Category: Contract Law & Beyond


Law Talk: Gordon Smith and Contracts as Organizations

This week I speak with Professor D. Gordon Smith of BYU Law School (and, of course, The Conglomerate). In this week’s episode, we discuss Gordon’s paper “Contracts as Organizations” (with Brayden King), now up on SSRN. Essentially, Gordon is proposing an emperical research agenda for the study of contracts. By “contracts,” Gordon really does mean “contracts,” not contract law or contract dispute resolution. His argument is that we can use ideas from sociology and organization theory to think about contracts as a species of organization, a move that he claims opens up new possibilities in terms not only of how we answer questions about the process of contracting but also what questions we ask. Enjoy!

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Article 9, Asset Securitization, and the Great Depression

forgottenman.jpgI’ve been reading Amity Shlaes’s wonderful book The Forgotten Man: A New History of the Great Depression, which provides some great story-telling and a richly deserved economic send-up of the New Deal. She illustrates the illogic of many New Deal policies — such as the NRA’s attempt to deal with the monetary problem of deflation through price controls — as well as the sheer contradictory ad hocery Roosevelt’s “bold, ceaseless, experimentation.” Her main thesis seems to be that the New Deal never actually had an economic — as opposed to an electoral and political — logic. To the extent that it was Keynsian it was Keynsian mainly by accident.

Along the way, she rehabilitates some of the class villains of the 1930s and their pre-Crash shenanigans, among them the use of holding companies by utilities. In the traditional story, the captains of industry in the 1920s used holding companies to manipulate stock prices to reap huge profits at the expense of naive investors who found themselves bilked when the market crashed in 1929.

Shlaes has a different story.

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Carbon Offsets, Contract, and Complicity

CarbonEmissions.jpgThe Washington Post ran a front page story earlier this week on the wild and unregulated world of carbon offset markets. The basic idea is that one purchases some off set — either in the form of technological development or contracts not to emit — for one’s own carbon emissions so that one’s over all carbon footprint is zero. This is just the sort of environmentalism that makes my free-market-contracts-prof’s heart go pitter patter. The regulators, however, are now snooping around. As The Post reports:

Critics say that offset sellers usually have good motives. But the market is confusing enough that, this month, the Federal Trade Commission said it would look into whether consumers are being adequately protected.

“It’s just like the Wild West,” said Frank O’Donnell of the group Clean Air Watch. “There are no controls, no standards.”

Having grown-up in the West, I object to “Wild West” as a term of regulatory derision, but it strikes me that there is a deeper problem here, namely what exactly is it that a person is trying to get when they do a carbon offset.

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Debt, Status, and Fatherhood

penguin.jpgProfessor Maldonado’s thoughtful post on fathers reminds of me of one area where the distinction between status and contract in the family still has a huge bite: Debt. In particular the debts created by child support obligations.

Most debts are created in one of two ways. The first method is by contract. I borrow money, I buy on credit, I breach a contract that gives rise to damages, etc. The second method is by committing some tort that gives rise to an award of damages. Interestingly, once these debts are reduced to a sum certain they are more or less treated in the same way. The failure to pay the debt is not a crime. Furthermore, we do not generally allow injunctive relief for debt collection. (In other words, a court will not order a debtor to pay on pain of contempt.) By and large, the debts are even treated in comparable ways in bankruptcy.

Not so for debts of child support. In some jurisdictions failure to pay child support is a crime. Child support debts receive preferred treatment in bankruptcy. In the Old Dominion they try to hit deadbeat dads were they really live, revoking their hunting licences if they refuse to pay. Indeed, some courts have even upheld injunctions requiring unemployed fathers to accept offered employment so as to comply with child support obligations, claims that such work-on-pain-of-contempt-and-imprisonment violates the Thirteenth Amendment’s prohibition on “involuntary servitude” notwithstanding. In short, we treat the debts created by the status of “fatherhood” as being quite different than the debts created by contract or even by harm to others.

