Law Commons^™

Innovation Versus Encrustation: Agency Costs In Contract Reproduction, Stephen J. Choi, Mitu Gulati, Robert E. Scott

Faculty Scholarship

This article studies the impact of exogenous legal change on whether and how lawyers across four different deal types revise their contracts’ governing law clauses in order to solve the problem that the legal change created. The governing law clause is present in practically every contract across a wide range of industries and, in particular, it appears in deals as disparate as private equity M&A transactions and sovereign bond issuances. Properly drafted, the clause increases the ex ante economic value of the contract to both parties by reducing uncertainty and litigation risk. We posit that different levels of agency costs …

Executive Underreach, In Pandemics And Otherwise, David E. Pozen, Kim Lane Scheppele

Faculty Scholarship

Legal scholars are familiar with the problem of executive overreach, especially in emergencies. But sometimes, instead of being too audacious or extreme, a national executive's attempts to address a true threat prove far too limited and insubstantial. In this Essay, we seek to define and clarify the phenomenon of executive underreach, with special reference to the COVID-19 crisis; to outline ways in which such underreach may compromise constitutional governance and the international legal order; and to suggest a partial remedy.

Why The Fed Should Issue A Policy Framework For Credit Policy, Kathryn Judge

Faculty Scholarship

The Federal Reserve has long used policy frameworks to both explain and inform its policymaking. These policy frameworks typically explain what the Fed is seeking to achieve in a given domain and how it plans to achieve its desired aims. Two prominent examples are the Fed’s use of Bagehot’s dictum when acting as a lender of last resort and its monetary policy framework issued in 2012 and revised in 2020. In both instances, the framework provides a foundation for informed debate among Fed policymakers, Congress, and the public, enhancing both efficacy and accountability. Since the onset of the Covid crisis, …

The Data Standardization Challenge, Kathryn Judge, Richard Berner

Faculty Scholarship

Data standardization offers significant benefits for industry and regulators alike, suggesting that it should be easy. In practice, however, the process has been difficult and slow moving. Moving from an abstract incentive-based analysis to one focused on institutional detail reveals myriad frictions favoring the status quo despite foregone gains. This paper explores the benefits of and challenges confronting standardization, why it should be a top regulatory priority, and how to overcome some of the obstacles to implementation.

The paper also uses data standardization as a lens into the challenges that impede optimal financial regulation. Alongside capture and other common explanations …

Building A Good Jobs Economy, Dani Rodrik, Charles F. Sabel

Faculty Scholarship

Conventional models are failing throughout the world. In the developed world, the welfare state-compensation model has been in retrenchment for some time, and the drawbacks of the neoliberal conception that has superseded it are increasingly evident. Yet there is no compelling alternative on offer. In the developing world, the conventional, tried-and-tested model of industrialization has run out of steam. In both sets of societies a combination of technological and economic forces (in particular, globalization) is creating or exacerbating productive/technological dualism, with a segment of advanced production in metropolitan areas that thrives on the uncertainty generated by the knowledge economy co-existing …

Being True To Trulia: Do Disclosure-Only Settlements In Merger Objection Lawsuits Harm Shareholders?, Eric L. Talley, Giuseppe Dari‐Mattiacci

Faculty Scholarship

A significant debate within mergers and acquisitions law concerns the explosive popularity of the “merger objection lawsuit” (MOL), a shareholder action seeking to enjoin an announced deal on fiduciary duty grounds. MOLs blossomed during the Financial Crisis, becoming popularly associated with “shareholder shakedowns,” whereby quick-triggered plaintiff attorneys would file against – and then rapidly settle with – acquirers, typically on non-monetary terms containing modest added disclosures in exchange for blanket class releases and attorney fee awards. This practice unleashed a torrent of criticism from lawyers, commentators, academics, and (ultimately) judges, culminating in a doctrinal shift in Delaware law in the …

The Middleman’S Damages Revisited, Victor P. Goldberg

Faculty Scholarship

If A promises to sell to B who, in turn, promises to sell to C and either A or C breaches should B receive the gain it expected had both transactions occurred (lost profits) or the larger market/contract differential? Recent case law and commentary argues for the lost profit remedy. The argument is that there is a conflict between awarding market damages and making the nonbreacher whole. This paper argues that there is no conflict. If B were a broker, and C breached, then A would have an action against C for market damages. If B were party to the …

Why Autonomy Must Be Contract's Ultimate Value, Hanoch Dagan, Michael A. Heller

Faculty Scholarship

In “The Choice Theory of Contracts”, we develop a liberal theory of contract law. One core task of the book was to persuade advocates of economic analysis that they must situate their enterprise within our liberal framework. Autonomy, rightly understood, is the telos of contract.

