Thursday, April 18, 2013
New in Print (including books)
Kenneth S. Abraham, Four Conceptions of Insurance, 161 U. Pa. L. Rev. 653 (2013)
Kenneth Ayotte & Henry Hansmann, Legal Entities As Transferable Bundles of Contracts, 111 Mich. L. Rev. 715 (2013)
Karen Blum, et al. Municipal Liability and Liability of Supervisors: Litigation Significance of Recent Trends and Developments, 29 Touro L. Rev. 93 (2012)
Mindy Chen-Wishart, Legal Transplant and Undue Influence: Lost in Translation or a Working Misunderstanding? 62 Int'l & Comp. L.Q. 1 (2013)
Harvey Gilmore, When We Lie to the Government, It's a Crime, but When the Government Lies to Us, It's... Constitutional? 30 Buff. Pub. Interest L.J. 61 (2011-2012)
Ugljesa Grusic, Should the Connecting Factor of the 'Engaging Place of Business' Be Abolished in European Private International Law? 62 Int'l & Comp. L.Q. 173 (2013)
Najib Hage-Chahine, Culpa in Contrahendo in European Private International Law: Another Look at Article 12 of the Rome II Regulation, 32 Nw. J. Int'l L. & Bus. 451 (2012)
Richard T. Karcher, Redress for a No-Win Situation: Using Liquidated Damages in Domparable Coaches' Contracts to Assess a School's Economic Damage from the Loss of a Successful Coach, 64 S.C. L. Rev. 429 (2012)
Christopher M. Newman, A License Is Not a "Contract Not to Sue": Disentangling Property and Contract in the Law of Copyright Licenses, 98 Iowa L. Rev. 1101 (2013)
David L. Noll, Rethinking Anti-Aggregation Doctrine, 88 Notre Dame L. Rev. 649 (2012)
Gary E. Sullivan & Braxton Thrash, Purchasers Lacking Privity Overcoming "The Rule" for Express Warranty Claims: Expanding Judicial Application of Common Law Theories and Liberal Interpretation of U.C.C. Section 2-318, 5 Drexel L. Rev. 49 (2012)
David Vaver, Intellectual Property: 'Bargain' or Not? 89 U. Det. Mercy L. Rev. 381 (2012)
Tuesday, April 16, 2013
Dog Bites Man Story from the Nota Bene Blog
Under the headline "Contract Law Can Be Interesting!" Nota Bene, a blog by the librarians at the University of Houston O'Quinn Law Library, features a post praising some recent contracts law books. Other interesting posts on the Nota Bene blog include "Objects Fall to Earth," "Smoking May Be Harmful to Your Health," and "Cubs Unlikely to Win World Series this Year."
After proclaiming contracts to be right up there with civil procedure on the list of most boring law courses, he author \recommends two books that can make this daunting subject palatable: Contracts Stories, edited by Douglas Baird, and Larry Cunningham's Contracts in the Real World, about which we posted an online symposium a few months ago.
I also recommend these books, but I'm not sure the blog post's author's marketing strategy is going to work. He says, in effect, "I recommend to you these two books (only one of which I've read) about a subject that doesn't interest you. If you did not enjoy studying contracts, here are two books about contracts that will cause you to upgrade your attitutude towards the subject from 'feh' to 'meh.'"
Whatever. I always thought that the point of books like Contracts Stories is to enable students to learn more about the fascinating cases that they studied in their law courses. They also provide insights into litigation strategies, legal history, business strategies underlying contractual disputes, and lots of other useful supplements to the raw case law. Contracts in the Real World is an excellent representation of the sorts of issues that come up in the world of contracts law all the time. If there were some huge gap bewteen what Larry Cunningham talks about in his book and what we talk about in contracts courses, the book would not be as useful as it is.
Ultimately both books are born of a love of contracts law. And a book is a mirror. . . .
Monday, April 15, 2013
Weekly Top Tens from the Social Science Research Council
CBC Radio Interview with Margaret Radin
Next month, we will host an online symposium on Margaret Radin's recent book, Boilerplate.
For those who can't wait to get a sesne of the book, you can listen to a Canadian Broadcasting interview with Professor Radin here.
Irony of ironies: in order to listen to this, I had to download an upgrade of Adobe Flash Player, and of course that required my agreement to boilerplate terms and conditions.
There is no escape from boilerplate.
