its usage referred unambiguously to recreational activity (bungee jumping), whereas at least 50 contexts referred explicitly to “sport” as rule-based athletic competition, and many others strongly and unambiguously suggested the same. Apart from a small subset of contexts not related to either meaning, the result is an overwhelming quantitative prevalence of “sport” as rule-based competition, with only exceedingly infrequent use in the alternative meaning of physical recreation. “To the extent that our understanding of plain meaning has a frequency component,” Mouritsen sensibly points out, “we might conclude that the plain meaning of sport is rule-based competition.” A conclusion, he notes, that is not available through qualitative introspection.
Under the corpus linguistics method, snorkeling—which is not a rule-based competition—should not be interpreted as a “sport.” The court, in that case, got it right; but for the wrong reason. Had the court truly relied on dictionaries and then applied the “susceptible to more than one meaning” test for ambiguity, it would have concluded that “sport” is ambiguous and either demanded additional evidence or applied the contra-proferentem tie breaker. Instead, with corpus linguistics interpretation, the court would reach an unambiguous definitive interpretation.
Corpus linguistics, Mouritsen shows, can also help identify circumstances where a specialized or less common meaning is likely intended—again, without lengthy legal proceeding over the credibility of extrinsic evidence.
While corpus linguistics deploys rigorous tools and large databases to identify common meaning of language, it is of course not free from various subjective judgments. Which corpus to use? How to interpret the co-occurring words? But these determinations are done in an explicit and systematic manner, no longer fudged in the cognitive depths of judicial intuition. The time has come for courts to give data-driven interpretation methods their deserved attention.
Robin B. Kar & Margaret J. Radin, Pseudo-Contract & Shared Meaning Analysis
, 132 Harv. L. Rev.
(forthcoming 2019), available at SSRN
By now, it’s old news that contracts have undergone a transformation in the couple of decades and not for the better. Just thirty years ago, it was a relatively rare occasion when the average American entered into a contract. It may have been a lease or a home purchase, or maybe a car rental agreement. But to purchase a shirt at the mall did not require signing a contract unless it was to sign one’s name on a credit card slip. What a difference the Internet makes. Now, people routinely are deemed to have entered into “contracts.” In their article, Robin Bradley Kar and Margaret Jane Radin address this phenomenon, putting the term “agreement” and “contract” in scare quotes to underscore how these types of “contracts” have “fundamentally different meanings” from their traditional counterparts. (P. 5.)They come up with a more appropriate term for these types of unread, ubiquitous contracts – pseudocontracts – and note the importance of using a different term to describe a different concept because the “use of homonymous terms for concepts that have evolved to have different meanings can mislead one to think that there is no fundamental difference” between the traditional contracting scenario and the one that online consumers routinely encounter. They write that “one must consider how contemporary methods of communication have altered the way parties use language during contract formation.”
Kar and Radin article is both normative and descriptive in that it describes how contract law should address interpretation issues and explains what courts have been doing – at least when they do it correctly (i.e. before ProCD and its ilk mucked things up and made teaching 1L Contracts so much more difficult). Their article is lengthy and chock-filled with terms which neatly capture hard-to-explain concepts. For example, they describe the incremental changes that contract law has undergone to doctrinally accommodate digital contracts as a “paradigm slip” which has the overall result of fundamentally changing core doctrinal concepts such as assent. They explain that their approach – “shared meaning analysis” is not “an alien approach to contract interpretation” but is “consistent with long-standing approaches that are rooted in a nuanced and careful assessment of the shared meaning that private parties produce when they use language to form contracts.” (P. 8.) This is basically the same “contextual” approach adopted by the Restatement (Seconds) of Contracts and the Uniform Commercial Code, but which courts have applied in an uneven and erratic manner. Their approach does more than explain what courts have done (when they are applying interpretation rules correctly); it provides more transparency and “precision to traditional approaches by building on the well-known linguistic distinction…between what sentences mean (including any sentences delivered in boilerplate text) and what people mean when they use language to communicate with one another (including to form contracts.”) (P. 9.) Kar and Radin turn to the work of Paul Grice, a philosopher of language, who distinguished between the meaning of a sentence and what a speaker means when using that sentence within a particular context.
Kar and Radin hone in on what “context” means, explaining that sometimes speakers mean something different or additional to what is expressly said. An example they give is a lackluster recommendation which damns with faint praise, such as a “recommendation” for a Supreme Court clerkship which notes that the applicant engaged in a “great amount of independent legal research and writing” and “showed up for class on time on every single day.” Even though the letter does not expressly say anything negative about the student, the letter clearly implies that the student is unqualified for a Supreme Court clerkship.” The information is conveyed by “conversational implication” meaning that it was part of the professor’s meaning, but not the meaning of any sentence.