Oren Bar-Gill pushes back strongly in “Choice Theory and the Economic Analysis of Contracts”. He offers a penetrating – perhaps devastating – critique of our approach. Bar-Gill notes the substantial convergence between choice theory and a welfarist view. If he is right, then what does choice theory add?

Our task in Part I of this …

Consequential Damages And Exclusion Clauses, Victor P. Goldberg

Faculty Scholarship

Contracts often include language excluding compensation for consequential damages. However, the boundary between consequential and direct damages is a blurry one. Courts have used concepts like foreseeability, natural result of the breach, and collateral business in their attempts to define the boundary. Those categories, I argue, are not particularly helpful. I consider three classes of cases: wrongful termination, delay, and breach of warranty. This paper argues that lost profits, when referring to the change in value of the contract after a wrongful termination would be direct damages; the hard case involves terminated dealers who had been paid indirectly for retailing …

The Origins Of A Capital Market Union In The United States, Jeffrey N. Gordon, Kathryn Judge

Faculty Scholarship

EU policy-makers have focused on the creation of a “Capital Market Union” to advance the economic vitality of the EU in the aftermath of the Global Financial Crisis of 2007-09 and the Eurozone crisis of 2011-13. The hope is that EU-wide capital markets will help remedy the limitations in the EU’s pattern of bank-centered finance, which, despite the launch of the Banking Union, remains tied to Member States. Capital market development will provide alternative channels for finance, which will facilitate greater resiliency, more economic integration within the EU, and more choices for savers and firms. This chapter uses the origins …

The Lost Volume Seller In English Law, Victor P. Goldberg

Faculty Scholarship

If a buyer breaches a contract but the market price has remained unchanged, English courts and the treatises have treated the seller as a “lost volume seller.” The seller, it is argued, could have had two sales, not one, so it lost the profit on the second sale. This paper recognizes that the buyer has an option to terminate and that the contract prices that option. The implicit option price of the lost volume remedy results in an absurd contract, setting the option price high when it should be low and vice versa. The default rule ought to be the …

The Agency Costs Of Activism: Information Leakage, Thwarted Majorities, And The Public Morality, John C. Coffee Jr.

Faculty Scholarship

Few doubt that hedge fund activism has radically changed corporate governance in the United States – for better or for worse. Proponents see activists as desirable agents of change who intentionally invest in underperforming companies to organize more passive shareholders to support their proposals to change the target’s business model and/or management. So viewed, the process is fundamentally democratic, with institutional shareholders determining whether or not to support the activist’s proposals.

Skeptics respond that things do not work this simply. Actual proxy contests are few, and most activist engagements are resolved through private settlement negotiations between the activists, who rarely …

Heading Off A Cliff? The Tax Reform Man Cometh, And Goeth, Michael J. Graetz

Faculty Scholarship

The major tax policy challenge of the 21st century is the need to address the nation’s fiscal condition fairly and in a manner conducive to economic growth. But since California adopted Proposition 13 nearly forty years ago, antipathy to taxes has served as the glue that has held the Republican coalition together. Even though our taxes as a percentage of our economy are low by OECD standards and low by our own historical experience, anti-tax attitudes have become even more important for Republicans politically, since they now find it hard to agree on almost anything else. So revenue-positive, or even …

Free Markets, State Involvement, And The Wto: Chinese State Owned Enterprises (Soes) In The Ring, Petros C. Mavroidis, Merit E. Jano

Faculty Scholarship

The WTO has struggled with the treatment of nonmarket economies (NMEs). What was a nonissue in the original GATT (because of the homogeneity of participants) became quite an issue with the accession of formally centrally planned economies, which were not transformed to market economies, at least not in the eyes of the incumbents. Contracting this issue has proved to be so far always wanting, and leaving it to adjudicators has not produced good results either. With respect to Chinese SOEs this risks continuing to be an issue, since the contractually agreed deadline (2016) after which China should not be treated …

Trade Agreements, Regulatory Sovereignty And Democratic Legitimacy, Bernard Hoekman, Charles F. Sabel

Faculty Scholarship

Governments increasingly are seeking to use bilateral and regional trade agreements to reduce the cost-increasing effects of differences in product market regulation. They also pursue regulatory cooperation independent of trade agreements. It is important to understand what is being done through bilateral or plurilateral mechanisms to address regulatory differences, and to identify what, if any, role trade agreements can play in supporting international regulatory cooperation. This paper reflects on experience to date in regulatory cooperation and the provisions of recent trade agreements involving advanced economies that have included regulatory cooperation. We argue for a re-thinking by trade officials of the …