Fourth Circuit Vacates District Court's Finding that an Arbitration Clause is Unconscionable
Samuel Muriithi was a driver for Shuttle Express, a shuttle service that transported passengers to and from the Baltimore-Washington International Thurgood Marshall Airport (BWI). Muriithi signed a Unit Franchise Agreement with Shuttle Express in 2007 (the Agreement). He claims that he was misled when he signed the agreement and objects to Shuttle Express having classified him as an independent contractor and franchisee rather than as an employee. He claims entitlement to payment of at least federal minimum wage plus overtime pay.
Based on this claims, Mr. Muriithi brought a Fair Labor Standards Act (FLSA) claim, as well as state law claims, on his own behalf and behalf of a purported class of other similarly situated drivers. in reliance on the Agreement's arbitration provision, which included a fee-splitting provision, a one-year statute of limitation and a class action waiver, Shuttle Express moved to compel arbitration.
The District Court found the arbitration provision unenforceable based on all three features mentioned above. The District Court found that the fee-splitting provision made arbitration so expensive as to deter an arbitration that Mr. Muriithi might consider. In addition, hat provision coupled with the class action waiver would prevent Mr. Muriithi from vindicating his statutory rights. Finally, the District Court found that the one year statute of limitations was unenforceable because inconsistent with the FLSA's two year statute of limitations. Concluding that the arbitration provision was "permeated by substantively unconscionable parts," the District Court found no way to severe the objectionable elements and denied Shuttle Express's motion to compel arbitration. Shuttle Express appealed.
In Muriithi v. Shuttle Expres Inc., decided April 1st, the Fourth Circuit vacated and remanded. The Fourth Circuit quickly established that Mr. Muriithi's dispute with Shuttle Express was subject to the arbitration provision, so the only questions was whether that provision was for some reason unenfroceable. In appealing the District Court's ruling that the class action waiver rendered the provision unconscionable, Shuttle Express contended that AT&T Mobility v. Concepcion foreclosed any such finding. Whilte Muriithi and the District Court attempted to limit Concepcion to cases involving federal pre-emption of state law claims and thus render it inapplicable to Muriithi's FLSA claim, the Fourth Circuit read Concepcion more broadly. It read Concepcion as foreclosing any unconscionability defenses to an otherwise valid arbitration agreement based on a class action waiver.
As to the fee-splitting provision, such a provision can render an arbitration agreement unenforceable, if plaintiff can establish that the "arbitral costs are so high that they effectively preclude a litigant from vindicating his federal statutory rights in an arbitral forum." The Fourth Circuit concluded that Mr. Muriithi failed to make such a showing. Finally, since the statute of limitations was not part of the arbitration clause, the Fourth Circuit found that the District Court had erred in addressing it on a motion to compel arbitration.
The case was remanded to the District Court for an order compelling arbitration, with Suttle Express paying the costs of such arbitration, pursuant to its in-court agreement to do so.
Thursday, April 11, 2013
7th Circuit to Johnson Controls: No Second Bite at the Apple for You!
According to Judge Wood, Johnson Conrols, Inc. v. Edman Controls, Inc., was a simple case of a party agreeing to arbitration and then seeking to avoid arbitration once the decision went against it. The parties had an agreement according to which Edman Controls (Edman) was supposed to have the exclusive right to distribute the products of Johnson Controls (Johnson) in Panama. The agreement provided for arbitration of all disputes under Wisconsin law and for the losing party to pay the prevailing party's attorneys' fees. At the time of the agreement, both parties were aware that Edman would rely on its Panamanian subsidiaries (Pinnacle) to carry out the distribution agreement.
In 2009, Johnson breached the agreement by seeking to sell its products directly in Panama. The Seventh Circuit noted that there was nothing subtle about the breach. Johnson approached Edman's clients directly and refused to communicate with Edman about attempts to market its products in Panama, In 2010, Edman brought its claims, sounding in tortious interference, unjust enrichment and breach of the duties of good faith and fair dealing to an arbitrator.
The arbitrator ruled in Edman's favor and awarded about $750,000 in damages. However, the arbitrator dismissed Edman's claims relating to tortious interference with Pinnacle, finding that he had no authority over the relations between Johnson and Pinnacle. "Aha!" said Johnson (we paraphrase). Challenging the arbitral award, Johnson argued that all of Edman's harm actually derived from Pinnacle's harm, and the arbitrator had no jurisdiction over Pinnacle's harms.
The District Court was unimpressed. The parties knew that Edman would be operating through Pinnacle, and given the narrow scope of the court's review on a challenge to an arbitral award, Johnson's claim that the arbitrator had been mistaken in his understanding of Wisconsin law was unavailing. But thanks for playing, Johnson. For your troubles, the District Court awarded Edman attorneys' fees of about $250,000, bringing the total in damages to a tidy $1 million.
