Contracts Commons^™

Mobility-Restricting Covenants In Business Contracts: The Case Of Franchising, Francine Lafontaine, Lorenzo G. Luisetto, J.J. Prescott

Articles

Several studies show that restrictive covenants in employment contracts, such as non-compete agreements, may affect employees in detrimental ways, including by reducing mobility and suppressing wages. While such concerns are real, these clauses also have the potential to serve legitimate business purposes by helping companies protect valuable information, which can encourage investment and training and enhance social welfare. This paper explores the use of several types of covenants, including non-competes but also confidentiality and post-relationship non-recruitment clauses, in franchise contracts, an important and accessible category of business contracts. Many of these contracts impose restrictive covenants on franchisees but also on …

Institutionalizing The Trade-Labor Nexus, Yueming Yan

Michigan Journal of International Law

While scholars have extensively explored the evolution of labor provisions in trade agreements, less attention has been paid to the institutional mechanisms that operationalize these provisions. This article addresses this gap by offering a comparative analysis of labor compliance models that are emerging across jurisdictions.

Recognizing that no institutional design is without trade-offs, this article applies the theory of comparative institutional analysis to evaluate existing models—not by asking whether they are (in)effective in the abstract, but: (in)effective compared to what? Specifically, it examines the strengths and limitations of various institutional mechanisms using benchmarks that matter to policymakers, including procedural efficiency, …

Denizens Of Dexit: Why Controlled Companies Are The First To Leave The First State, Jack Kanzler

Michigan Business & Entrepreneurial Law Review

A series of high-profile companies announcing plans to leave the state of Delaware and reincorporate out of state has sparked many commentators to predict a coming wave of corporate exodus from the First State called “DExit.” This paper seeks to explore the DExit “movement” with a particular focus on “controlled companies” and the recent doctrinal developments that have created a perception that Delaware law has become hostile to such governance arrangements. I will begin by discussing a brief history of Delaware’s corporate law and its current role in the American corporate legal system. I will then move to a robust …

Reverse Breakup Fees And Antitrust Approval, Albert H. Choi, Abraham L. Wickelgren

Law & Economics Working Papers

The paper examines the antitrust implications of use of reverse breakup (termination) fees in mergers. By promising to pay a reverse breakup fee to the target if the proposed merger does not get the necessary antitrust approval, the acquirer can signal to the antitrust authority that the merger is more likely to be pro-competitive. A large reverse breakup fee can also function as a commitment device by the acquirer to spend more resources in case the merger is challenged by the antitrust authority. While the first, signaling function is efficiency enhancing, the second, commitment function can lead to an efficiency …

Library E-Book Licensing And State Law Reform, Kincaid Brown

Law Librarian Scholarship

Libraries don’t “buy” most e-books the way they buy print books; they license them. That reality is at the crossroads of budgetary constraints and patron satisfaction in modern libraries. With print, a library typically pays once, owns the copy, and lends it until it wears out. With e-books, publishers and intermediaries, like platforms such as OverDrive, commonly offer time-limited or loan-limit-ed terms (for example, a license that expires after a set number of checkouts or after a set period), can impose embargoes, and can set prices far above consumer retail. Libraries argue these terms frustrate their public mission and make …

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

Articles

A privately-informed entrepreneur may withhold material information from prospective investors who may sue the firm ex post for (alleged) non-disclosure. Absent liability, the entrepreneur has an excessive incentive to withhold bad news and pursue socially-wasteful projects. Liability deters inefficient non- disclosure and prevents capital misallocation. Any damage award received by investors is partially offset by a reduction in equity value. Depending on the likelihood of court error and litigation cost, the socially-optimal damage award may be either zero or the minimum necessary for full deterrence. The private incentive to waive liability may be socially excessive or insufficient. Positive and normative …

Read But Not Understood? An Empirical Analysis Of Consumer Comprehension In Homeowners Insurance, Daniel Schwarcz, Brenda J. Cude, Kyle D. Logue, German Marquez Alcala

Articles

Modern contract law assumes that consumers meaningfully assent to the standard forms that govern their daily lives. However, this assumption is widely regarded as a legal fiction for two key reasons: first, most consumers do not read standard forms, and second, even those who do often struggle to fully comprehend their terms and implications. Although the lack of consumer reading has been well documented through empirical research, consumers’ ability to comprehend standard-form contracts has received surprisingly little attention.

