Law Commons^™

Modular Bankruptcy: Toward A Consumer Scheme Of Arrangement, John A. E. Pottow

Law & Economics Working Papers

The world of international bankruptcy has seen increasing use of the versatile scheme of arrangement, a form of corporate reorganization available under English law. A key feature of the scheme is its modularity, whereby a debtor can restructure only a single class of debt, such as bond indentures, without affecting other debt, such as trade. This is the opposite of chapter 11 of the U.S. Bankruptcy Code’s comprehensive reckoning of all financial stakeholders. This article considers a novel idea: could the scheme be transplanted into the consumer realm? It argues that it could and should. Substantial benefits of more individually …

The Judicial System’S Unjust Relationship With Attorney-Client Privilege: How Judges Knowingly (And Erroneously) Abrogate Important Contractual Arrangements In Corporate Transactions, Edward S. Adams

Michigan Business & Entrepreneurial Law Review

A Delaware court has recently recognized the need to enforce contracts that delineate where the attorney-client privilege rests after an asset transfer. This Article will argue that courts across the country should recognize the important and legitimate reasons for this type of decision. Part I will review how the attorney-client privilege functions for corporations and how courts respect the importance of the privilege in other contexts. Part II will review the fundamental corporate changes in which these questions can arise and situations in which courts choose to recognize the importance of protecting the attorney-client privilege. Part III will argue that …

Third-Party Beneficiaries Of Government Contracts: Imagining An Equitable Approach And Applying It To Broken Promises In Detroit, Gabe Chess

Michigan Law Review

Courts have widely adopted a heightened standard for recognizing third-party beneficiaries of government contracts. But the justifications offered for the heightened standard do not withstand scrutiny. Instead, courts should apply a series of equitable factors to produce results consistent with the concern for “manifest justice” that animates third-party beneficiary doctrine. Governments make contracts frequently, often to address issues of huge importance to their citizens, including housing, economic development, and healthcare. In each of these areas, third-party beneficiary doctrine may be an important avenue of relief to citizens harmed by broken promises and may encourage the government and its contracting partners …

Public Client Contingency Fee Contracts As Obligation, Seth Mayer

Michigan Law Review

Contingency fee contracts predicate an attorney’s compensation on the outcome of a case. Such contracts are widely accepted when used in civil litigation by private plaintiffs who might not otherwise be able to afford legal representation. However, such arrangements are controversial when government plaintiffs like attorneys general and local governments retain private lawyers to litigate on behalf of the public in return for a percentage of any recovery from the lawsuit. Some commentators praise such public client contingency fee contracts, which have become commonplace, as an efficient way to achieve justice. Critics, however, view them as corrupt, undemocratic, and unethical. …

Cloud Gaming Demystified: An Introduction To The Legal Implications Of Cloud-Based Videogames, Mitchell Longan, Gaetano Dimita, Johan David Michels, Christopher Millard

Michigan Technology Law Review

In this paper, we “demystify” cloud-based videogaming and its legal implications, in two stages. First, we describe the videogame sector; explain the basics of cloud computing and traditional videogame technologies and set out how the two converge in cloud-based videogame systems. Based on this analysis, we distinguish three separate models for cloud gaming services: (i) the “layered” model of Gaming-as-a-Service (‘GaaS’); (ii) the ‘integrated’ model of GaaS; and (iii) the ‘consumer infrastructure-as-a-service’ model. We argue that these three models are key to analyzing how intellectual property rights, contractual rights, and regulatory issues will develop in this novel environment for videogame …

Liability For Non-Disclosure In Equity Financing, Albert H. Choi, Kathryn E. Spier

Law & Economics Working Papers

The paper analyzes the effects of holding firms liable for non-disclosure of material information when raising capital. We develop a model in which a privately-informed entrepreneur can choose to withhold information from prospective investors when issuing and selling stock and the investors can bring suit against the firm ex post for (alleged) non-disclosure. The damage payment received by the investors is partially offset by the reduced value of their equity stake. The analysis shows that the equilibrium depends on, among others, (1) the amount of personal capital the entrepreneur has to commit, (2) the frequency with which the entrepreneur is …

Contractual Inequality, Manisha Padi

Michigan Law Review

Most individuals strive to satisfy every obligation laid out in standard form contracts such as mortgages, insurance plans, or credit agreements. Sophisticated parties, however, adapt and modify their obligations during contract performance by negotiating for lenient treatment and taking advantage of unclear terms. The common law explicitly authorizes variance from standardized contract terms during performance. When the same standard terms create value for sophisticated individuals and destroy value for others, the result is contractual inequality. Contractual inequality has grown without scrutiny by courts or scholars, enabling regressive redistribution of resources and creating economic inefficiency by sowing distrust in markets for …