The Lost Volume Seller, R.I.P., Victor P. Goldberg

Faculty Scholarship

If the buyer breaches a sales contract, and if the seller can be characterized as a lost volume seller, courts and commentators have argued that the seller should be made whole by compensation for its lost profits. This paper argues that framing the problem in this way leads to an absurd result. The buyer has a termination option and the remedy should be the implicit option price. The lost profit remedy sets a price on that option, a price that bears no relation to reality. Examination of the case law suggests three conclusions: (a) the remedy often sets an excessive …

How Should The E.U. Respond To Brexit And Trump?: The Lessons From Trade Wars, John C. Coffee Jr.

Faculty Scholarship

The U.K.’s decision to exit the E.U. (popularly known as “Brexit”) sets the stage for a potential retaliatory trade war. Similarly, the aggressive nationalism of U.S. President Donald Trump does also. In both cases, game theory suggests how such a conflict might be resolved. This paper first examines three standard game theory models – the Chicken Game, the Prisoner’s Dilemma, and the Stag-Hunt Game – and then turns to the strong incentives for rent-seeking by special interests and considers how rent-seeking likely affects how these games might play out. Although the conventional wisdom expects that the U.K. will suffer retaliation …

A Note On Victoria Laundry, Victor P. Goldberg

Faculty Scholarship

In Victoria Laundry v Newman, Asquith LJ claimed that the headnote in Hadley v. Baxendale was “definitely misleading” noting that had it been accurate, the decision would have been decided the other way. In this note, I argue that the headnote was not misleading and, even if it were, his conclusion did not follow. His interpretation lowered the standard for finding liability for consequential damage. Given the facts, Victoria Laundry would have lost, even with his new standard. His solution was simple: alter the facts.

Border Adjustments And The Conservation Of Tax Planning, David M. Schizer

Faculty Scholarship

This article is based on Schizer’s keynote address at the 17th annual NYU-KPMG Tax Symposium on March 10.

In this article, Schizer argues that U.S. corporate and shareholder taxes need to be reformed, and the corporate rate should be much lower. In reforming this dysfunctional regime, according to Schizer, Congress should keep both of these taxes as a form of built-in redundancy; if one tax is avoided, the other can still be collected. More generally, Congress should be wary of Utopian solutions. Tax reform is more likely to change tax planning than to eliminate it entirely, Schizer concludes. For instance, …

Driverless Cars And The Much Delayed Tort Law Revolution, Andrzej Rapaczynski

Faculty Scholarship

The most striking development in the American tort law of the last century was the quick rise and fall of strict manufacturers’ liability for the huge social losses associated with the use of industrial products. The most important factor in this process has been the inability of the courts and academic commentators to develop a workable theory of design defects, resulting in a wholesale return of negligence as the basis of products liability jurisprudence. This article explains the reasons for this failure and argues that the development of digital technology, and the advent of self-driving cars in particular, is likely …

The New Business Rule And Compensation For Lost Profits, Victor P. Goldberg

Faculty Scholarship

For many years most American jurisdictions applied the “new business” rule, denying recovery of lost profits for new businesses. The majority position today rejects the per se rule, treating the issue as a rule of evidence — lost profits must be proved with “reasonable certainty.” This paper argues that the new business rule ought not be viewed as merely a matter of whether the evidence is sufficient to surmount the “reasonable certainty” hurdle. The confusion arises because courts have lumped together a number of different problems. By breaking these out, a more nuanced picture emerges. For one category, in particular, …

Follow The Money: Essays On International Taxation – Introduction, Michael J. Graetz

Faculty Scholarship

Publicity about tax avoidance techniques of multinational corporations and wealthy individuals has moved discussion of international income taxation from the backrooms of law and accounting firms to the front pages of news organizations around the world. In the words of a top Australian tax official, international tax law has now become a topic of barbeque conversations. Public anger has, in turn, brought previously arcane issues of international taxation onto the agenda of heads of government around the world.

Despite all the attention, however, issues of international income taxation are often not well understood. This Introduction outlines a collection of essays, …

A "Barbarous Relic": The French, Gold, And The Demise Of Bretton Woods, Michael J. Graetz, Olivia Briffault

Faculty Scholarship

Since the time of the French Revolution, when a gold standard saved the nation from hyperinflation, France has wanted gold to be the linchpin of international monetary arrangements. And, indeed, from the earliest use of bills and coins as money until August 1971, money was, in principle at least, a claim on gold.