On appeal, the Seventh Circuit noted that although both parties relied on Chapter 1 of the Federal Arbitration Act (FAA), the case was actually governed by either the FAA's Chapter 2, which incorporates the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards, or the FAA's Chapter 3, which incorporates the (Panama) Inter-American Convention on International Commercial Arbitration. The Seventh Circuit noted that it was not clear whether a court could rely on FAA Chapter 1 to vacate a decision taken by a U.S. arbitrator relating to an agreement that is governed by either the New York or the Panama Convention.
In a close case, the Seventh Circuit opined, a court would have to address that issue, as the grounds for vacatur in FAA Chapters 2 and 3 are different from those in Chapter 1. But this was not a close case. Arbitral decisions are not overturned lightly and will be upheld so long as “an arbitrator is even arguably construing or applying the contract and acting within the scope of this authority.” Johnson claimed that the arbitrator exceeded its power by letting Edman bring claims on behalf of its subsidiary. But that would only be a mistaken application of Wisconsin law if Johnson were correct. Such a mistake would not be enough to overturn the award, and Johnson is not correct as to Wisconsin law. And in any case, it seems, not of that matters anyway, because Edman was directly harmed by Johnson's breach and the arbitrator allowed recovery only for Edman's direct losses.
The Seventh Circuit also affirmed the award of attorneys' fees, finding that the District Court had not abused its discretion in finding that Johnson had to pay a 33% contingency fee to Edman's attorneys. The Court denied Edman's request that the Court impose Rule 38 sanctions on Johnson for a frivolous appeal largely, it said, because the attorneys' fee award was already sanction enough.
Wednesday, April 10, 2013
New in Print
Erez Aloni, Registering Relationships, 87 Tul. L. Rev. 573 (2013)
Sarah Howard Jenkins, Rejection, Revocation of Acceptance, and Avoidance: A Comparative Assessment of UCC and CISG Goods Oriented Remedies, 22 Minn. J. Int'l L. 152 (2013)
Robert H. Jerry, II, Bad Faith at Middle Age: Comments on "The Principle without a Name (Yet)," Insurance Law, Contract Law, Specialness, Distinctiveness, and Difference. 19 Conn. Ins. L.J. 13 (2012-2013)
Harry Surden, Computable Contracts, 46 UC Davis L. Rev. 629 (2012)
Tuesday, April 9, 2013
Weekly Top Tens from the Social Science Research Council
RECENT HITS (for all papers announced in the last 60 days)
Monday, April 8, 2013
Svidrigailov's Contract with Marfa Petrovna
In Part VI, Chapter 4 of Fyodor Dosteovsky's Crime & Punishment (beginning on page 834 in this version), Svidrigailov, the unrepentant libertine whose attentions nearly ruined the life of Raskolnikov's sister, Avdotya (Dunya) Romanovna, describes to Raskolnikov the nature of what Svidrigailov characterizes as his "contract" with his (now decesased) wife, Marfa Petrovna.
According to Svidrigailov (and he is by no means a reliable narrator), the agreement, which he specifies was unwritten, had the following terms:
1. Svidrigailov would never leave Marfa Petrovna and would always be her husband;
2. He would never absent himself from her without her permission;
3. That he would never take on a "permanent mistress";
4. In return, Marfa Petrovna would give Svidrigailov "a free hand with the maidservants, but only with her secret knowledge";
5. Svidrigailov was expressly forbidden to faill in love with a woman of his own station;
6. But should 5 occur, Svidrigailov must reveal that fact to Marfa Petrovna.
So this sounds like a prenuptial agreement that would not be enforceable because not reduced to writing. Anybody out there know the 19th-century Russian rule on such matters? Moreoever, without a remedial provision, it is not clear what this contract accomplishes.
Friday, April 5, 2013
The Measure of a Seller’s Damages for Breach of a Real Estate Sale Contract
Remarkably, until just last month, the New York Court of Appeals was not presented with the occasion to decide the measure of a seller’s damages for a buyer’s breach of contract to purchase real property. Should the damages be based on the difference between the contract price and the market value of the property at the time of breach? Or, should the damages be based upon the difference between the contract price and the lower price obtained by the seller in a later resale of the property?
Relying heavily on Williston, the Court held that the measure of damages is “the difference, if any, between the contract price and the fair market value of the property at the time of the breach.” The Court stated that the resale price is not irrelevant to the determination of damages because,
in a particular case, it may be very strong evidence of fair market value at the time of breach. This is especially true where the time interval between default and resale is not too long, market conditions remain substantially similar, and the contract terms are comparable.