The authors then move to the cooperative norms that govern language to form contracts and explain how these norms explain doctrinal concepts, such as the implied duty of good faith which is part of the performance of every contract. The problem with boilerplate is that it is too long and violates various linguistic/conversational maxims (e.g. the Maxim of Quantity, the Maxim of Manner, etc). Because boilerplate is not actually created as a result of cooperative conversation during contract formation, they argue that much of it – though not all – “currently fails to produce any actual agreement with shared meaning during contract formation.” (P. 22.) Consequently, “(b)oilerplate text that is never cooperatively communicated cannot contribute anything to a ‘common meaning of the parties’ produced during contract formation.” (P. 22.)
Kar and Radin then dissect how shared speaker meaning is produced in classic offer-and-acceptance scenarios and contrast that with boilerplate text which may have both contractual and non-contractual purposes. They propose a three-stage (actually four) approach to help courts distinguish the actual agreement of the parties from non-contractual text. They suggest that courts “simply imagine that all of the written and digital text exchanged during contract formation is converted into oral form and contributes to a face-to-face conversation between the relevant parties.” Then courts should ask: “Could this boilerplate text have contributed to an oral conversation that adds terms to a contract while preserving the presupposition that both parties are observing the cooperative norms that govern language use to form contracts?” This “thought experiment” would help courts manage boilerplate text as follows. First, the boilerplate text that falls within this boundary is part of the parties’ actual agreement and is enforceable unless an applicable contract law defense applies. Second, court may better be able to assess “potential hidden conflicts” such as arbitration provisions, waivers and exculpatory clauses which might be inconsistent with the parties’ actual agreement. Third, courts can evaluate remaining boilerplate text which may be neither part of the actual agreement nor in conflict with it.
The shared meaning analysis provides an alternative to generalist or blanket assent approaches to boilerplate. By focusing on shared speaker meaning, Kar and Radin are essentially doubling down on the core of contract law being about the intent of the parties. Of course, the intent of the parties and their reasonable expectations are where contract law should have been all along and where it was before the onslaught of digital boilerplate. Kar and Radin’s article is thoughtful and thought-provoking and should be read by those who might otherwise be tempted to succumb to the paradigm slip which threatens to undermine contract law’s very essence.
Fundamental legal and policy debates usually revolve not only around the goals that the law should pursue, and the appropriate means to achieve them, but also around the underlying facts. Reality is complex, and people tend to look for evidence, to perceive it and interpret it in ways that confirm their prior attitudes. Rigorous empirical research is therefore critically important. In recent years, a growing number of legal scholars have conducted empirical legal studies, often in collaboration with researchers from other social-science disciplines. The thought-provoking article reviewed here—on discrimination against women sellers by bidders in eBay auctions—belongs to this emerging genre.
Market-based allocations of goods and entitlements are presumably not only more efficient than centralized allocations, but also freer and more egalitarian. In the market, buyers and sellers freely transact on an equal footing, as opposed to being rewarded on the basis of their class, race, or gender. Of course, these ideals do not always materialize: there are market failures; transactions do not always reflect the free will of the parties; and markets are sometimes discriminatory. With regard to inequality, some have argued that what appears to be prejudice-based discrimination is actually “rational”—because race and gender are proxies for contractual performance; because profit-maximizing firms cater to the preferences of their prejudiced customers; or because cooperation works best between employees of similar social background. In theory, irrational discrimination cannot survive in a competitive market, simply because it is a faulty profit-maximizing strategy. Arguably, therefore, the continued prevalence of market discrimination indicates either that it is rational, or that our expectations of market competition are exaggerated (or both). Of course, rationality and efficiency do not imply desirability or even permissibility, but most would agree that these are relevant issues when it comes to understanding market discrimination and considering what to do about it.
To shed light on this question, one would ideally look for an environment where it is impossible to come up with any “rational” explanation for market discrimination. In the context of gender discrimination, this would mean a setting where the same products are sold and bought by men and women; contracting processes are identical; no extended, close relationships are expected between the parties; there are no gender differences in terms of perceived reputation; and so forth. Ideally, one would look at a large number of transactions involving a wide range of products. Designing such an environment experimentally would be a daunting task, and finding it in the real world practically impossible—or so one might think before reading Tamar Kricheli-Katz and Tali Regev’s fascinating study.