At Bretton Woods, New Hampshire, where in July 1944 730 delegates from 44 countries met to create the post-war international financial order, the French argued that gold – which John Maynard Keynes had described two decades earlier as a “barbarous relic” – was the key to international …

Short-Termism And Long-Termism, Michal Barzuza, Eric L. Talley

Faculty Scholarship

A significant debate in corporate law and finance concerns the role of activist investors (especially hedge funds) in corporate governance. Activists, it is often alleged, imprudently privilege short term earnings over superior (but less liquid) long term investments. Activists counter that they target managers who unjustifiably cling to questionable strategies. While this debate is hardly new, it has grown increasingly fractious of late. We analyze the activism debate within a theoretical securities-market setting. In our framework – which draws from an emerging literature in empirical and experimental finance – managers are differentially overconfident (causing them to favor long-term projects), while …

"Section 5 And 'Unfair Methods Of Competition': Protecting Competition Or Increasing Uncertainty?", Tim Wu

Faculty Scholarship

Since the late 1980s, Section 5 of the FTC Act has come to center on a certain kind of case, the so-called anticompetitive “scheme” featuring extraordinary and nefarious conduct – like gaming a standards process, rigging industry tests, that sort of thing. Deception, fraud, bad-faith and oppressive action are typical. This kind of self-restraint has, to its credit, yielded a focus on cases where the conduct is extraordinary, an anticompetitive intent is obvious and the harm is substantial. At this point, the self-imposed limits on Section 5 enforcement are extensive enough that a critic could fairly accuse the agency of …

From British Westinghouse To The New Flamenco: Misunderstanding Mitigation, Victor P. Goldberg

Faculty Scholarship

Both the venerable British Westinghouse decision and the current New Flamenco case have been analyzed in terms of mitigation. Properly understood, in neither is mitigation relevant. Although in the former, the House of Lords came to the right result, the replacement of the substandard turbines with new superior ones was not to mitigate damages — the buyer would have installed the new turbines even had the Westinghouse turbines met the contractual specifications. Even if Westinghouse’s failure accelerated the replacement (which it almost certainly did not) it would have been a mistake to compensate the buyer for the cost of the …

After The Golden Victory: Still Lost At Sea, Victor P. Goldberg

Faculty Scholarship

In The Golden Victory the House of Lords held that when determining damages for a repudiatory breach, in a conflict between the compensatory principle and finality, the former trumped. The decision was recently ratified by the Supreme Court in Bunge SA v. Nidera BV. The claim in this paper is that this was a mistake; properly conceived, there is no conflict. The contract should be viewed as an asset and compensation would entail determining the decline in value of that asset at the time of the breach. The value of the contract at that moment would reflect the possible effects …

Beyond Options, Edward R. Morrison, Anthony J. Casey

Faculty Scholarship

Scholars and policymakers now debate reforms that would prevent a bankruptcy filing from being a moment that forces valuation of the firm, crystallization of claims against it, and elimination of junior stakeholders’ interest in future appreciation in firm value. These reforms have many names, ranging from Relative Priority to Redemption Option Value. Much of the debate centers on the extent to which reform would protect the non-bankruptcy options of junior stakeholders, or harm the non-bankruptcy options of senior lenders. We argue that this focus on options misplaced. Protecting options is neither necessary nor sufficient for advancing the goal of a …

Variation In Boilerplate: Rational Design Or Random Mutation?, Stephen J. Choi, G. Mitu Gulati, Robert E. Scott

Faculty Scholarship

Standard contract doctrine presumes that sophisticated parties choose their terminology carefully because they want courts or counterparts to understand what they intended. The implication of this “Rational Design” model of rational behavior is that courts should pay careful attention to the precise phrasing of contracts. Using a study of the sovereign bond market, we examine the Rational Design model as applied to standard-form contracting. In NML v. Argentina, federal courts in New York attached importance to the precise phrasing of the boilerplate contracts at issue. The industry promptly condemned the decision for a supposedly erroneous interpretation of a variant of …

Preserving The Corporate Superego In A Time Of Activism: An Essay On Ethics And Economics, John C. Coffee Jr.

Faculty Scholarship

This essay focuses on the impact of recent changes in corporate governance on ethical behavior within the public corporation. It argues that a style of corporate behavior – one characterized by a risk tolerant, even reckless, pursuit of short-term profits and a disregard for the interests of non-shareholder constituencies – is attributable in significant part to recent changes in corporate governance, including the rise of hedge fund activism, greater use of incentive compensation, and the appearance of blockholder directors. It then surveys feasible responses intended to strengthen the role of the boards as the corporation’s conscience and superego. Given the …