Jun 28, 2023 Martha Ertman
Marissa Jackson Sow’s brilliant article Whiteness as Contract pushes contracts scholars and critical race theorists to think about old topics in new ways by revealing connections between seemingly separate areas. It builds on Cheryl Harris’ Whiteness as Property, 106 Harv. L. Rev. 1709 (1993), to show the deep synergy between contract and white supremacy the way that Harris connected the private law of property to public law regulating racial subordination. Like Harris, Jackson Sow marshals high theory – here social contract theory — to explain persistent structural, economic, and physical harms to African Americans and in doing so prescribes a fix to those injustices. Jackson Sow’s “whiteness as contract” theory could and should shape many if not most future scholars’ writing about law and inequality.
We’re on the Contracts Jotwell page, so I focus on Jackson Sow’s Washington & Lee Law Review article. But you may already know about the breadth and ambition of Jackson Sow’s theory from the wide range of contexts to which she’s applied it: police brutality in Protect and Serve, 110 Cal. L. Rev. 743 (2022); enfranchisement in (Re)Building the Master’s House: Dismantling America’s Colonial Politics of Extraction and Exclusion, 121 Mich. L Rev. 113 (2023); and to defend critical race theory in Whiteness as Guilt: Attacking Critical Race Theory to Redeem the Racial Contract, 69 UCLA L. Rev. Disc. 20 (2022).
Together these articles offer the best answer I have encountered to persistent racial injustices. In a legal and social environment that trumpets its commitments to equal treatment, why do police continue to harass and brutalize African Americans, schools to shunt black youth down the prison pipeline, health care providers to deprive black patients of equal treatment, lenders to exploit black borrowers, to name just a few racial injustices? Because, Jackson Sow explains, our core commitment is to white supremacy, not equality. She asserts that the U.S’s “primary social contract – the U.S. Constitution – established the centrality of property ownership, and necessarily the right of contract” and formally excluded Black people from these rights via provisions such as the Three-Fifths Clause. (1820) In this view post-Civil War Reconstruction reforms such as the 13th, 14th & 15th Amendments and derivative legislation failed to “revoke the racist social contract.” (1821) Even after the reforms of the mid-20th century civil rights movement, racial injustices continue because, she explains, “[t]he signatories to the white supremacist racial contract viewed antiracist legal reforms as breaches to the contract and always sought to remedy those breaches via legal, illegal, and extralegal means.” (1822)
In other words, racial subordination is the rule, rather than an exceptional departure from a norm of race equality. Whiteness as Contract lays the theoretical foundation to reveal this truth and suggest interventions to remedy this deep defect in our justice system. The first of her two theoretical touchstones – Cheryl Harris’ notion of whiteness as property – is familiar to law professors. But one of the major contributions of Whiteness as Contract is Jackson Sow’s dexterous use of philosopher Charles Mills’ book The Racial Contract (1997) to expose connective tissue between the metaphysical social contract and commercial contracts.
Social contract theory à la Rawls imagines a primordial exchange in which our distant ancestors swapped the freedom enjoyed in a mythical state of nature for the so-called “civil freedom” of civilized society. In this view people chose in their self-interest to relinquish some freedoms to the state for their own good and the community’s greater good. Government – and thus law — is for everyone and by everyone. Mills critiques the idealism embedded in this model, in particular Rawls’ imagined “veil of ignorance” that prevents hypothetical designers of law and society from knowing their race, sex, level of wealth, or other social and physical characteristics. According to this widely used heuristic, that blindness allows us to imagine and create an ideal society in which legal and social rules would not allow – let alone facilitate — any one group to systemically dominate the others. Mills points out that Rawls’ forward‑looking approach conveniently ignores past harms and baked-in hierarchies that continue to distribute wealth and power to white men and away from white women and people of color.
A growing number of contracts scholars such as Mehrsa Baradaran likewise situate systemic racism as a breach of the social contract, and propose reforms as necessary remedies to that breach. Those proposals seek to reform what Mills calls “the Racial Contract” to make it live up to its liberal promise. Yet often legal scholars elide over the difficult matter of connecting the terms of the idealized social contract and the actual Racial Contract to commercial contracts. Whiteness as Contract fills this gap by clearly identifying the social contract terms that the Racial Contract breaches, thus creating a framework for doctrinal reforms to repair that harm.
Whiteness as Contract begins by detailing white vigilantes’ near-lynching of a black man who supposedly trespassing on private land with some white friends to watch a lunar eclipse, and water shutoffs in Detroit because the city charged (largely Black) residents more for the water in the vast reservoir under the city than whites who abandoned the city for suburbs. Jackson Sow marshals “contract theory to explain why Black people’s possession of property – including their rights to home ownership and life-sustaining utilities, their rights to personal physical integrity, . . . is regularly met with brutal resistance.” (1810) Her “theory of personhood “maps ways that Black people are stripped of contractual capacity and the rights to political, commercial, or personal proprietorship” (1810).
Of course, formal law has long enabled Blacks to exercise economic citizenship. But Jackson Sow looks behind the surface of black letter to explain how and why “proximity to whiteness comes with greater access to rights,” and “proximity to Blackness comes with greater exclusion from them.” (1812) Whiteness as Property argues that these relentless abuses persist because “whiteness is a product of contracting – both commercial and social – that creates, and continues to negotiate, an invisible common law that preserves control over property, capital, power, and contracting authority for those raced as white.” (1810-1811) In short, “the terms of whiteness are written in an ‘invisible ink’” to maintain “a sociopolitical order that places Black and Indigenous people outside of the law, outside of personhood, and – as necessary – outside of property, via displacement, dispossession, disenfranchisement, or death.” (1811)
Space constraints prevent detailed analysis of Jackson Sow’s convincing link between social contract theory and persistent racial bias in actual, commercial contracts. Her case study of the Detroit water crisis reveals that largely-black Detroit residents subsidize the water delivery to the more monied and more white suburban residents. (1855). Another contractual injustice that contributed to the sky-high Detroit foreclosure rates of 25% between 2011 and 2015 involved the city inflating Detroit real property taxes, tacking on inflated water bills to the taxes, and having those debts run with the property so that new owners enter already behind in their payments (1864-1865). She contends that formal rules such as property ownership get treated as mere tenancy under the Racial Contract, because “[w]hiteness is only valuable property when it is exclusive and exclusionary,” leaving African Americans “dependent upon the whims of the landlords” and white citizens “exercising their lay policing authority.” (1868) Think of New Yorker Amy Cooper calling the police on black bird watcher Christian Cooper in Central Park for the “crime” of telling Ms. Cooper to leash her dog.