I’m not sure what to make of this. Mainly, I suspect that it simply reflects the desire to protect the rights’ of children to the economic support of their parents. But it is more than that. For example, other debts for the benefit of children — say those created by contract such as insurance policies — are not given anything like the same kind of treatment. In other words, it is not simply about making sure that kids get paid. Rather, I suspect that Maine’s claim about the progress of the law notwithstanding, we view a father’s obligation of economic support as changing his status. He is not simply a citizen with a debt. He is a father, something different than an ordinary person, and thus subject to certain intrinsic obligations. In this sense, I think, the law insists that fathers are more than simply income sources. They certainly are not treated like other income sources. Rather, the law insists that the failure to support one’s children is an action of particular blameworthiness that we are willing to accept extra costs to avert and that we are willing to punish with greater severity than other kinds of non-payment of debt. This doesn’t respond to the sorts of concerns raised by Professor Maldonado’s post, of course, but it does suggest that we are willing to treat the obligations of fatherhood as being more than accidental to one’s legal personhood.

Fathers aren’t like everyone else.


Politics, Private Space, and Total Persuasion


A lunch today with a colleague at another school, coupled with an article in the Wall Street Journal, has brought me to back to a topic I blogged about back in January: Total Persuasion. As I suggested, there are analogies to be drawn between the government’s defunct secret possibly ongoing program to gather reams of information about its citizens and corporations’ desire to grab consumer mind-share by every persuasive avenue possible. Indeed, we’re rapidly approaching a time when it will be exceedingly difficult for the law to draw lines between advertising and not-advertising; between fraud and persuasion; and between censorship and consumer protection.

These claims are easy to overdraw, so let me give you an example and a theory to help set the stage for the discussion. In today’s Journal, John McKinnon has a interesting article about Sara Taylor’s decision to leave her job as the White House’s political director to join the private sector. Taylor is an expert in microtargeting, a marketing technique developed by corporations to segment their consumer markets by mining data to learn more about the structure of consumer’s preferences. According to McKinnon, microtargeting was “honed” by political operations to “more effectively zero in on voters’ emotion triggers,” and uncover groups of voters that are susceptible to future efforts. Taylor sees a “big future” for taking such political lessons back to the corporate world by “helping corporations focus on potential customers’ . . . feelings about buying a product or service.”

There are some roadblocks in this prosperous path, as the article points out. Most salient, businesses are “more constrained in the claims they can make” than politicians, presumably by the law of fraud (in its various guises). But there is a solution to this problem: encourage consumers to make their own persuasive advertising by creating “social networks around products and brands . . .” In the future, we should anticipate that such social persuasion will become an increasingly prevalent aspect of corporate marketing efforts, just as politicians have worked to co-opt social networking sites for their own ends.

Why? Because consumers have fewer defenses to social persuasion, and aren’t cynical about it yet. Moreover, social persuasion is probably less subject to legal sanction in the general case (indeed, it may be immune under circumstances where the same language if spoken by the corporation would be actionable). It is also, obviously, cheaper to produce. The downside (loss of control over message) is probably something that corporations will learn to live with. (I thank my lunch companion for pointing this problem out to me!)

What’s wrong with a society in which most speech that you hear is designed to persuade you to consume? When framed that way, some might immediately respond: nothing! After all, no one is being compelled to any particular purchase. If the consumer market is efficient, and consumers had a taste not to consume, wouldn’t savvy marketers satisfy the taste with a unpersuasive campaign? (The idea is silly on its face, but isn’t it sort of what Saturn and Berkshire Hathaway were/are up to?) Even assuming that the consumer product market is somehow irrational, marketers would presumably compete to satisfy whatever inefficient desires are extant.

But I doubt that market rhetoric is going to provide satisfying answers to whether the law should work to hinder a total persuasion society. I haven’t fully thought this issue through, but my starting point is an essay by Jonathan Franzen called Imperial Bedroom, in his book How to Be Alone. Franzen attacks privacy advocates for focusing on privacy as just problem of being from free from others’ (corporations, the government, space aliens, the U.N., etc.) prying eyes and grasping hands.