Contract Schemas, Roseanna Sommers

Articles

This review draws on the notion of “contract schemas” to characterize what ordinary people think is happening when they enter into contractual arrangements. It proposes that contracts are schematically represented as written documents filled with impenetrable text containing hidden strings, which are routinely signed without comprehension. This cognitive template, activated whenever people encounter objects with these characteristic features, confers certain default assumptions, associations, and expectancies. A review of the literature suggests that contract schemas supply (a) the assumption that terms will be enforced as written, (b) the feeling that one is obligated to perform, and (c) the sense that one …

The Separation Of Voting And Control: The Role Of Contract In Corporate Governance, Gabriel V. Rauterberg

Articles

The default rules of corporate law make shareholders’ control rights a function of their voting power. Whether a director is elected or a merger is approved depends on how shareholders vote. Yet, in private corporations shareholders routinely alter their rights by contract. This phenomenon of shareholder agreements—contracts among the owners of a firm— has received far less attention than it deserves, mainly because detailed data about the actual contents of shareholder agreements has been lacking. Private companies disclose little, and shareholder agreements are thought to play a trivial or nonexistent role in public companies. I show that this is false—fifteen …

Deal Protection Devices, Albert H. Choi

Articles

In mergers and acquisitions transactions, a buyer and a seller will often agree to contractual mechanisms (deal protection devices) to deter third parties from jumping the deal and to compensate a disappointed buyer. With the help of auction theory, this Article analyzes various deal protection devices, while focusing on the two most commonly used mechanisms: match rights and target termination fees. A match right gives the buyer a right to “match” a third party’s offer so as to prevent the third party from snatching the target away, while a termination fee compensates the buyer when a third party acquires the …

Contract Design When Relationship-Specific Investment Produces Asymmetric Information, Albert H. Choi, George Triantis

Articles

Under conventional contract theory, contracts may be efficient by protecting relationship specific investment from holdup in subsequent (re)negotiation over terms of trade. This paper demonstrates a different problem when specific investment also provides significant private information to the investing party. This is fairly common: for example, a manufacturer invests to learn about its buyer's idiosyncratic needs or a collaborator invests to learn about a joint venture. We show how such private information can lead to subsequent bargaining failure and suboptimal ex ante relationship-specific investment. We also show that this inefficiency is worse if the parties enter into a binding and …

Rethinking Mac Clauses In The Time Of Akorn, Boston Scientific, And Covid-19, Samuel Shapiro

Michigan Business & Entrepreneurial Law Review

The MAC clause is perhaps the most important clause in contract law, giving acquirers the ability to terminate even the largest agreements in the face of an often vaguely defined “Material Adverse Change.” For decades, even though MAC clauses have been present in nearly every merger agreement, courts have almost universally refused to enforce them. But the Delaware Chancery Court’s 2018 decision in Akorn may finally change that. As the world deals with the economic uncertainty caused by COVID-19, courts may soon get more opportunities to decide whether or not they will follow Akorn’s lead and begin to allow …

Two Visions Of Contract, Hanoch Dagan

Michigan Law Review

A Review of Justice in Transactions: A Theory of Contract Law. by Peter Benson.

Libor Phaseout: Litigation Is Coming, John Michael Neubert

Michigan Business & Entrepreneurial Law Review

This paper will explore the different steps market participants should take to make sure they are prepared when LIBOR is phased out in December 2021. Part I will focus on the actions market participants should do before going into negotiations that can increase their potential to reach a consensual agreement. Part II will explore what financial firms should be prepared for during the negotiation process and what claims may arise when no agreement is reached. The decision for how to handle any LIBOR-linked financial instrument in their portfolio should be left to the discretion of market participants themselves. This paper …

A Feminist Economic Perspective On Contract Law: Promissory Estoppel As An Example, Orit Gan

Michigan Journal of Gender & Law

Economic analysis is a highly influential theoretical approach to contract law. At the same time, feminist analysis of contract law offers an important critical approach to the field. However, feminist economics, a prominent alternative approach to mainstream neo-classical economics drawing from both economic theory and feminist theory, has only been applied scarcely and sporadically to contract law. This Article seeks to bridge this gap and to apply the key features of feminist economics to an analysis of the doctrine of promissory estoppel. This Article uses promissory estoppel as an example to demonstrate a feminist economic analysis of contract law.