Whiteness as Contract concludes that contract theory helpfully locates “the motivations of government to prey on Black and Indigenous people, extracting resources they enjoy, possess, and manage, and expropriating them for the benefit of white individuals, the state, and corporations.” (1881) Once we see this expropriation as a breach, the question of damages arises. Jackson Sow supports “antiracist racial contracting” (1833) in the form of, for example, supporting Black-owned and Indigenous-owned businesses (1844), ending extractive practices such as the Detroit water policies by charging affordable, flat rates for all regional consumers, and providing reparations for Detroit and Flint victims of water policies with tax credits to recognize and offset some of those losses. (1886)
Finally, Jackson Sow calls on her white readers to “recognize their individual and collective guilt” as either “signatories to or beneficiaries of an ongoing series of negotiations over the benefits and spoils of white supremacy.” (1888) It’s a perfect end to an extraordinary scholarly contribution that addresses a seemingly intractable social and legal problem, beautifully highlighting the role of high theory such as social contract analysis to our obligations to one another in the everyday matters of mortgages, grocery bills, student loans, and other contracts that shape our lives and life chances.
Editor’s note: For a previous review that discusses this article see Ezra Young, Trumpism and Critical Contract Theory, JOTWELL (Dec. 7, 2021).
May 29, 2023 Orit Gan
Albertina Antognini & Susan Frelich Appleton,
Sexual Agreements, 99
Wash. L. Rev. 1807 (2022).
This thought-provoking article analyzes the interaction between contract and sex. Seemingly they belong to two utterly different and separate worlds, with no connection between the two. As the authors show, the conventional wisdom is that a contract for sex is unenforceable, whether the parties are married or not. In the case of unmarried couples, the courts refuse to enforce sex for property contracts since that would validate prostitution. Contracts for illicit sexual services are void for violating public policy. In the case of married couples, the courts would not allow the parties to alter the marriage contract written by the state. Sex is essential to marriage, and as the loss of consortium claim proves, sex also has economic value in marriage. This is sex exceptionalism, which means the state prevents the distribution the parties agreed upon in their contract whether in marriage or outside of marriage. Moreover, the authors claim that privileging marriage–and not prostitution–is the reason the courts invalidate non-marital sexual agreements and maintain the marriage-cohabitation hierarchy.
However, the authors claim that in fact the law governing sexual agreements is more complex, and they offer a nuanced description of the law’s treatment of cases where sex is part of the contract. Drawing from paid gestational surrogacy, parentage agreements, surrogate partner therapy and adult entertainment employment as examples they show that the law recognizes these sexual arrangements as legal contracts. Moreover, rape law is based on consent, which means the distinction between lawful and unlawful sex is constructed in a contractual manner. As these examples demonstrate sex and contract are not separate but they coexist and converge.
The article concludes by discussing the benefits of contractual approach to sex. Though it has some disadvantages (such as commodification, perpetuating gender inequalities and maintaining gender biases, and the limited notion of contractual consent) the authors conclude that sexual agreements should be enforceable.
This fascinating article on sexual agreements raises questions about the entanglement of sex, marriage, and contract, as well as profound questions regarding each of these concepts separately.
First, the article questions, What sex is all about? Is it a commodity of economic value? Is it emotional (even prostitution serves emotional, and not only sexual, needs)? Is it part of marriage? Is it separate from other aspects of marriage? Is it part of any loving relationship whether marital or non-marital, and whether between same-sex couples or different-sex couples? It also challenges how sex is gendered in a patriarchal society, and how we might envision what sex would be in a utopian egalitarian world.
Second and relatedly the article questions, What is marriage all about? How is it different from a non-marital committed relationship? How is it different from prostitution? Is it a public institution governed by state regulations or a private institution governed by the parties’ agreement? Is it a status or a contract? And it also challenges how marriage–like sex–is gendered in a patriarchal society, and how we might envision what egalitarian marriage would be like free from gender roles.
Lastly, the article questions, What is contract all about? Is contract restricted to the market and to commercial agreements? Is it applicable to the family? Is it an economic tool to enhance the parties’ welfare or is it about relations? How should the law set the boundaries of contract law? What is included in the world of contract and what is excluded from it? Is consent a workable basis for contract? Is there a difference between consent to sex and consent to contract? What public policy should invalidate contracts? And it also challenges the role of the courts in enforcing contracts, policing property distribution, and maintaining social institutions like marriage.
There is a rich and diverse literature on contracts between family members, challenging the separation between the market and the family. This article takes this issue a step further by focusing on sexual agreements, making an immense contribution to this scholarship. It questions how contract law treats sexual agreements and sexual distribution. It also questions how contract law should be revised in order to enforce sexual agreements and to allocate sex in a just and egalitarian manner.
Apr 28, 2023 Hila Keren
Gregory Klass & Tess Wilkinson-Ryan,
Gender and Deception: Moral Perceptions and Legal Responses, 117
Nw. U. L. Rev. __, forthcoming 2023, Jan. 20 2023 draft available at
SSRN.
Is caveat emptor indeed “a rule for he and not for she”? This is only one of the excellent questions raised by co-authors Gregory Klass and Tess Wilkinson-Ryan in their recent symposium contribution Gender and Deception. The question is induced by classical casebook entries that seem to reflect an increased judicial willingness to protect women from market deception. Recall, for example, the many “Arthur Murray cases” in which franchised dance studios around the country made exuberant profits from making elderly women with no dancing experience believe that they are only a few more lessons away from becoming professional dancers. However, to the extent such a gender-based approach exists (which is unclear at best), it often comes with a price not only for male buyers. Too often, as the co-authors importantly remind readers, intervention on behalf of deceived women seems to reflect and perpetuate gender biases regarding their capabilities—disrespectfully portraying them as gullible.
Given those implications, Klass and Wilkinson-Ryan delved into the relationship between gender and market deceit armed with exciting empirical tools. They designed three vignette-based studies that, in their words, “focus on common moral attitudes toward deception.” The authors report that the first study yielded the most significant results. This study tested the moral judgments of online-survey takers regarding a simple transaction between two individuals: a seller and a buyer of a used kitchen table. The deceiving party presented the table as an antique and sold it to the deceived buyer for $500, although the table was bought in a big box store, such as Target or Walmart, and was worth only $200. Participants identifying themselves as men, women, or nonbinary (counted with women), were asked to consider three different levels of buyer’s misrepresentation (implied, nondisclosure, and explicit lie) and ranked how ethical they were on a 1 to 7 scale.