The non-breaching sellers are entitled to the benefit of their bargain, and that benefit should not be denied by the application of a rule that fails to take that basic tenet into account. The cases cited by the majority in support of the "time-of-the-breach" rule appear to apply the rule by rote. . ., detached from the reality of realty by failing to consider the legal consequence of an axiom that is harmful to the non-breaching party.
The majority ultimately supports its adoption of the "time-of-the-breach" rule – which is common in contract law and in the Uniform Commercial Code where the parties are dealing in common activities or fungible goods – by relying primarily on a case involving a school district's cause of action seeking the cost of replacing or repairing defective window panels that had been installed in its building (see Brushton-Moira Cent. School Dist. v Thomas Assoc., 91 NY2d 256 ). There, the Court, applying general, black letter law, stated that "damages for breach of contract are ordinarily ascertained as of the date of the breach" (id. at 261 [citations omitted]).
But real property, unlike window panels, is not fungible. While there are usually extensive and active markets for fungible goods, thereby making it relatively less difficult for the seller to mitigate or cover in the event of a breach, the sale of real estate is clearly different because each parcel is unique. . . As a result, the pool of buyers is plainly smaller for real estate than goods, and when a buyer breaches a real estate purchase agreement, the seller must then commence the sale process anew, which may require a reassessment of the list price and more showings of the property to new buyers, who may or may not find the property's location, amenities or architectural style desirable. This may take a substantial amount of time and effort on the seller's part, and the seller's efforts may not readily succeed, because once the house has been on the market for a significant period of time, the market may have declined or prospective purchasers may be wary of the amount of time the house has been on the market, leading them to conclude that the property is tainted in some fashion. Meanwhile, under our holding today, the breaching buyer will walk away indifferent to the hardship caused to the seller by his conduct.
* * *
There is no dispute that the general rule is that damages are measured by the fair market value at the time of the breach; the issue here is whether that measure, in cases where the property is later sold with reasonable diligence and in good faith, is adequate or even realistic. In such a circumstance, why should the non-breaching seller suffer the consequences of the buyer's breach? If market conditions decline, shouldn't the loss be laid squarely at the feet of the breaching buyer, particularly where the seller is able to make a colorable claim at trial in that regard?
The majority also holds that the trial court in this case will need to consider, among other things, whether the sellers "made sufficient efforts to mitigate" . . ., but mitigation is irrelevant under the majority's rule since the only calculation that matters is the difference between the fair market value at the time of the breach and the contract price.
Here's a link to a webcast of the oral argument.
White v. Farrell, No. 43 (N.Y. Ct. of Appeals Mar. 21, 2013).
[Meredith R. Miller]
Thursday, April 4, 2013
Contracts clauses in contracts class
I thought I might jump on the “classroom posts” bandwagon and blog a little about something I have been trying to do more of in my Contracts class – incorporate contract clauses in class discussions. What I typically do is introduce a contract provision when I’m wrapping up a particular topic. For example, when we finished up the section on substantial performance (and breach and conditions- it’s hard to talk about one without the other, IMHO), I asked my students about the meaning and effect of this provision:
“ TIME SHALL BE OF THE ESSENCE IN THE PERFORMANCE OF THE OBLIGATIONS UNDER THIS AGREEMENT. “
The phrasing sometimes throws off students – what’s this “of the essence” business? But they realize that the provision indicates that the timeliness of performance is important to the parties. In other words, if the services are to be performed according to a schedule, they intend to stick to the schedule. More to the point, without such a clause, a court will probably not find a small delay to be a material breach. With the clause, even a short delay may constitute a material breach - which brings me to substantial performance. A material breach has legal effects, one of which is that a party who has materially breached has not substantially performed -- and so can’t recover expectations damages under the doctrine of substantial performance. A material breach also excuses the other party’s performance.
The clause illustrates how the different doctrines work together, and given the emphasis on “skills” teaching, underscores that doctrine and skills are really intertwined. (I’m not sure how anyone can effectively teach skills without a good grasp of the underlying doctrine). Another reason to introduce contract clauses is to help my students overcome the automatic response that most normal people get when they see boilerplate – glazed eyes, numbing sensation, urge to do something more exciting. My hope is that once they learn the legal meaning behind the legalese, reading a contract will be a more engaging and rewarding experience.