This Article addresses the latter issue by empirically examining whether providing excerpts from the dominant standard-form homeowners insurance policy improves consumer understanding …

Designing Contract Modification, Albert H. Choi, George G. Triantis

Articles

For long-term commercial contracts, modification tends to be the norm rather than the exception. While modification often takes place in response to an arrival of new information, contracting parties frequently modify the terms in response to a shift in bargaining power. In this Article, we explain how the flexibility to renegotiate in response to a shift in bargaining power can facilitate long-term contracting and thereby beneficial reliance investments and risk allocation. The prospect of modification can induce contracting parties who expect their bargaining power to improve, such as from the emergence of outside opportunities, to enter into contracts earlier and …

Merger Remedies Unbound, Dhruv Aggarwal, Albert H. Choi, Geeyoung Min

Articles

How should foundational contract law doctrines apply to corporate mergers? This Article argues that recent changes in Delaware law grant parties expansive contractual freedom to define their preferred remedies in merger agreements, untethered from the limits imposed by traditional contract law. A new provision in the Delaware corporate code, or the Delaware General Corporation Law (DGCL), permits penalty clauses in merger agreements, notwithstanding the traditional “anti-penalty doctrine” that forbids punitive liquidated damages in contracts. Delaware courts have also shown deference to specific performance provisions, treating them as presumptively enforceable commitments instead of retaining their traditional judicial discretion over the choice …

A Comparative Analysis Of The Lack Of Contractual Protections In Female Dominated Opportunities: Collegiate Competitive Dancers And Cheerleaders Compared To Ncaa Student-Athletes And National Pageant Organization Titleholders Compared To Employees/Independent Contractors, Abigail Church

Michigan Journal of Gender & Law

The lack of contractual protections and regulations throughout female-dominated opportunities is abundantly clear in the collegiate competitive dance & cheer and the national pageant organization titleholders. Collegiate competitive dancers and cheerleaders have no standardized contractual requirements regarding their commitment to an academic institution or their engagement in NIL opportunities. Their NCAA recognized student-athlete counterparts, on the other hand, have extensive regulations and protections in place for both categories of contracts. In the pageant industry, pageant titleholders have no protection against the all-too-common procedural and substantive unconscionability of their service agreements, which can be found in confidentiality and arbitration clauses. In …

Remedies For Non-Disclosure In Asset Sales: Voidance Vs. Damages, Albert H. Choi, Kathryn E. Spier

Law & Economics Working Papers

This paper analyzes the problems of non-disclosure in the context of an asset sale between a buyer and a seller. The seller can have important information about the asset and can opportunistically decide not to disclose that information to the buyer, and the buyer may sue the seller ex post for remedy. The buyer and the court have a choice over different types of remedy. The paper considers three different remedy regimes: (1) no liability; (2) voidance; and (3) damages. Under voidance, the buyer can rescind the transaction (return the asset and get the price back), while with damages, the …

Merger Remedies Unbound, Dhruv Aggarwal, Albert H. Choi, Geeyoung Min

Law & Economics Working Papers

How should foundational contract law doctrines apply to corporate mergers? This Article argues that recent changes in Delaware law grant parties expansive contractual freedom to define their preferred remedies in merger agreements, untethered from the limits imposed by traditional contract law. A new provision in the Delaware corporate code permits penalty clauses in merger agreements, departing from the traditional “anti-penalty doctrine” that forbids punitive liquidated damages in contract. Delaware courts have also shown deference to specific performance provisions, treating them as presumptively enforceable commitments instead of retaining their traditional judicial discretion over the choice of remedies. Given that Delaware law …

Cruising Beyond Car Dealer Dominance, Piotr Tereszkiewicz

University of Michigan Journal of Law Reform

The automotive industry plays a pivotal role in both the American economy and American daily life. This means that the laws that govern the automotive industry and structure power dynamics between central players in the market also play a pivotal role in both the American economy and American daily life. One such area of law has room for improvement: laws governing the manufacturer-dealer relationship in car sales.