The authors predicted that participants’ moral judgments study would show greater tolerance when the deceiving and the deceived parties are of the same gender, and vice versa. But, despite these nuanced forecasts, the study found that subjects viewed only one combination—“men fooling women”—to be particularly objectionable. It also showed that corporations were perceived as male, which made their deceptions of women especially problematic. These seemingly modest results, the authors explain, are original and valuable nonetheless, in part because previous experimental moral psychology studies had demonstrated a tendency to treat moral agents’ identity features, such as gender, “as noise rather than signal.”
The second study reported in Gender and Deception built on the first. It tested whether the heightened wrongfulness of men fooling women would extend to enhanced support of protective regulation to products typically sold to women. Here, the authors designed vignettes centering the possible consumer protection regulation of similarly priced goods associated more with men (e.g., beard trimmers) or women (e.g., hair dryers). The main finding of this study was “a small but statistically significant effect of product gender on the propensity to regulate.” It demonstrated greater support—by male and non-male participants alike—for restrictive regulation of products associated with women.
In the third and last study, the authors examined subjects’ willingness to respond to deception with punitive measures. Here, they introduced a scenario of criminal fraud against either two brothers or two sisters and predicted a greater tendency to punish the defrauding party (a man) when the victims were women. To the authors’ admitted surprise, the study did not find a statistically significant difference in punitive inclination based on victims’ gender. Instead, the data suggested that it was the subjects’ features—age, gender, and political ideology—that played some role in the length of sentences assigned in each case.
So, is caveat emptor indeed “a rule for he and not for she”? Not so much, according to the three original studies reported by Klass and Wilkinson-Ryan, which supported a narrow positive answer: when the buyer is a woman deceived by a man in the context of buying used furniture. Perhaps the modern retraction from caveat emptor is less influenced by the entry of vulnerable buyers into the market, as the authors at some point propose, and is more related to the increased diversity of market actors’ moral views. Might it be that the driving force behind less tolerance of market deception is women’s enhanced active participation in the market and growing role in business and legal decision-making? This alternative is tempting because it presents a less victimizing or paternalistic view of the evolution of legal rules—one that a feminist approach to contracts would more easily embrace.
While the authors do not suggest such an explanation, I was enthused to learn that their most significant finding might support the above feminist hypothesis. In their first study on moral judgments of deceptions, the authors found “robust support for the proposition that women are more likely than men to regard deception in the marketplace as an ethical wrong.” It turns out that victims’ gender notwithstanding, male respondents ranked deceitful behaviors as more ethical than female and nonbinary respondents. Klass and Wilkinson-Ryan do not elaborate much about the broader meaning of their salient finding. Indeed, they are cautious enough to stress that, at this stage of their work, they have little to say about whether or not men are more predisposed than women to engage in deceptions. They do allude, however, to a correlation they describe as both probable and desirable between believing that conduct is wrongful and refraining from engaging in it. They also mention others who had claimed and provided evidence that women are less inclined to deceive. Additional works similarly demonstrate an over-representation of men in fraud, including in scientific research, fraud cases in 2020-2021, corporate crime, and white-collar crimes.
Therefore, as we await with anticipation additional experiments to follow the research agenda that the article provides, could we consider the possibility that it is women’s expectation of morality in the market and possibly their honesty that makes at least some of the difference? Is it conceivable that Gender Deception’s reported results align more with Carol Gilligan’s work on women’s different voices than with the judges that helped female dancers while patronizing them? Indeed, at one point, Klass and Wilkinson-Ryan generalize their findings as follows: “Women subjects were more likely to express that consumer deception is unethical and more likely to support regulation of consumer deception or risky consumer products. They favored lower prison sentences, however, than men.” Significantly, more than demonstrating stereotypical female fragility, such a description seems to capture a specific version of morality—one that leading feminists have called the ethics of care.
Besides feminism, the hypothesis of moral diversity would also fit game theories that have long taught us about the salient role of reciprocity in actors’ decision-making. On this view, if women expect more integrity from themselves and others and accordingly are believed to be less involved in deception than men, then (in line with the first study) deceiving them might become less acceptable, especially when the deceivers are men who are assumed to be less committed to honesty. Similarly (in line with the second study), enhanced restraint of deceit related to products associated with female users may be explained less due to women’s vulnerability and more as further support of reciprocity.
All told, Gender Deception is a fascinating and promising work that should become, as the authors propose, “the very beginning of a larger project in the psychology of consumer protection.”
Cite as: Hila Keren,
Gender and Marketplace Morality, JOTWELL
(April 28, 2023) (reviewing Gregory Klass & Tess Wilkinson-Ryan,
Gender and Deception: Moral Perceptions and Legal Responses, 117
Nw. U. L. Rev. __, forthcoming 2023, Jan. 20 2023 draft available at SSRN),
https://contracts.jotwell.com/gender-and-marketplace-morality/.
Mar 24, 2023 Nancy Kim
Tim Samples, Katherine Ireland, and Caroline Kraczon,
TL;DR: The Law and Linguistics of Social Platform Terms-of-Use, __
Berkeley Tech. L. J. __ (forthcoming 2023), available at
SSRN.
Much has been written about ubiquitous online terms of service or terms of use (TOUs). But, as Samples, et. al. write in their forthcoming article, TL;DR: The Law and Linguistics of Social Platform Terms-of-Use, TOUs are poorly understood. Their interdisciplinary study examines the “law and linguistics” of 196 agreements for 75 smartphone-based social platforms. Most other studies of TOUs have a law and economics vantage point, but their study combines legal analysis with “natural language processing, data science, and corpus linguistics.” (P.5.) Corpus linguistics is the “scientific study of naturally-occurring language in the aggregate, often in large datasets, so-called corpa.” (P. 4.) All this means that their study focuses on what matters when thinking about consumer contracts: the language and readability of contracts.
The article begins with a summary of what most contract scholars know by now (nobody reads adhesive form contracts), and then proceeds with an overview of the law in this area. The authors note that social platform TOUs have characteristics that make them particularly problematic. First, they operate on an unprecedented scale. The largest platforms, such as Facebook, affect billions of users.