Wednesday, April 3, 2013
What Jay-Z Can Teach
The entertainment mogul Shawn “Jay-Z” Carter has added another hat, er, baseball cap, to his rather extensive collection. The NYT reports that his company, Roc Nation Sports, just signed up to represent Robinson Cano, the New York Yankees second baseman. I’ve long been interested in Jay-Z’s business acumen and his ability to gauge where unpredictable markets are headed (and made a brief mention of it in this short essay). More than that, he seems to be making the most of these changes rather than resisting them. When he signed with LiveNation in 2008, Jay-Z was one of the first musicians to work with, rather than fight or deny, the changes in the music business (Madonna, another savvy business person, did too). He took that money and started Roc Nation (of which Roc Nation Sports is a part). Now he’s realizing the potential to be found in the blurring of sports and entertainment (and the public's perception of athletes and entertainers) . An athlete typically has a relatively short shelf life in the field, so why not make that short shelf life as lucrative as possible? Furthermore, an athlete may have a longer shelf life as a brand. Gven the coalescence of sports and entertainment, and the way social media makes celebrities so accessible, there's a lot of revenue generating opportunities there. So why should this be interesting to readers of this blog, many of whom may have no interest in baseball? Sure, Jay-Z is probably a great negotiator and the contract – if we ever get to see it – will be interesting. But more than that, we should be like Jay-Z and recognize how quickly the landscape and technology changes – and consider what impact those changes might have on our contracts. For example, there are outstanding recording/distribution contracts which predate digital distribution formats. Are digital recordings included under such contracts? ( The Eminem case touches upon a related issue having to do with a failure to anticipate digital tunes). The book publishing industry is another sector that is undergoing much disruption. While no lawyer is expected to be an oracle, it may help your client – or help your students to help their future clients) to think about future marketplace and technological changes during contract negotiations, especially where the contract is a long term one.
New in Print
Steven J. Burton, A Lesson on Some Limits of Economic Analysis: Schwartz and Scott on Contract Interpretation, 88 Ind. L.J. 339 (2013)
Jeffrey L. Harrison, The Influence of Law and Economics Scholarship on Contract Law: Impressions Twenty-Five Years Later, 68 N.Y.U. Ann. Surv. Am. L. 1 (2012)
Professor Harrison's paper is not yet up on the Annual Survey website, but it is up on SSRN, and here is the abstract:
This is an update of a work done in conjunction with a contract law conference 25 years ago. My specific assignment was to assess the impact of law and economics scholarship on contract law. I responded by conducting an empirical study of judicial citations to selected law and economics works in order to ascertain the extent to which judges seemed to be relying on the teachings of law and economics. In effect, the effort was part of a general question that concerns all law professors: Does scholarship matter? I have repeated the study with respect to the scholarship sample selected twenty-five years ago. In addition, I have supplemented and expanded the sample of scholarship to include works appearing since the initial effort. The results of this project are the focus of this article. This examination suggests that law and economics scholarship has had two uses. First, it has provided a new rationale for many traditional contract rules. As one would expect this means it is most likely to be invoked when there are pressures to change the law. Second, although the quantity of citations remains modest, it is clear that law and economics scholarship, at least in the context of contract law, has affected the vocabulary and reasoning of courts.
Robert Hockett, Were "It" to Happen: Contract Continuity under Euro Regime Change. 34 U. Pa. J. Int'l L. 277 (2012)
Russell Korobkin, The Borat Problem in Negotiation: Fraud, Assent, and the Behavioral Law and Economics of Standard Form Contracts. 101 Cal. L. Rev. 51 (2013)
Tuesday, April 2, 2013
Liquidated Damages Clause Leads to Protests in the Streets of Ann Arbor
A student recently sent me this story as an example of a liquidated damages clause gone awry, at least for the contractor. The contractor, Crystal Corp., was supposed to remodel a building to be the new location for a restaurant, Kuroshio, by September 30th. The work was not completed until late December. The contractor does not appear to be contesting whether there was a breach. However, he is contesting the damages.
The contract apparently contained a liquidated damages clause that specified a per-day penalty for any delays. It also required Crystal to notify Kuroshio, in writing, of any delays, and the reason(s) for those delays. Crystal did not supply the required notice. And, because of the length of the delay, the contractor now reportedly owes more money to Kuroshio than he is owed for completing the work. Further, because the contractor has not been paid by the restaurant, he reportedly has not paid his own employees. Thus, the contractor and/or his employees have taken to the street in front of the restaurant. According to AnnArbor.com, they protested in front of the restaurant every evening for over a week (there's no obvious update since late March). A protester's photo is available here.
I thought this case was a good one to mention in class because it's not every day that a contract dispute leads to public protest. More specifically, I hope to use this dispute to illustrate how liquidated damages clauses may not be enforceable (the cases in the text I use, Kvassay and O'Brian, are great but a present day example always seems to work better for cementing the material into students' minds).