Arbitration Waiver And Prejudice, Timothy Leake

Michigan Law Review

Arbitration agreements are common in commercial and consumer contracts. But two parties can litigate an arbitrable dispute in court if neither party seeks arbitration. That presents a problem if one party changes its mind and invokes its arbitration rights months or years after the lawsuit was filed and substantial litigation activity has taken place. Federal and state courts agree that a party can waive its arbitration rights by engaging in sufficient litigation activity without seeking arbitration, but they take different approaches to deciding how much litigation is too much. Two basic methods exist. Some courts say waiver requires the party …

The Behavioral Effects Of (Unenforceable) Contracts, Evan Starr, Jj Prescott, Norman Bishara

Articles

Do contracts influence behavior independent of the law governing their enforceability? We explore this question in the context of employment noncompetes using nationally representative data for 11,500 labor force participants. We show that noncompetes are associated with reductions in employee mobility and changes in the direction of that mobility (i.e., toward noncompetitors) in both states that do and do not enforce noncompetes. Decomposing mobility into job offer generation and acceptance, we detect no evidence of differences in job search, recruitment, or offer activity associated with noncompetes. Rather, we find that employees with noncompetes—even in states that do not enforce them—frequently …

Class Actions And Private Antitrust Litigation, Albert H. Choi, Kathryn E. Sprier

Law & Economics Working Papers

When firms collude and charge supra-competitive prices, consumers can bring antitrust lawsuits against the firms. When the litigation cost is low, firms accept the cost as just another cost of doing business, whereas when the cost is high, the firms lower the price to deter litigation. Class action is modeled as a mechanism that allows plaintiffs and attorneys to obtain economies of scale. We show that class actions, and the firms' incentive to block them, may or may not be socially desirable. Agency problems, settlement, fee-shifting, treble damages, public enforcement, and sustaining collusion through repeat play are also considered.

Making Employment Arbitration Fair And Accessible, Theodore J. St. Antoine

Articles

Mandatory arbitration agreements require employees, as a condition of employment, to agree to arbitrate all employment disputes instead of filing court suits. The Supreme Court has approved such agreements but many labor experts oppose them. The U.S. House of Representatives has passed a bill to prohibit pre-dispute agreements, the common form for mandatory arbitrations. This article argues that the House bill would have the practical effect of virtually eliminating employment arbitration. Instead, proposals are presented for either legislative or judicial steps to ensure that employment arbitration is fair and accessible. Requirements would include: (1) voluntary agreements on the part of …

Consumer Psychology And The Problem Of Fine Print Fraud, Roseanna Sommers, Meirav Furth-Matzkin

Articles

This Article investigates consumers' beliefs about contracts that are formed as a result of fraud. Across four studies, we asked lay survey respondents to judge scenarios in which sellers use false representations to induce consumers to buy products or services. In each case, the false representations are directly contradicted by the written terms of the contract, which the consumers sign without reading. Our findings reveal that lay respondents, unlike legally trained respondents, believe that such agreements are consented to and will be enforced as written, despite the seller's material deception. Importantly, fine print discourages consumers from wanting to take legal …

Designing And Enforcing Preliminary Agreements, Albert H. Choi, George Triantis

Articles

Preliminary agreements—variously labeled as memoranda of understanding, letters of intent, term sheets, commitment letters, or agreements in principle—are common in complex business transactions. They document an incomplete set of terms that the parties have agreed upon, while anticipating further negotiation of the remaining provisions. They often create legal obligations, particularly a duty to negotiate in good faith. This duty has been the subject of a substantial number of judicial opinions over the past few decades and yet continues to be regarded as a confusing and unpredictable issue in contract law. Legal scholarship is hamstrung in its analysis of the case …

Identifying Fundamental Breach Of Articles 25 And 49 Of The Cisg: The Good Faith Duty Of Collaborative Efforts To Cure Defects - Make The Parties Draw A Line In The Sand Of Substantiality, Yasutoshi Ishida

Michigan Journal of International Law

Article 49(1) of the CISG allows buyers of international goods to avoid their sales contracts “if the failure by the seller to perform . . . amounts to a fundamental breach.” A breach is “fundamental,” as defined by CISG article 25, when it causes the buyer such detriment “as substantially to deprive him of what he is entitled to expect under the contract.” This definition is followed by the so-called “foreseeability test,” an “unless” clause that excepts the situation where “the party in breach did not foresee[,] and a reasonable person of the same kind in the same circumstances would …

The Use Of Soft Law In The Creation Of Legal Norms In International Commercial Law: How Successful Has It Been?, Henry Deeb Gabriel