Second, the platforms have attention surveillance business models and are “positioned to harvest particularly intimate and sensitive data about their users.” (P. 14.) The attention-surveillance business model “generates problematic incentives” and tempts platforms to “deploy addictive interfaces (also known as ‘dark patterns’) to maximize user engagement.” (P. 17.) These addictive designs combined with “extraordinary scale and data sensitivities…add another layer of differentiation between general consumer contracting and social platform TOUs.” (P. 17.)
Third, because these platforms “mediate almost every aspect of modern human life,” they are hard to resist and using them becomes “almost inevitable.” (P. 18.) The authors note that “(t)heories of rational behavior falter in these conditions. Because the top social platforms play such an essential role in everyday life, users are hardly facing a real choice when they click the ‘I agree’ button.” (P. 18.)
Finally, the “ownership and management of data is elemental to governance” and “TOUs play a significant role in digital governance, especially in jurisdictions that have weaker data and consumer protection laws.” (P. 19.) They note that these platforms take a quasi-governmental role and “play outsized roles in shaping privacy and speech rights at the global scale.” The TOUs are “central in defining the relationships between technology and society” and through creating “governance frameworks for the users of digital platforms, TOUs shape basic human rights such as privacy, personal security, and political participation.” (P. 19.) For example, they note, when the former President Trump sued Twitter for removing him from the platform, a judge looked to Twitter’s TOU to decide whether to grant the motion to transfer. (P. 19.)
Having persuasively summarized what makes platform TOUs unique, the authors then assess the readability, linguistic complexity, and key tendencies of social platform TOUs. (P. 20.) They use several metrics, including the Flesch Reading Ease test and the Flesch-Kincaid test, that measure various factors, including text length and paragraph size, as well as lexical and syntactic structures and complexity. (In the article, they provide a comprehensive discussion of the datasets they used and the data processing methods for those who want more information).
The Flesch Reading Ease scores indicate that TOUs are “incomprehensible to most consumers.” (P. 32.) The authors note that arbitration clauses are particularly unreadable. The Flesch-Kincaid score similarly shows the unreadability of TOUs. Both scores indicate that at least some undergraduate coursework is required to understand the average TOU.
They compare their dataset with earlier studies conducted by Michael Rustad and Thomas Koening and Uri Benoliel and Shmuel Becher. These prior studies also found TOUs unreadable although not to the same extent which the authors interpret to mean that TOUs are getting worse, not better. (P. 33.) As for syntactic complexity, TOUs across the board exhibited a “high degree of overall difficulty and lack of reading ease,” and arbitration clauses were particularly unwieldy. (Pp. 34-35.)
Finally, except for the platform Telegram, which was unusually laconic, the TOUs were quite wordy. Venmo’s TOU had 20,505 words, which the authors note, is the length of a law review article. They observe that the benefits of such wordiness are one-sided because platforms “incur very little cost in adding terms to online contracts” while “snowballing length poses enormous transaction and opportunity costs for consumers.” (P. 40.) To make matters worse for consumers, these documents are typically read (or supposed to be read) on mobile phones, an impracticable if not impossible feat.
These unread clauses do not simply recite harmless company policies. They deprive adherents of valuable rights. Samples et. al. note that 64% of the TOUs (48 of 75) contain arbitration clauses (P. 42), and nearly all of those contain class or collective action waivers. Virtually all of them (71 of 75) contain unilateral modification clauses which platforms take advantage of by modifying their TOUs frequently.
The authors conclude that there is a “yawning gap” (P. 49) between classic contract doctrine and modern contracting and that “contract law remains static” (P. 49) despite profound marketplace changes. I disagree; I think that contract doctrine has (d)evolved dramatically, at least as applied to TOUs. Traditional contract law doctrines require more in the way of contract formation than what is required under the deviant strain of wrap contract law unleashed by ProCD v. Zeidenberg and its progeny. Samples et. al’s study does an excellent job of demonstrating just how far the law of TOUs is from the classic conceptions of mutual assent, intent, and reasonable expectations that are foundational to contract law.
Feb 15, 2023 David Hoffman
Keith Hylton,
Waivers (2022), available at
SSRN.
There is nothing more worth celebrating than articles you learn from even when you think they are wrong from soup to nuts. Keith Hylton’s new draft, Waivers, is that kind of piece for me. In the paper, Professor Hylton considers waivers, which as Professor Bob Hillman once described, are “crazy stuff.” They aren’t necessarily contracts and need no consideration; they extinguish legal rights with the lightest of touches, but can be retracted just as easily, except when they can’t; and they are subject to a policing regime that varies considerably between states and across time. Is waiver x enforceable can be one of the most difficult questions for contract and tort jurists to answer. And yet, as the Waiver Society Project has illustrated, waivers are increasingly ubiquitous. We need clear thinking about this phenomenon, and Waivers is therefore a paper I like lots, even though I reject its premises, analysis and conclusion.
The Article summarizes some of the skeptical law on waivers, and the scholarly worries which helps to justify it. It’s fair to say that Professor Hylton, as a practicing legal economist, is not convinced by claims that waivers are bad for the rule of law, create externalities that can’t be managed, undermine democratic control over the lawmaking power, or reduce individuals’ dignity. But he does summarize those complaints lucidly and fairly. He then offers a defense of waivers that starts by first providing the ideal case—fully informed consumers—and then a more realistic one. The argument that will be of most use to you, I suspect, is his claim that waivers (which can stand in for other kinds of boilerplate) have social value even when they are unread, unknown and adhesive. As he says, firms will benefit from waivers regardless of whether consumers know what they’ve lost; in competitive markets waivers thus can be assumed to result from consumer choices between products based on price, and maximize social welfare.
Professor Hylton offers some limits on this market-valorizing solution, which largely cash out at worries that consumers are systemically undervaluing their legal rights, either as a result of information asymmetry or wealth effects. From this he generates (P. 34) a test, which would teach courts to condition enforceability of a waiver on the degree of the underlying negligence it exculpates. When the underlying conduct suggests “weak or ambiguous” negligence, the waiver is likely welfare enhancing, while when it suggests “strong or unambiguous” negligence, it is not.
The theory is both normative and descriptive. He suggests that this hydraulic test better explains the relevant caselaw than some of the more diffuse public policy ideas that are extant, and would ground it better in a testable economic theory. In particular, Professor Hylton says that his test explains why we continue to see waivers deemed unenforceable in contracts: as the question of enforceability turns on the facts of the negligence, not the general situation, firms “continue to include waiver provisions in their contracts with consumers…because the unenforceability holdings are often conditioned on the facts of the case, in spite of the expansive rhetoric often employed by courts.”