Having secured the cooperation of the eBay research lab, Kricheli-Katz and Regev analyzed 1.1 million transactions made through eBay—an extremely popular platform worldwide for e-commerce between private individuals (and commercial entities). The data used involved the sales of the 420 most popular products from each of the main categories of the eBay catalogue, between 2009 and 2012. Of the four sale platforms available on eBay, the study focused specifically on sales through auctions—because once a seller lists an item there, the final price is not affected by the seller’s behavior, but only by the buyers’ bidding, so that possible gender differences in bargaining behavior are irrelevant.
For each transaction, the researchers had complete data about the sales object; its presentation by the seller; the auction’s starting price; the hidden reserve price (if set by the seller); the final price; the number of bids made; the seller’s feedback-based reputation; the seller’s eBay experience; the seller’s and buyer’s gender; and more. Apart from the sellers’ feedback-based reputation—which was higher for women sellers—men and women sellers were pretty similar in most respects (with such a huge sample, almost any difference is highly statistically significant, so it is more important to look at the magnitude of the difference than its statistical significance). More importantly, when comparing the number of bids and final prices paid to male sellers with those paid to women sellers, the researchers controlled for all other variables so as to isolate the effect of gender.
Along with various findings concerning certain gender differences in item descriptions, risk-aversion, and buyers’ willingness to pay, the key findings were that women sellers received fewer bids than men, and were paid about 80% of the price paid to men when selling an identical new product, and 97% when selling an identical used one (most private sellers sell used items). The price gap varied across types of items, but there was no easily discernible regularity in this respect.
To complement the main observational study, the authors conducted two experiments. The first established that people accurately identified sellers’ gender based on their eBay actual profiles in 56% of the cases (even though the seller’s gender is not stated), misidentified sellers’ gender in only 8.5% of the cases, and could not tell what the seller’s gender was in the remaining 35%. In the other experiment, participants were asked how much they would be willing to pay for an $100 Amazon gift card, when it was sold by either “Alison” or “Brad.” Similarly to the actual eBay results regarding the sale of gift cards, when the card was sold by “Brad,” the average sum was $87.42, and when sold by “Alison,” only $83.34.
In the absence of any sensible reason to pay more for products merely because they are sold by men rather than women, the price differences found in the study appear to be neither rational nor efficient (unless one tautologically defines efficiency as maximizing the satisfaction of revealed preferences). The findings do not tell us whether such gender-based, price discrimination is conscious or not, although my hunch is that it is at least partly unconscious.
While these troubling findings are clear, their normative and policy implications are not. Arguably, bidders in eBay auctions pay less for items sold by women because other buyers offer lower prices for them. Is there anything morally wrong with that? And even if paying more for items sold by men than by women violates the moral prohibition on harming women by discriminating against them, taking legal steps to prevent price discrimination by private buyers might violate the prohibition on limiting people’s freedom. Of course, we might wish to eliminate gender-based discrimination even if there is nothing immoral in the behavior of any individual buyer. To complicate matters still further, unlike some types of discrimination, the study shows that women sellers are discriminated against by women buyers as well as men. Finally, even if one were to conclude that the government, or other entities, or eBay itself, should take measures to curb this discrimination, it is not at all clear what could be done in this regard. While the authors do not answer these questions, we should thank them for compelling us to seriously consider them.
Cathy Hwang, Deal Momentum
, 65 UCLA L. Rev.
(forthcoming, 2018), available at SSRN
Cathy Hwang’s article Deal Momentum offers empirical evidence to support a new view of preliminary agreements that could reshape the way we think about these hybrids between contract and non-contract. Her data – interviews with deal lawyers and a review of practitioner literature – challenge the conventional wisdom that businesspeople in large mergers and acquisitions hire counsel to draft memoranda of understanding (“MOU”), letters of intent (“LOI”), or term sheets to resolve either deal uncertainty or deal complexity. That view coheres with the standard statement in a LOI – often on every page – that the parties do not intend it legally bind them on substantive provisions such as price. Yet Hwang’s interviews with corporate counsel, her review of practitioner literature and case law suggest that most business people resolve uncertainties and complexities before entering a LOI, not afterwards.
Hwang solves this puzzle of why parties pay counsel to draft term sheets that make substantive terms non-binding when in fact the parties usually intend to – and do — go ahead with the deal once they create a LOI. She concludes that preliminary agreements instead serve as “signposts” that “lend form and formality to an otherwise unstructured phase of the negotiation process.” (P. 37.) She dubs this tipping point “stickiness,” meaning the point when the parties come to believe that the deal will stick.