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Hadley v. Baxendale, a One Act Play

Apparently Ben Davis of the University of Toledo law school really gets into the facts of Hadley v. Baxendale, acting out the various parts for his students. (Who, of course, have taped his performance and posted it to Google Videos.) For the non-contracts geeks in the audience, Hadley is a famous case on the recoverability of consequential damages for breach of contract. The facts had to do with late delivery of a replacement mill shaft, and the mill owner’s claim for lost profits. Here is professor Davis, complete with mill shaft…

I am still trying to decide if this is a case of creative pedagogy, or a cautionary tale about students, cameras, and Google…


Fiduciary Duty and Financial Aid


The financial aid scandal, sparked by NY Attorney General Andrew Cuomo’s investigation (and possibly a shut-out competitor) has already led to some settlements with lenders and universities. The basic thrust of Cuomo’s investigation is that if lenders pay administrators referral fees (whether direct or indirect) to steer students to take certain loans, that conduct is a deceptive trade practice, “in violation of New York Executive Law ‘ 63(12) and General Business Law 349 and 350 and other relevant state law.”

Universities are falling over themselves to settle with NY, as is the lending industry, in light of some bad facts: the companies have sought to influence financial aid administrators with stock, Broadway tickets, and other goodies. So this question is, literally, academic: is the alleged conduct by the university employees a violation of a fiduciary duty (loyalty) owed to students?

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Commercial Law and the Law School Curriculum

signing contract.jpgThe Uniform Commercial Code contains some articles whose reach into the law is so ubiquitous that virtually any lawyer likely needs at least some passing familiarity with their rules (e.g. Article 2’s rules regarding sales and warranties). Other articles, like Article 9 dealing with secured transactions, are fundamental to extremely broad categories of practice such as commercial transactions and bankruptcy. On the other hand, other portions of the Code deal with subjects so technical that even those specializing in the area don’t study the rules. For example, my office-suite mate is an expert in corporate and securities law. On the other hand, she recently confessed to me that she had never even dealt with (let alone studied) the rules contained in Article 8 regarding the sale of investment securities.

Which leads me to wonder how much U.C.C. coverage a decent law school curriculum needs to provide. For example, both payment systems (essentially Article 4) and negotiable instruments (Article 3) are included on most bar exams. On the other hand, an afternoon’s worth of study with a hornbook is sufficient to learn enough negotiable instruments law to pass the bar. It strikes me that payment systems is really only of practical use in this day and age if you are going to be in-house counsel at a bank. Negotiable instruments has a much broader appeal, but I still wonder how useful it is outside of a fairly narrow commercial practice.

Which leads to my questions. Should law schools offer U.C.C. courses in esoteric subjects simply because they are on the bar? How many schools offer payment systems courses? (As far as I know the course was not offered at Harvard while I was there; is this standard or an anomaly?)


The Thin Line Between Pirate and Repo Man, Arrrg Matey!

pirate.gif“Great things are done,” says Blake, “when men and mountains meet;/ This is not done by jostling in the street.” The results when repo men and the sea meet, it would seem, are also not the sort of things done by “jostling in the street.” Under Article 9, a creditor can repossess the collateral of a defaulting debtor so long the repo is done without a “breach of the peace.” What happens, however, when the collateral is a ship? In theory, the sea is governed by a web of international conventions supplemented by the customs and principles of admiralty law. In his fascinating book The Outlaw Sea: A World of Freedom, Chaos, and Crime, William Langewiesche reveals that the reality is considerably messier. The vastness of the oceans continues to provide a level of anonymity that is surprising in our information soaked age, and mobility allows ships to decamp to friendly or corrupt (or both) jurisdictions with ease. In many ways, it is still the wild, wild West. (Perhaps Pirates of the Carribean is a better metaphor.)

Enter F. Max Harberger, who — according to an L.A. Times story sent me by one of my students — is essentially in the business of stealing ships for creditors whose debts are due. The legality of what he does is far from clear, although in fairness he is frequently repoing ships that have been illegally seized by port officials in the developing world who are easily bribed. A $10 million ship can apparently be seized with a $100 bribe to a justice of the peace. Consider the following repo:

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