What I liked–and why I recommend Waivers to you–is that this very short piece will offer readers a sophisticated version of classic law and economics arguments in general defense of boilerplate. You can understand, reading the piece, the gist of the case against policing the fine print. Professor Hylton’s description of the limits of that case is equally useful, particularly his careful teasing out of litigation and information costs. Almost all modern contract scholarship thinks that the case against boilerplate died with the informed minority reading hypothesis: He aptly shows us how consumers might benefit from product (contract) attributes they never know about, and when they might, without particularly complicated economic jargon. And his hydraulic test does offer a charitable defense for the (shocking?) fact that many consumer-facing contracts contain terms that courts have found unenforceable.
I had questions reading the piece. Most importantly, I was unclear if courts could actually determine negligence without reference to the waiver in those circumstances where one of the inputs into the legal rule is the consumers’ knowledge of risks. That is, waivers have two effects: they might legally exculpate liability as a matter of contract, and (separately) they can inform the factual question of whether the firms conduct is wrongful. If a supermarket puts a “WET FLOOR” sign in an aisle, it primarily affects the latter judgment; if Instacart requires you to waive your rights to sue for foodborne illness in its terms and conditions of delivery, the effect is primarily on the former. But many waivers can do both things simultaneously, which makes it difficult to clearly know if a waiver should be enforceable as a function of the quantity (or quality) of the negligence it governs. Or to put it differently, isn’t negligence endogenous to waiver?
And generally, I wondered about the scope of the claim. What counts as a waiver–would we think (as Professor Hylton suggests) that arbitration is a waiver merely because it varies the litigation default? Are choice of law clauses a waiver? This seems to put great weight on the status quo. Some of the time reading the paper I was unclear if instead of “waiver” we should substitute “right affecting term,” and if so whether the conclusions would follow.
Regardless of these disagreements, this is a good paper to read. It’s short, elides Greek letters and equations that will turn off the math-phobic, and steelmans most of the arguments it rejects. I recommend it to you.
Jan 16, 2023 Daniel Barnhizer
J.J. Prescott and Evan Starr,
Subjective Beliefs about Contract Enforceability __
J. Legal Stud. __ forthcoming 2023, available at
SSRN.
In this article, J.J. Prescott and Evan Starr analyze the practical problem of how perceptions of contract enforceability can affect party behavior even when those perceptions are incorrect as a matter of law. Specifically, the authors tackle the difficult divide between the law on the books versus the law in action as famously described by Roscoe Pound. Under Pound’s formulation, the practical applications of law by parties in the real world will often diverge from the model of behavior upon which applicable laws regulating the parties’ conduct are based. As the divergence between reality and law increases, eventually either the law must adapt through development and adaptation of legal fictions to resolve the divergent applications or courts and legislatures must respond with new law. Subjective Beliefs about Contract Enforceability develops important observations regarding how parties actually respond to unenforceable contract obligations versus legal prohibitions on enforceability of certain contract terms and provides support for creation of new legal responses to address that divide.
The article approaches the general problem of perceptions of contract enforceability through the lens of employment contracts. In particular, the article analyzes the issue through the empirical question of how employees’ perceptions of the enforceability of non-compete clauses in their contracts affects their willingness to seek alternative employment even where state law prohibits enforcement of such provisions. The empirical project begins with the proposition that “[h]ow individuals behave in response to law depends on their particular and sometimes mistaken beliefs about the law’s content, including the probability of enforcement.” (P. 1.) As the authors note:
Our work is motivated by two recent findings that point to the possible influence of mistaken beliefs in this domain. First, employers use noncompetes heavily in states that explicitly refuse to enforce them. Second, noncompetes appear to influence employee mobility even in states where such provisions are unenforceable. While there are several reasons why employers might use and employees might comply with noncompetes even when employees know that a court will not enforce them (e.g., reputational harm or disutility from breaking a “promise”), one explanation for these results is that employees have mistaken beliefs about noncompete policies and that these beliefs matter to their choices. (P. 1.)
From these two initial motivations, the authors develop an empirical description of the degree of disconnect between the law – nonenforceability of noncompetes in particular jurisdictions – and the impact of employees’ mistaken perceptions of the law. Specifically, employees generally appear to be widely impacted by the presence of a noncompete term in their employment contracts, regardless of whether the term is enforceable under state law. At the same time, employees demonstrated relatively low awareness regarding the enforceability of noncompetes in their own states. Approximately 75% of employees in states that enforce noncompetes correctly believed such agreements are enforceable while approximately 70% of employees in states that do not enforce noncompetes incorrectly believed the agreements are enforceable. (P. 11.)
The impact of both noncompetes in general and mistaken perceptions regarding the enforceability of noncompetes appears to be significant. According to Prescott and Starr, employees who mistakenly believe noncompetes are enforceable “put less effort into searching for new positions at competing firms, necessarily limiting their ability to learn about the law governing their contract from competitors. This finding reminds us that certain mistakes – even mistakes about the law – may cause agents to refrain from activities that facilitate error correction and thus can become persistent.” (P. 14.)
Moreover, the data suggest that employers in states that do not enforce noncompetes still include those terms in employment contracts and have an incentive to maintain employee misperceptions regarding the enforceability of noncompete agreements. In comparing equivalent employees, one of whom receives an offer from a competing firm and one who does not, the authors found that “comparing two observationally equivalent employees (per our controls) who are subject to a noncompete and who have received job offers from competitors, an employee with an unenforceable noncompete is approximately 40 percentage points more likely to receive a reminder about their (unenforceable) noncompete (71% vs 32%, 34%) from their employers.” (P. 15.)
One note of optimism lies in the authors’ finding that educational outreach aimed at employees in states that do not enforce noncompetes may affect the willingness of those employees to seek alternative employment. (Pp. 16-19.) However, it is worth noting that there may be factors exogenous to the contract terms that create disincentives for employees to pursue alternative employment even after learning that their noncompete agreement is unenforceable.
Overall, this article provides an extraordinary insight into the real-world impact of noncompete agreements on employee mobility, as well as the in terrorem effects of such contract terms even if they are not legally enforceable. On a more abstract level, such empirical investigations into how contract law actually affects party behavior critically inform analysis of how legal institutions should respond (if at all) to both the substance of particular contract terms as well as whether one side in a particular transaction type is systematically exploiting informational and bargaining power advantages.