Deal Momentum, like the work of Robert Ellickson and Lisa Bernstein, demonstrates the power of norms – instead of or in addition to law – to shape relationships. It suggests that law might not be so important to business people as legal scholars assume. But unlike the ranchers, farmers, and merchants in diamonds and cotton, the parties to M&A deals generally are not members of a tight-knit community.
Hwang interviewed twelve deal lawyers with years of experience in private M&A deals at firms in New York, Silicon Valley, Chicago, and Houston, as well as in-house counsel, she reports that the core terms of a deal don’t change much between the LOI and the final agreement and closing. (P. 36.) Deal lawyers, bankers, and business people see the “real work” of the deal differently, based on their role:
From a deal lawyer’s perspective, then, the real work of the deal begins after the preliminary agreement. From the perspective of bankers and business people, however, the deal is finalized in broad strokes at the preliminary agreement stage. This explains why preliminary agreement terms remain largely unchanged after the agreement’s signing – they are business terms that are negotiated by bankers and businesspeople, who have already completed the bulk of their relevant diligence prior to the agreement’s signing. (P. 36.)
Why, then, would a business spend the time and money to negotiate a non-binding agreement, when they could skip right to the stage of finalizing the agreement?
Following Fuller’s three functions served by formalities like writing requirements under the statute of frauds – evidentiary, cautionary, and channeling – Hwang sees preliminary agreements as providing a vehicle for parties to
signal to each other and attach moral suasion to their non-binding agreement . . . [they] can organize their early collaboration, and introduce lawyers, who act as a set of reputational gatekeepers, to help them further solidify their certainty in the deal.” (P. 38.)
The moral suasion is particularly surprising, since the parties to these M&A deals are not repeat-players with one another. Accordingly, her subjects report that walking away from a LOI generally does not harm a party’s reputation. Yet they also say they care about “their word,” and having the reputation as an “integrity player. (P. 39.) Hwang surmises that the multi-stage nature of big deals creates an incentive to induce trust in the other side. As one subject put it, parties want to show commitment short of legal obligation: “You go on dates, . . . but that doesn’t mean you’re getting married. But you give gifts sometimes. It means some level of commitment.” (P. 40.)
LOIs also signal organization. One deal lawyer analogized the attorney’s role to the 1980s TV ads for Reese’s peanut butter cups:
Too many times the business people come and they think they have a great idea. Like, I’m going to put my chocolate in your peanut butter. You have to sit back and be like, that’s great, but who’s going to pay for the packaging? The marketing? How about employees”? [A term sheet] helps both sides knock out the material terms and figure out if there’s a skeleton to get the deal done. (P. 40.)
Contrary to the reputation of lawyers as deal-killers, this story – offered by a deal lawyer, of course – shows value that transactional lawyers can bring.
But most interesting for law professors is the role of attorneys as gatekeepers. Unlike the parties, the attorneys are repeat players with one another. Lawyers at the elite firms that structure M&A deals encounter one another repeatedly in different transactions, so they have an incentive to keep their word, and thus function as “reputational intermediaries” that signal to parties, bankers, and regulators that attorneys are on task as gatekeepers of legitimacy, screening out legal flaws and verifying compliance with regulations and procedures. In other words, bringing in the lawyers is a way that the parties tell one another and third parties that they mean business.
Signaling through exchanges on the edge of law shows up in areas other than M&A deals. A couple gets engaged when they have found out enough about one another to conclude that they’re sufficiently congenial to make a lifelong commitment. In my book Love’s Promises, I dub these not-legally-binding exchanges as “deals” that support relationships. Combining that approach with the idea of deal momentum, the engagement ring signals one party’s commitment to provide of financial stability, as well as respectability via the public announcement of that exchange. Moreover, the trouble a proposer takes to pop the question in a dramatic or emotional way implicitly promises years of sharing stories about how that family came to be, a norm that could support them through bad times and give them an additional reason to be glad of their merger when things are going well.
The data compiled in Deal Momentum shed light on why parties enter both personal and corporate agreements that are not binding, thus mapping the shadow of the law in which bargaining occurs as well as lawyers’ roles. Future scholars may well suggest another term to describe the stage of a deal’s life when a LOI is merited. Hwang’s term “sticky” coheres with her main point that a term sheet signals the stage in a deal when the parties switch from “why should we enter this deal?” to “why not?,” a switch from a “no” default to a “yes” default. The “yes” becomes a sticky default at that moment. Yet stickiness also implies stasis, not movement. The term “traction” may better capture Hwang’s observation that a LOI works as a green light ushering the parties toward completing the transaction.