I also hope to use this dispute as an example of another theme I stress in class. I tell my studentes that, as a deal lawyer, they'll often have to be the most negative person in the room. They have to ask many "what if" questions of their clients before suggesting they sign contracts. For example, "What if...you get inside and find out that the HVAC system is in terrible disrepair? Are you going to want to pay the per-day penalty in that situation? If not, then we need to revise the contract because, as written, you're going to be on the hook for the daily penalty no matter what." I'm not sure how much of this they'll remember but I'm hopeful that at least some of it will stick with them.
[Heidi R. Anderson, h/t to student Michael DeRosa]
Weekly Top Tens from the Social Science Research Council
RECENT HITS (for all papers announced in the last 60 days)
TOP 10 Papers for Journal of Contracts & Commercial Law eJournal
January 31, 2013 to April 1, 2013
Monday, April 1, 2013
ABA Adopts Radical, Contracts-Based Curricular Reform
Having recieved comments from numerous quarters, including from this blog's own Meredith Miller, the ABA Task Force on the Future of Legal Education, has announced that it is recommending that all areas of law now be understood as subsidiaries of contracts law. In addition to recommending that all law schools require their students to take six hours of contracts in the first year, the Task Force is recommending that second year students take required courses in Sales, Leases, Licensing and International Sales. Those courses, including related live-client courses, simulations, moot court and trial advocacy competitions, and practica, will constitute much of the second year curriculum.
According to the Task Force sources who asked not to be named because the Task Force's report has yet to be released officially, those elements of the reform proposal were uncontroversial. "Everyone recognizes that all lawyers need a firm grounding in contracts and contract-related areas. The only question disagreement on the Task Force was over whether six credits in the first year was enough. Some members wanted 24."
Somewhat more controversial is the Task Force's recommendation that other areas of law be subsumed within the law of contracts. According to our source, the Task Force is recommending that both Constitutional Law and Criminal Law be re-conceptualized as constituting either actual contracts or social contracts best understood with the traditional doctrinal tools of contracts law. The Task Force concedes that this innovation was in part driven by a desire to reduce students' text book costs. "All they have to buy is one, maybe two books by Randy Barnett, and they are covered," according to our source. In addition, the Task Force recommends that International law courses will now be divided into Private International Contracts and Public International Contracts (Treaties).
When asked if the Task Force anticipated difficulties persuading faculty members from other doctrinal areas to re-conceive those areas in terms of contracts law, our source told us that the Task Force considered the question and could not conceive of a doctrinal area that would not be better understood through contracts doctrine.
UPDATE: THE FULL TASK FORCE PRESS RELEASE CAN BE FOUND HERE.
Thursday, March 28, 2013
Online Symposium on Oren Bar-Gill's Seduction By Contract: Professor Bar-Gill Responds
This is the eighth and final post in a series of posts on Oren Bar-Gill's recent book, Seduction by Contract: Law Economics, and Psychology in Consumer Markets. The contributions on the blog are written versions of presentations that were given last month at the Eighth International Conference on Contracts held in Fort Worth, Texas. Below, Professor Bar-Gill (pictued) responds to the comments provided by Angela Littwin, Alan White and Nancy Kim.
I wish to open these comments by thanking Jeremy for organizing a great panel and for following up with this on-line symposium. I also wish to thank Angela, Alan and Nancy for their thoughtful comments and suggestions. I cannot, in this space, respond to all the valuable ideas and critiques that these experts presented in their posts. Rather, I will touch upon three sets of issues that I consider especially important or provocative.
1. The Role of Competition
Competition is often considered to be a solution to market failure. “Seduction by Contract” argues that competition is not necessarily a solution to the behavioral market failure, which is the focus of the book. In essence, if imperfectly rational consumers generate biased demand, sellers in a competitive market must respond to this biased demand by designing products, contracts and prices that exploit the consumer bias.
This does not mean, however, that competition cannot play a helpful role. It can, and it does. Consumer biases and misperceptions are dynamic and can be influenced by market forces. Specifically, sellers can educate or debias consumers through advertising. For example, until recently, imperfectly rational consumers paid little attention to late fees when shopping for a credit card. Now banks are competing over cardholders by advertising their late-fee policies. Another example, noted in Nancy’s post, concerns early termination fees (ETFs) in cellphone contracts. Until recently, ETFs were non-salient to consumers and a 2-year lock-in contract was the norm. Now many carriers are advertising No Contract options. Nancy argues that the rise of No Contract is an imperfect market solution, and I agree that it is imperfect. Nonetheless, it shows how markets can respond to changes in consumer perception (and misperception) and, in some cases, lead these changes.