Cite as: Daniel Barnhizer,
Perceptions and Reality, JOTWELL
(January 16, 2023) (reviewing J.J. Prescott and Evan Starr,
Subjective Beliefs about Contract Enforceability __
J. Legal Stud. __ forthcoming 2023, available at SSRN),
https://contracts.jotwell.com/perceptions-and-reality/.
Dec 5, 2022 Eyal Zamir
Much of contract law—including the doctrines pertaining to contract formation and to defects in the contracting process (such as mistake and duress)—revolves around the question of whether the parties have expressed a valid will or consent. Drawing the line between valid and invalid consent preoccupies other spheres of law as well, such as tort law (for example, in the context of consent to a medical treatment) and criminal law (e.g., the distinction between voluntary sex and rape).
In contract law, special challenges are posed by the fact that nowadays the great majority of contracts (some would say 95% to 99% of the written contracts) are made through standard forms, where one party—be it a consumer or a commercial customer—does not meaningfully participate in setting the terms of the transaction. In fact, practically no one reads the terms of the standard forms before expressing his or her consent. This is true not only when signing a form in a bank or a store (where reading the contract before signing it may upset the people waiting in line), but also when contracting online in the comfort of one’s home or office (Bakos, Marotta-Wurgler and Trossen 2014). Not only people do not actually read contracts before signing or clicking their consent; even if they wanted to, there is practically no way they could read all the contracts and other types of information they are constantly bombarded with by commercial firms, governmental agencies, and other institutions (Ben-Shahar and Schneider 2014).
How can legal policymakers, including courts, hold that people consent to terms that they do not (and practically cannot) read before making the contract? Joanna Demaree-Cotton and Roseanna Sommers’ experimental study in Autonomy and the Folk Concept of Valid Consent may provide an interesting answer to this lingering question. The authors distinguish between people’s capacity to make free and autonomous decisions, and the exercise of this capacity. Even when people have the capacity to rationally make a decision that reflects their true will, they do not always use this capacity. Should a consent given by a person who has the capacity to make a free and autonomous decision be considered valid, or should it be considered valid only if the person has actually exercised that capacity?
The authors study this question in the contexts of consent to sex, to medical treatment and to police’s entrance into and search of one’s home. They compare people’s judgments of the validity of consent when it is given by (1) a person who is able to make a free and autonomous decision and actually makes such a decision, (2) a person who can make such a decision but does not use the capacity to do so, and (3) a person who is unable to make free and autonomous decisions. More specifically, in Study 2 reported in the article, the second condition (being able to make a free and rational decision, but not exercising this ability) includes cases in which the decision to undergo an elective surgery is made (1) out of impulse, (2) due to peer pressure, (3) without the relevant information, or (4) based on a superstition.
Without going into details, the main result of the studies reported in the article is that people judge a consent given by a person who is capable of making free and rational decisions as valid, whether or not he or she has exercised this capacity for any reason (people are considerably less inclined to view consent given by a person who lacks the necessary capacity as valid).
Since the results were found in three different contexts and in more than one experiment, they appear to be quite robust. However, as is always the case with experimental studies, one may raise questions about the generality and external validity of the findings, and one may wish to see replications of the same results. Particular caution is necessary when extrapolating from the contexts studied by the authors to other contexts, such as “the no-reading problem” (Ayres and Schwartz 2014) in contract formation. Nevertheless, I suggest that these findings can shed light on the notion of consent in contracting, as well.
Demaree-Cotton and Sommers’ intriguing findings explain how courts and other legal policymakers can hold people who could in theory read standard-form contracts bound by their terms, even though it is crystal clear that they did not actually read them and could not reasonably be expected to do so (they do not explain the rulings that people are bound by contractual terms that they could not possibly see before expressing their consent, as in ProCD, Inc. v. Zeidenberg, 86 F.3d 1447 (7th Cir. 1996), but for many, such rulings are indeed perplexing).
To be sure, psychological findings do not carry direct normative implications. When moving to the normative sphere, comparative law teaches us that framing the issue as a dichotomous choice between determining that people are bound by the terms of contracts they hardly ever read, and holding that they are not subject to those terms, is false. Most legal systems, at least in the Western world, opt for a third option: Standard-form contracts are generally enforceable, but many of their terms are not. Many legal systems provide for “black lists” of one-sided and unfair contract terms that are deemed invalid in standard-form contracts, and “gray lists” of unduly disadvantageous terms that are presumed invalid unless a court or an administrative agency sanction them. Comparable proposals have been made in the United States, as well (see, for example, Rakoff 1983). The lack of statutory regulation of standard-form contracts and the relative dearth of mandatory rules in contract law more generally, in US law (Zamir and Ayres 2020) is exceptional. Interestingly, it appears that this exceptionalism does not reflect the prevailing attitudes of the American population, which actually supports mandatory rules in contractual contexts (Katz and Zamir 2021). But this is another story.
Nov 2, 2022 Eboni Nelson
For nearly two and half years, we have all been grappling with a global pandemic that has significantly impacted individuals, families, businesses, and global economies. Although COVID-19 has affected everyone in some way, the pandemic’s detrimental impact has been disproportionately felt in low income communities and communities of color. According to Professor Mechele Dickerson, this unfortunate reality is due in part to the fact that many people in these communities were deemed to be essential workers who lacked adequate protections during the pandemic. In her recent thought-provoking essay Protecting the Pandemic Essential Worker, Professor Dickerson argues that federal and state agencies should mandate that businesses enact plans to provide necessary safety protections for low wage essential workers in light of workers’ limited ability to obtain such protections for themselves via employment contracts or collective bargaining agreements.
Professor Dickerson begins her essay with a discussion of how workers within certain industries became designated as essential workers during the pandemic and how such designations exposed workers to greater health risks. She recounts how following President Trump’s essentiality declaration, states used the Department of Homeland Security Cybersecurity & Infrastructure Security Agency’s (CISA) list of “Essential Critical Infrastructure Workers” as their guide when issuing their own declarations, which included workers in sectors such as grocery and convenience stores, first responders, and food and agricultural services. Professor Dickerson asserts that because “COVID-19 declarations transformed generally safe workplaces into potentially lethal ones,” the essentiality designation itself exposed essential workers to greater health risks once they entered such workplaces. Unlike other workers who were able to work remotely within the relative safety of their homes, some essential workers, such as those who worked at meat and poultry processing plants with inadequate ventilation and lax masking and outbreak reporting requirements, experienced higher COVID-19 infection and mortality rates, which detrimentally impacted their lives, families and communities.