Although the law currently structures automotive industry power dynamics to the detriment of consumer welfare, it does not have to be this way. This Article proposes legal reforms aimed at improving consumer welfare …

Harms, Relationships, And The Contours Of Liability For Emotional Distress, Steven Schaus

Articles

In Reasonableness and Risk, Greg Keating argues that the law of torts is “preoccupied” with harm—with safeguarding conditions of effective agency. In this comment, I ask whether Keating’s picture can make sense of the tort claims, like loss of consortium, that provide some measure of protection to relationships—and to marriage-like relationships, in particular. It would be awful if my life partner were seriously injured or killed—a serious setback to my interests—a harm by almost any measure. But in what sense would it impair my agency, as Keating’s account of harm seems to require? I explain the force of the question …

Designing Contract Modification, Albert H. Choi, George Triantis

Law & Economics Working Papers

For long-term commercial contracts, modification tends to be the norm rather than the exception. While modification often takes place in response to an arrival of new information, contracting parties frequently modify the terms in response to a shift in bargaining power. In this paper, we explain how the flexibility to renegotiate in response to a shift in bargaining power can facilitate long-term contracting and thereby beneficial reliance investments and risk allocation. The prospect of modification can induce contracting parties who expect their bargaining power to improve, such as from the emergence of outside opportunities, to enter into contracts earlier and …

Read But Not Understood? An Empirical Analysis Of Consumer Comprehension In Homeowners Insurance, Daniel Schwarcz, Brenda J. Cude, Kyle D. Logue, German Marquez Alcala

Law & Economics Working Papers

Modern contract law assumes that consumers meaningfully assent to the standard forms that govern their daily lives. However, this assumption is widely regarded as a legal fiction for two key reasons: first, most consumers do not read standard forms, and second, even those who do often struggle to fully comprehend their terms and implications. While the lack of consumer reading has been well-documented through empirical research, consumers’ ability to comprehend standard form contracts has received surprisingly little attention.

This Article addresses the latter issue by empirically examining whether providing excerpts from the dominant standard form homeowners insurance policy improves consumer …

Empirical Essays On Mobility-Restricting Covenants, Lorenzo G. Luisetto

SJD Dissertations

This thesis, which consists of four essays, uses empirical methods to study questions on the use of mobility-restricting covenants in business and employment contracts.

The first chapter investigates the spillover effects of the so-called “No-Poach Initiative,” an enforcement action launched by the Antitrust Division of the State of Washington Attorney General’s Office in January 2018 that led 237 franchisors to agree to stop using no-poaching clauses—i.e., provisions in franchise contracts that prohibit franchisees from hiring each other’s employees—nationwide. I document that approximately one third of the franchisors not targeted by the No-Poach Initiative removed the no-poaching clause from their franchise …

Altering Rules: The New Frontier For Corporate Governance, Gabriel Rauterberg, Sarath Sanga

Articles

Corporate law has taken a contractarian turn. Shareholders are increasingly contracting around its foundational rules—statutory rights, the fiduciary duty of loyalty, even the central role of the board—and Delaware courts are increasingly enforcing these contracts. In the one case where they did not, the legislature swiftly overruled the decision and adopted a new statutory provision permitting boards to completely cede their powers to a shareholder by contract. These developments have sparked a polarized debate, with some calling for a return to mandatory rules, while others push for total contractual freedom.

We argue, however, that the best approach lies neither in …

Shareholder Agreements In India: An Unsettled Jurisprudence., Vikramaditya S. Khanna

Book Chapters

Shareholder agreements (SAs) are becoming more common around the world as the ownership of companies become more concentrated. Larger investors— in particular, private equity investors— often document their understandings about their investments in increasingly sophisticated SAs. India has also witnessed a rise in SAs, usually with foreign private equity players, which reflects a level of sophistication and formality in contract negotiations that was not always present when such agreements were between family or affinity groups. This has placed increasing pressure on Indian case law to evolve in response to these agreements.