2. Normative Framework
Alan asks about the appropriate normative framework. As an economist, I am a welfarist. But I should emphasize that welfarism is very different from utilitarianism. The welfarist cares about distributional effects; the utilitarian does not.
Since I focus my policy analysis on disclosure (see below), Alan infers that I care primarily about autonomy. But, as explained above, my normative framework is welfarist. My preference for disclosure regulation rests on the argument that optimally designed disclosures can enhance social welfare, by helping to overcome (or bypass) consumer biases and misperceptions.
This last point also responds to some of Alan’s critiques of my disclosure proposals. I agree with Alan that most existing disclosure mandates simply don’t work. But the fact that badly designed disclosures don’t work, doesn’t tell us very much about the potential benefits from well-designed disclosure mandates. My goal was to come up with disclosures that will be effective, given the imperfect rationality of consumers.
3. Legal Policy Response: The Role of Disclosure Regulation
The policy analysis in “Seduction by Contract” focuses on disclosure regulation. This is not because disclosure always works and it is not because disclosure, when it works, perfectly cures the behavioral market failure. I focus on disclosure, because I think it can help, when optimally designed; because often it is the most (and sometime the only) politically feasible mode of regulation; and because it avoids certain costs associated with more paternalistic modes of regulation. To be clear, I do not argue that more paternalistic intervention is never warranted. And if I had the tenacity to write a longer book, I would definitely explore other regulatory approaches beyond disclosure. Angela and Alan are disappointed by my focus on disclosure. I hope this response provides some (limited) reassurance.
The analysis of disclosure regulation in “Seduction by Contract” hopes to provide some guidance to lawmakers on how to optimally design disclosure mandates. I begin by emphasizing the importance of product use information, and product use disclosures. Second, I outline two disclosure strategies that can help imperfectly rational consumers. First, simple aggregate disclosures, like a “total cost of ownership” disclosure, can help consumers make better choices. Second, more comprehensive disclosures can be used, but these disclosures would be targeted at sophisticated intermediaries, and would not be for direct “consumption” by imperfectly rational consumers.
[Posted, on Oren Bar-Gill's behalf, by JT]
Wednesday, March 27, 2013
Online Symposium on Oren Bar-Gill's Seduction By Contract, Part IIIB: Nancy Kim on Cell Phone Contracts
This is the seventh in a series of posts on Oren Bar-Gill's recent book, Seduction by Contract: Law Economics, and Psychology in Consumer Markets. The contributions on the blog are written versions of presentations that were given last month at the Eighth International Conference on Contracts held in Fort Worth, Texas. Today is the second of a two-part contribution from our own Nancy Kim of the California Western School of Law.
Bar-Gill argues that the three part design of cell phone contracts (summarized in yesterday's post) imposes welfare costs by preventing efficient switching of plans and discouraging comparison shopping and by regressively redistributing wealth from the consumers to carriers, and from lesser informed (and presumably poorer) consumers to better informed (and presumably richer) consumers. He also argues that market solutions are limited as providers must respond to the biased demands of consumers or else be driven out of the marketplace.
I tend to agree but only to a point. I do think in many markets, and the cell phone service market is one, consumers eventually wise up (i.e. after “bill shock”) and competition heats up in response to consumer dissatisfaction. The problem is that it might take a while, and by the time consumers can muster up some momentum, the existing players have gotten bigger and more entrenched – and newer companies can’t compete in terms of marketing dollars. In the cell phone space, for example, Walt Mossberg of the Wall Street Journal, recently reviewed a new upstart called Republic Wireless. The company’s offering is the exception to the standard three part contract design – they offer no contract. Furthermore, users pay for the phone in exchange for which they pay a very low monthly fee – only $19. (Users also have the option of paying less for the phone and slightly more for the monthly service). The catch? The reception itself isn’t as good because the technology isn't quite there yet – but it’s coming. I think the bigger challenge for the company isn’t that calls sometimes get dropped – I use Sprint and my calls get dropped all the time! – it's getting their name out there (Republic who?) and overcoming consumer inertia.
Bar-Gill proposes disclosure regulation as a way to deal with problematic contract design. He’s right to a certain extent – while disclosure has been knocked as ineffective, the problem is really with the type of disclosure and not the notion of disclosure. In other words, we need the right kind of information. Bar-Gill proposes that carriers be required to disclose consumer use information (both specific to the consumer based upon past use as well as use by others similar to the consumer) and total cost of ownership information which would be the total amount paid by the consumer including overage charges on a yearly basis or over the duration of the plan. He also proposes that there be real time disclosures or warning so consumers know before they make that call that they are about to exceed their plan limit.