In discussing “the typical [face to face] F2F essential worker,” Professor Dickerson draws much needed attention to the economic and racial disparities that exist between groups of workers and to the social determinants of health, all of which contributed to the disproportionate harms that lower wage and essential workers of color experienced during the pandemic. For instance, with regards to those who could work from home (WFH) during the pandemic and those who could not, she notes that “higher wage workers were more than twice as likely to report being able to WFH compared to lower wage workers. Additionally, college graduates and whites were more likely than non-college workers, Blacks and Latinos to have the ability to WFH.” Employers of Black, Indigenous, People of Color (BIPOC) workers were less likely to provide paid leave and health insurance, and according to Professor Dickerson, some essential workers were discouraged from availing themselves of the leave if it was provided. When these disparities are combined with social determinants of health such as income and wealth inequities, neighborhood air and water quality, lack of availability of healthy foods, and less safe working conditions, the resulting disproportionate infection and mortality rates experienced by certain essential workers was sadly not surprising or unexpected.
Professor Dickerson convincingly argues that such detrimental outcomes were also attributable to low wage essential workers’ lack of contractual power to demand safer working conditions for themselves and offers several reality checks to demonstrate such. The first concerns the fact that low wage essential workers are unlikely to have employment contracts. As Professor Dickerson acknowledges, they “are instead at-will employees who can be fired without warning for good cause, bad cause, or no cause at all assuming the termination does not violate federal or state labor or anti-discrimination laws.” Operating from such a precarious and vulnerable employment position deterred rather than empowered essential workers to demand safer workplaces. Second, most non-remote essential workers are not members of unions and, thus, did not possess the collective bargaining power to successfully protest against unsafe working conditions or demand safer workplaces during the pandemic. Professor Dickerson also asserts that essential workers’ bargaining power was further diminished by businesses hiring independent contractors and full-time temporary workers through staffing agencies that did not press for more robust COVID-19 protocols for fear of losing the business as a client.
In light of essential workers’ lack of contractual and bargaining power to secure adequate safety protections from businesses during the current pandemic, Professor Dickerson advocates that state and federal agencies take a proactive role to better protect essential workers during future pandemics. “[S]tate and federal health and labor agencies should prepare default [pandemic essential worker] PEW regulations that protect all essential workers (whether classified as employees, temporary, contract, or gig workers and whether U.S. citizens, undocumented, unionized, or at-will) from being forced to choose between being safe or being paid.” By devising and mandating uniform, clear rules and specifying when essential businesses must implement them, agencies will provide more effective guidance to assist businesses in making necessary changes to better protect essential workers during future pandemics.
Professor Dickerson’s proposal would benefit not only essential workers by creating safer workplaces but also the business itself by reducing uncertainty and guesswork regarding protocols that would need to be implemented should another pandemic occur. Her proposal respects businesses’ autonomy by permitting them to proactively devise their own PEW plans provided they do so in consultation with workers or a bargaining unit. This caveat is particularly important considering the previous discussion regarding essential workers’ general lack of bargaining power to secure adequate safety protections in the midst of a pandemic. Professor Dickerson’s thoughtful and comprehensive proposal also includes a variety of other caveats and recommendations, such as immunity from certain liability, to incentivize businesses to enact PEW plans that will lead to greater protections for the health and wellbeing of essential workers.
As scholars, policymakers, and countless others reflect on the current pandemic in an effort to identify useful lessons and observations from which to learn and improve, Professor Dickerson’s essay is an important, helpful, and timely contribution. In it, she centers the pandemic’s harmful impact on essential workers, particularly low wage BIPOC workers, and offers proposals to afford them greater protections during future pandemics. In so doing, Professor Dickerson provides valuable tools by which we can lessen rather than exacerbate the many racial and economic disparities COVID-19 exposed in our country and around the world.
Oct 27, 2022 Omri Ben-Shahar
Sadie Blanchard,
Nominal Damages As Vindication, __
Geo. Mason L. Rev. __ (forthcoming 2022), available at
SSRN.
Nonlegal sanctions have never enjoyed such glory days. Dare you misbehave in a social or commercial relationship, your misdeeds are likely to be recorded, posted, and eventually aggregated with other feedback by a rating platform. Businesses are graded by their customers on Yelp, landlords and guests review each other on Airbnb, drivers are rated by their auto insurers, and borrowers are scored by credit agencies. These reputations determine people’s access to services, the prices they pay, and the friends they meet.
The sharp teeth of nonlegal sanctions pose a challenge: how to make sure that they are levied when proper, and in the right magnitude? More generally, how should the frequent presence of reputational sanctions and rewards affect the design of legal sanctions, and in particular the damage measures awarded in private law for the breach of contract or the commission of a tort?
In recent years, scholars in law and economics began to develop a theoretical framework for the optimal blend of legal and nonlegal sanctions. Many have noticed that legal sanctions have the potential to trigger informal reputational penalties. In an interesting article, Bob Cooter and Ariel Porat asked how to optimally combine the two. If the wrongdoer already suffered reputational ruin, should this fact be a reason—as they argued—to moderate their legal sanction, for example by reducing the legally-assessed damages? Later, in examining the effect legal sanctions have on informal penalties, Ed Iacobucci usefully distinguished between two types of third party responses: the conscious (and privately costly) propensity to ostracize bad actors who were found to be legally liable, and the self-interested motivation to refrain from dealing with those revealed by the legal sanction to be unattractive or dangerous trading partners. To this literature, Sadie Blanchard recently added a wonderful contribution in Nominal Damages As Vindication, nesting it in a discussion of the law of nominal damages.
Nominal damages are awarded in cases in which the plaintiff demonstrated a violation of a right but did not prove compensable harm nor seek an injunction. Why does the law permit plaintiffs to bring a suit for nominal damages? If there is no compensable injury, why use the fiction—or the symbolism—of nominal damages and allow parties to fight their expensive battles in court?
It is obvious that there is a difference between a $1 nominal damage for the victorious plaintiff versus $0 in the event of a defendant victory, and that this difference is much more than one dollar. But what exactly is this difference? What is the mechanism that determines its magnitude? Blanchard’s article thickens the texture of the bare bones law-and-econ model of nonlegal sanctions. Courts, Blanchard says, “function as producers of presumptively reliable information that is used in reputation-based private governance.” An audience of third parties observe the ruling, and it is the hard fought-over certification of liability, not the puny magnitude of damages, that rallies this audience to participate in informal punishing of the wrongdoer. Because the information comes from courts, and not from solicited Yelp reviews or from a journalistic hatchet job, it is credible. And because it is credible, it triggers justified informal sanctions.