This chapter explores that response and finds that it …

Contractual Remedies In Mergers: Lessons From Crispo V. Musk, Dhruv Aggarwal, Albert H. Choi, Geeyoung Min

Law & Economics Working Papers

The Delaware Chancery Court recently restricted a merger target's ability to recover damages on behalf of its shareholders from a breaching buyer. This paper investigates the impact of the decision. First, we present a theoretical analysis to generate empirical predictions. Second, we show that the decision led to a decrease in the firm value of targets in mergers governed by Delaware law. Third, we hand-collect relevant provisions from merger agreements and find that the agreements governed by Delaware law increasingly include target-friendly non-price terms after the decision. We also present evidence suggesting deal price responds to the inclusion of novel …

Subjective Beliefs About Contract Enforceability, J. J. Prescott, Evan Starr

Articles

This article assesses the content, role, and adaptability of subjective beliefs about contract enforceability in the context of postemployment covenants not to compete (noncompetes). We demonstrate that employees tend to believe that even clearly unenforceable noncompetes are enforceable, including their own. We provide evidence for both supply- and demand-side stories that explain employees’ persistently inaccurate beliefs. Moreover, we show that believing that unenforceable noncompetes are enforceable likely causes employees to forgo better job opportunities and to perceive that their employer is more likely to sue them if they choose to compete. Finally, we use an information experiment to inform employees …

Covid-19 Risk Factors And Boilerplate Disclosure, Stephen J. Choi, Mitu Gulati, Xuan Liu, Adam C. Pritchard

Law & Economics Working Papers

The SEC mandates that public companies assess new information that changes the risks that they face and disclose these if there has been a “material” change. Does that theory work in practice? Or are companies copying and repeating the same generic disclosures? Using the shock of the COVID-19 pandemic, we explore these questions. Overall, we find considerable rote copying of boilerplate disclosures. Further, the factors that correlate with deviations from the boilerplate seem related more to the resources that companies have (large companies change updated disclosures more) and litigation risks (companies vulnerable to shareholder litigation update more) rather than general …

Scrutiny Of Employee Covenants Not To Compete Under The Rule Of Reason: An Empirical Inquiry, Daniel A. Crane

Other Publications

For over 300 years, the common law has scrutinized employee covenants not to compete for their reasonableness. That is about to change. On April 23, 2024, the Federal Trade Commission announced a rule that will prohibit employers from imposing noncompete agreements on workers. The rule declares all covenants not to compete in the employment context to be unfair methods of competition under section 5 of the FTC Act. If the rule takes effect, thirty million contracts will become illegal. The FTC justifies this rule based on the ostensibly pernicious effects of employee covenants not to compete—limiting employee opportunities to pursue …

Preparing Future Lawyers To Draft Contracts And Communicate With Clients In The Era Of Generative Ai, Kristen Wolff

Articles

Thank you all for coming today. This is, I think, a really important topic. Important enough that the conference has decided to have two talks on the same topic, and Mark will be presenting on this in the next session, too. I plan on attending because I don’t think you can get enough perspectives on it right now. And hearing this information, I had to attend several talks myself before I really digested it and understood what this was all about. So, I hope that I can give you a little bit of that today. My name is Kristen Wolff. …

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 …

Modernizing Notice Of Breach Rules To Preserve Contract Remedies, Stephen Plass

University of Michigan Journal of Law Reform

Recently, the legal community has scrutinized the capacity of mandatory arbitration rules to deter or foreclose claims for breach of contract. But little attention has been paid to express and constructive notice of breach rules that are just as effective at foreclosing contractual remedies. While four-year statutes of limitations are typically viewed as the default cutoff time for breach of contract claims, contracting parties, particularly buyers of goods, must act much sooner to preserve their legal remedies. It is now common practice for sellers to require notice of breach within days or weeks of their performance as an express condition …

The Value Of Understandable Consumer Insurance Contracts, Kyle Logue, Daniel Schwarcz, Brenda Cude

Articles

Insurance consumers, the intermediaries who serve them, and the regulators who protect them all would benefit from understandable consumer insurance contracts. This article outlines the benefits of understandable insurance contracts, identifies the regulatory tools that are or can be used to ensure such comprehensibility, and reviews the existing literature about how well consumers comprehend their insurance policies within the context of personal lines insurance in the U.S. The article concludes by proposing an empirical research strategy to study consumers’ understanding of the terms of homeowners insurance policies and, even when they have not read their policies, their expectations about coverage.

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. …