While I like his proposals, Bar-Gill omits one very important aspect of disclosure (which I have written about in other articles, most recently this one) – and that is visual design. In other words, effective disclosure should mean both the right information as well as the right presentation of that information. You can require all the relevant information you want but if consumers don’t notice it, then they won’t read it. How the information is disclosed is just as important, in my view, as what information is disclosed. Furthermore, in some markets, regulatory action of business practices (and not just disclosure regulation) may be required.
I could go on, but I’ve already taken up too much space. Hopefully this review has sparked your interest and made you want to run out and buy your own copy. Oren Bar-Gill has written a useful and thought provoking book and I think that it’s essential reading for contracts profs (as is Margaret Jane Radin’s book, BOILERPLATE, which was also discussed on a different panel).
[Editor's note: we expect to have an online symposium on Boilerplate in May)
[Posted, on Nancy's behalf, by JT]
New in Print (including books)
Harvey Gilmore, Law School Grades: Flunked Out, But Did Not Really Fail. 7 Charleston L. Rev. 207 (2012-2013)
David L. Johnson, The Parameters of "Solicitation" in an Era of Non-Solicitation Covenants, 28 A.B.A. J. Lab. & Emp. L. 99 (2012)
Tuesday, March 26, 2013
Online Symposium on Oren Bar-Gill's Seduction By Contract, Part IIIA: Nancy Kim on Cell Phone Contracts
This is the sixth in a series of posts on Oren Bar-Gill's recent book, Seduction by Contract: Law Economics, and Psychology in Consumer Markets. The contributions on the blog are written versions of presentations that were given last month at the Eighth International Conference on Contracts held in Fort Worth, Texas. Today is the first of a two-part contribution from our own Nancy Kim of the California Western School of Law. In this post, Nancy lays out Professor Bar-Gill's explanatory model. In tomorrow's post, Nancy will set out her differences with Oren's approach. Stay tuned:
Oren’s book adopts a behavioral economics approach to consumer contracts. His thesis is that companies are intentionally using contract design to exploit the imperfect rationality of consumers – what other contracts profs like Melvin Eisenberg and Russell Korobkin have referred to in their classic articles as “bounded rationality.” Prof. Bar-Gill’s book adopts this basic insight regarding contract design and applies them to three types of consumer contracts: mortgages, credit cards, and cell phones. The chapter I discussed was on cell phone contracts (Angela and Alan deftly tackled the other two).
Bar-Gill discusses some interesting facts about the cell phone market but the focus is on the three design features of cell phone contracts: three part tariffs, lock-in clauses and complexity.
The three part tariff consists of a monthly charge, a number of voice minutes that the monthly charge covers, and a per-minute price for minutes beyond the plan limit. Consumers choose calling plans based upon a forecast of future use, but consumers don’t forecast accurately. Many underestimate and end up paying much more by exceeding their plan limit whereas other (many more others, actually) overestimate their future usage and pay too much for their service by paying for minutes they never use.
The second feature, lock in contracts, are a market response to the imperfect rationality of consumers. The lock-in contract typically consists of a “free” fancy phone and a two or three year contract. The consumer is required to pay an early termination fee (although that is now greatly discounted or prorated– more on that later). Bar-Gill argues that these lock-in contracts take advantage of consumer myopia as subscribers are lured by the fancy free phone and underestimate the likelihood that switching will be beneficial down the road.
The final feature, complexity, allows carriers to hide the true cost of the contract, Complexity refers to all the confusing features and pricing variables offered by companies – in addition to the 3 part tariff, lock in clauses and early termination fees, there are different prices for different times of day, rollover minutes, family plans, etc. Boundedly or imperfectly rational consumers do not effectively aggregate costs associated with these different plans and will focus on a subset of salient features and prices and ignore or underestimate other features and prices. In response, providers will increase prices or reduce the quality of non-salient features.
Bar-Gill explains how carriers design their contracts using these three design features to exacerbate the misperceptions of consumers. In doing so, they reduce the net benefit that consumers derive from their service. He also addresses a typical rational choice explanation for the three part design of cell phone contracts, namely that consumers have heterogeneous preferences; complexity and multidimensionality cater to those differences. Yet, Bar-Gill concludes that this rational choice explanation fails simply because it is too costly for even perfectly rational consumers to ferret out this information. The cost of sorting out the information exceeds the benefit of finding the perfect plan, thus deterring any shopping for terms.
[Posted, on Nancy Kim's behalf, by JT]