From the perspective of the nominal-damages-seeking plaintiff, inflaming nonlegal sanctions through a judgment for nominal damages could be restorative, satisfying the desire for justice or retribution and rehabilitating their reputation. Think of a defamation suit, or an action for false arrest, where Blanchard correctly suggests that being right could be more significant than being compensated. No less importantly, the ensuing informal sanctions that third parties pile on provide much needed protection of rights which are important even though their violation does not create measurable pecuniary harm. We live in an era in which emotional interests like dignity, privacy, personal fulfillment, and reputation are central to individual wellbeing and widely attended to by public law. It is key that private law—historically stingy in compensating violations of these interests—offer tools for their protection. Nominal damages are one such tool. And as Blanchard points out, “[t]he threat of being publicly exposed in this way could also improve the plaintiffs’ position in negotiating with the defendant to make amends for the breach.” In other words, nominal damages that trigger nonlegal sanctions are, in equilibrium, much more than nominal. Their anticipation fuels significant settlements. They provide redress, but it is not the $1 that counts as the remedy. Redress comes from the nonlegal sanctions, or from the monetary settlement to avert them.
Blanchard’s insight—that the private value of suits for nominal damages comes primarily from the social value of the information they generate—allows her to discuss a rich set of nonobvious implications. For example, and somewhat counterintuitively, despite the fact that plaintiffs do not recoup much of the social value arising from their successful pursuit of nominal damages, it is not necessary to subsidize or otherwise incentivize such suits. Plaintiffs will pursue claims if they believe these claims produce information to which there is an interested and responsive audience, ready to inflict nonlegal sanctions. Hence, instead of courts ascertaining the social value of a nominal damages suit, it would be “determined organically” by plaintiff’s anticipation of its audience’s demand for information. Another implication is important for contract law. The widely share sense that expectation damages are systematically undercompensatory resulting in excessive incentive to breach fails to capture the reputational sanctions that liability may trigger. If, say, a hypothetical billionaire is found to have willfully breached a contract to purchase a hypothetical social network, the harm to their reputation among the public and future potential sellers of companies may dwarf the otherwise undercompensatory liquidated damages.
Oct 4, 2022 Robert Hillman
Adam J. Levitin,
Not Your Keys, Not Your Coins: Unpriced Credit Risk in Cryptocurrency, 101
Tex. L. Rev. _ (forthcoming 2022), available at
SSRN.
Not Your Keys, Not Your Coins: Unpriced Credit Risk in Cryptocurrency, by Professor Adam J. Levitin, is a must read for anyone writing about or just interested in (or even trying to understand) the world of digital currency. The article is filled with important information and explanations about cryptocurrency, cryptocurrency exchanges, the language and meaning of investor agreements, and current and proposed regulation. The article nonetheless has a particular concern: It focuses on the risks investors face if a cryptocurrency exchange, which not only facilitates trades between sellers and buyers, but also serves as custodian for their cryptocurrency, becomes insolvent. Such an issue, the article points out, likely escapes many investors passively holding their cryptocurrencies in such a custodial account (hence the title’s reference to “unpriced credit risk”). Although no U.S. exchange has yet filed for bankruptcy, the article posits its inevitability in part because of the likelihood of exchange hacking or poor exchange investment strategies. In fact, as I write this JOT, cryptocurrency values are plummeting, raising questions about their future.
Although Not Your Keys discusses an assortment of exchange account arrangements, the article focuses on a particular common one: Cryptocurrency is held in a custodial account, but for various reasons well documented in the article, the exchange has exclusive access to the cryptocurrency and comingles the asset with other investors’ holdings. Further, the custodial account may “lull customers with misleading language about ‘ownership’ and ‘title.’”(P. 52.) In such instances, investors face an insolvency risk possibly unknown to them. The bankruptcy court may treat the co-mingled cryptocurrency as the property of the exchange, with investors holding only a general creditor contract right. This is crucial because in such circumstances, customers must compete with all unsecured creditors of the bankrupt exchange after secured creditors and others with priority rights have taken assets off the top.
Accordingly, a significant part of Not Your Keys investigates whether, under current law and in light of this arrangement, investors or the cryptocurrency exchange has a property interest in the custodial account. Of course, the language of the custodial agreement comes first in answering this question. “Not Your Keys” therefore sets forth examples of custodial contracts, which often contain contradictory language on the issue of ownership. For example, on the one hand, an agreement may provide that the exchange is only a custodian of the cryptocurrency and that the investor is the “owner” or has title, which indicates that the investor has a property right and priority in bankruptcy. On the other hand, the same agreement may provide that the exchange controls the “private key” that accesses the cryptocurrency and may authorize the exchange to “store its customers’ cryptocurrency * * * in unsegregated accounts for all purposes—controlled solely” by the exchange. (P. 17.) Such language suggests that the exchange is the owner of the cryptocurrency and the investor is a mere general creditor.
How should a bankruptcy court interpret an agreement with internal contradictions of this nature? Court decisions interpreting similar contradictions in other contexts have largely ignored conclusory legal labels in the agreement if the evidence probative of the meaning and function of the agreement rebuts that language. Consider, for example, a “liquidated damages, not a penalty” term when the term is not a reasonable estimate of predicted or actual loss. Consider also, an agreement that states a conveyance is a lease and not a security interest when circumstances show otherwise.
Because custodial account agreements contain contradictions, Not Your Keys looks beyond them for guidance on how to treat cryptocurrency located in an insolvent exchange. Guidance is limited, however. The article reveals that current legal strategies that regulate bank deposits and securities accounts at brokers have not been applied to cryptocurrency exchanges. Nor do various kinds of legal relationships, including express and constructive trusts, bailments, entrustments, and sales, shed sufficient light on whether customers have a property or contract interest in their cryptocurrency. But analyses of these constructs as applied to particular facts should alarm investors. For example, “[f]or retail investors, the trust beneficiary * * * is typically the exchange itself, rather than the exchange’s customer, an arrangement that means that the exchange holds the beneficial interest in the cryptocurrency and its customers are merely its unsecured creditors.” (P. 26.)
In fact, Not Your Keys emphasizes that “this lack of clarity about legal characterization of custodial arrangements is the key point.” (P. 22.) The article’s main function is thus to raise a red flag about a risk not well appreciated by investors. Readers who want to understand the intricacies of cryptocurrencies, their exchanges, and looming bankruptcy ramifications should read the article for a very helpful primer on these subjects.