Michigan Journal of International Law

In this Article, I examine several interrelated points. After defining soft law in Part II, I briefly set out some of the assumed advantages soft law instruments may have over legislation and regulations in Part III. In Part IV, I examine why some soft law instruments in international commercial law have been successful in creating international legal norms. In this Part, I specifically examine the UNIDROIT Principles of International Commercial Contracts to show how one might gauge success by looking beyond the express purpose of the instrument. I also compare the UNIDROIT Principles of Commercial Contracts with the American Law …

The Best Of Times And The Worst Of Times: The Current Landscape Of Mandatory Arbitration Clause Enforcement In Domestic Arbitration, Virginia Neisler

Law Librarian Scholarship

There is nothing new about arbi­tration, a method of alternative dispute resolution designed to settle disputes more efficiently, cheaper, and faster than litigation. Today, mandatory arbitration clauses are ubiquitous in commercial contracts, social media terms and conditions, employment contracts, and more. These contracts, where one party in the weaker position (often a consumer or an employee) must either accept or reject the terms as written with no power to negotiate, are known as contracts of adhesion. The widespread use of arbitration clauses—specifically, pre­dispute, forced arbitration agreements, often including class­action waiv ers found in adhesion contracts—has come under pressure.

The Private Law Critique Of International Investment Law, Julian Arato

Articles

This Article argues that investment treaties subtly constrain how nations organize their internal systems of private law, including laws of property, contracts, corporations, and intellectual property. Problematically, the treaties do so on a one-size-fits-all basis, disregarding the wide variation in values reflected in these domestic legal institutions. Investor-state dispute settlement exacerbates this tension, further distorting national private law arrangements. This hidden aspect of the system produces inefficiency, unfairness, and distributional inequities that have eluded the regime's critics and apologists alike.

Moral Diversity And Efficient Breach, Matthew A. Seligman

Michigan Law Review

Most people think it is morally wrong to breach a contract. But sophisticated commercial parties, like large corporations, have no objection to breaching contracts and paying the price in damages when doing so is in their self-interest. The literature has ignored the profound legal, economic, and normative implications of that asymmetry between individuals’ and firms’ approaches to breach. To individuals, a contract is a promise that cannot be broken regardless of the financial stakes. For example, millions of homeowners refused to breach their mortgage contracts in the aftermath of the housing crisis even though doing so could have saved them …

Creative Commons: An Explainer, Kincaid C. Brown

Law Librarian Scholarship

Copyright protection attaches automatically to original works you create, whether a poem, photograph, painting, song, video, or essay. Copyright limits what others can do with your creative work and protects your original work from, for example, being compiled or reused and sold for profit. If you hold the copyright—and didn’t, say, create the original work in an employment context where it may be subject to being a work for hire—you may want to allow others to use your work for particular purposes. You could individually negotiate a license granting rights to each person, which would undoubtedly take more and more …

Creative Commons: An Explainer, Kincaid C. Brown

Law Librarian Scholarship

Copyright protection attaches automatically to original works you create, whether a poem, photograph, painting, song, video, or essay. Copyright limits what others can do with your creative work and protects your original work from, for example, being compiled or reused and sold for profit. If you hold the copyright—and didn’t, say, create the original work in an employment context where it may be subject to being a work for hire—you may want to allow others to use your work for particular purposes. You could individually negotiate a license granting rights to each person, which would undoubtedly take more and more …

Understanding The Consumer Review Fairness Act Of 2016, Eric Goldman

Michigan Telecommunications & Technology Law Review

Consumer reviews are vitally important to our modern economy. Markets become stronger and more efficient when consumers share their marketplace experiences and guide other consumers toward the best vendors and away from poor ones. Businesses recognize the importance of consumer reviews, and many businesses take numerous steps to manage how consumer reviews affect their public image. Unfortunately, in a misguided effort to control consumer reviews, some businesses have deployed contract provisions that ban or inhibit their consumers from reviewing them. I call those provisions “antireview clauses.”

Anti-review clauses distort the marketplace benefits society gets from consumer reviews by suppressing peer …

Contracts Ex Machina, Kevin Werbach, Nicolas Cornell

Articles

Smart contracts are self-executing digital transactions using decentralized cryptographic mechanisms for enforcement. They were theorized more than twenty years ago, but the recent development of Bitcoin and blockchain technologies has rekindled excitement about their potential among technologists and industry. Startup companies and major enterprises alike are now developing smart contract solutions for an array of markets, purporting to offer a digital bypass around traditional contract law. For legal scholars, smart contracts pose a significant question: Do smart contracts offer a superior solution to the problems that contract law addresses? In this article, we aim to understand both the potential and …