Institutional Design in Patent Law: Private Property Rights or Regulatory Entitlements – Article by Adam Mossoff

From Volume 92, Number 4 (May 2019)


Institutional Design in Patent Law: Private Property Rights or Regulatory Entitlements

Adam Mossoff[*]


Judges often observe that the U.S. patent system arose from the English practice of the Crown conferring commercial monopoly privileges under its prerogative power.[1] This is undeniably true—just as it is undeniably true that the American republic arose from the English constitutional monarchy and parliamentary system of government. After the American Revolution, the U.S. retained aspects of the English political and legal systems, such as the common law,[2] but it also implemented innovative structural and substantive changes in its new political and legal institutions. Its patent system represented the same fundamental break from the English patent system as other U.S. political and legal institutions.[3]

The early U.S. patent system was a legal system in transition, but with the first Patent Act of 1790, there were fundamental differences between the U.S. and English patent systems. This divergence reflected a fundamental choice in institutional design. It is the core difference between defining a patent, on the one hand, as a private property right or, on the other hand, as a regulatory entitlement—between securing rights through private law doctrines and legal institutions constrained by the rule of law versus granting rights as matters of public policy and through discretionary decision-making processes in the political organs of the government.[4]

This key distinction is often obscured by the oft-repeated judicial gloss about the provenance of the U.S. patent system. A single article cannot address all historical and institutional details, but, as historians and economists have recognized, the U.S. patent system generally diverged from the English patent system as a matter of institutional design by defining patent rights largely within the domain of private law.[5] By the late nineteenth century, there was some convergence among jurisdictions, as other countries adopted aspects of the U.S. private law model for their patent systems, such as providing enforceable property rights that are alienable in the marketplace for commercial development. The U.S. patent system has been the legal “gold standard” in applying to patents basic precepts of the rule of law, securing them in stable legal institutions such as a Patent Office that followed definitive procedures in first examining and then publishing the patents it issued to inventors, and using an independent judiciary to resolve infringement and validity disputes over issued patents.[6]

These comparative choices in institutional design are significant because, in the early twenty-first century, patent systems are diverging again. This time, however, the United States is shifting to a conception of patents as regulatory entitlements—defining patents as public rights within the administrative state, denying judicial remedies for private property rights to patent owners, and denying patent protections to new technologies, among other changes. Meanwhile, other jurisdictions are creating or reforming their patent systems as private law systems in order to promote their own innovation economies. This includes (surprisingly) China, which has moved aggressively in recent years to create a patent system and a supporting legal infrastructure as a key foundational pillar in its efforts to create its own growing innovation economy.

This Article will address the legal and economic implications of the institutional design choice in defining patents as private property rights versus public regulatory entitlements. First, it will identify the historical divergence of the U.S. patent system from the English patent system in two key respects: (1) in securing patents as private property rights by providing effective judicial remedies against infringers, both private citizens and public officials, and (2) in securing the alienation of patents in the marketplace on legal and commercial par with other property rights. It will detail these two fundamental pillars of a private property right in historical court decisions and in other primary sources in the historical record. Second, it summarizes the economic and historical evidence that has consistently found a causal relationship between a private law model for patent systems and growing innovation economies and flourishing societies. Third, it identifies the convergence in the nineteenth century around elements of the U.S. patent system, how this convergence was driven in part by the economic success of the U.S. patent system, and that the United States is now diverging from its historical private law model while other jurisdictions are retaining theirs or are adopting the private law model in their own reforms of their respective patent systems.

I.  The U.S. Patent System: A Private
Property Rights Model

From the beginning of the U.S. patent system, there has been a vibrant debate about the nature of patent rights. Some courts and commentators classified patents as monopoly privileges.[7] Others classified patents as private property rights.[8] As with all legal doctrines, one can identify judges or commentators who support one side or the other of the debate. Sometimes, the private property or monopoly privilege perspectives are expressed by the same person in a single legal document, such as in Chief Justice William Taft’s 1923 decision in Crown Die & Tool Co. v. Nye Tool & Machine Works.[9] There, Chief Justice Taft first explained that the “title” in a patent secures the classic “common-law right . . . of exclusive enjoyment,” but then he later shifted in framing a patent as a statutory “monopoly” and concluded that “[i]t is not safe . . . to follow implicitly the rules governing a transfer of rights in a chose in action at common law.”[10]

Yet Chief Justice Taft was wrong in his second claim that U.S. patent law did not incorporate the legal rules from the common law of property or contract. In creating the foundational doctrines that comprised U.S. patent law in the nineteenth century, courts explicitly applied to patent owners the same common law rules governing transfers of other property rights, as well as imported into patent law other private law doctrines in property, contract, and tort more generally. This is not an ex post observation by historians tantamount to the accounts by law and economists of how the common law implicitly achieved efficiency via private law doctrines.[11] Nineteenth-century courts and commentators explicitly recognized that the private law character of the U.S. patent system was one of its distinctive characteristics, especially in comparison to the English patent system whence the U.S. patent system arose.[12] By the nineteenth century, the English patent law system had progressed toward a private law model,[13] but it still bore significant vestiges of its provenance in a royal grant of privilege issued by either political favoritism or for purely economic policy goals.

Notably, the early U.S. patent statutes did not refer to patents as “property,” but they defined patents as securing the exclusive rights to make, use, and dispose of an invention.[14] Congress thus used in the patent statutes the longstanding definition of property reaching back to the Roman law, which legal elites in the United States recognized as a classification of patents as property rights.[15] This is confirmed by federal courts consistently recognizing patents as a “species of property.”[16] In 1813, for example, Chief Justice John Marshall, riding circuit, explained that the “constitution and law, taken together, give to the inventor, from the moment of invention, an inchoate property therein, . . .  [and] that this inchoate and indefeasible property in the thing discovered commences with the discovery itself, and is only perfected by the patent.”[17] Later, in 1824, a unanimous Supreme Court held that a patent secures to an “inventor . . . a property in his inventions; a property which is often of very great value, and of which the law intended to give him the absolute enjoyment and possession.”[18]

This dominant line of nineteenth-century patent cases represents a fundamental institutional design choice by Congress and courts. In its concepts, doctrines, and even in judicial rhetoric, U.S. patent rights were secured to their owners, not through political institutions defined by discretionary policy-making and modes of regulatory analysis, but largely through the private law doctrines of property, contract, and tort.[19] The evidence for this is widespread throughout early U.S. patent law, but in the constraints of a single article, I will illustrate this in two primary areas of private law theory: (1) the enforcement of the property right against infringers via lawsuits in courts, including against the government, and (2) the free alienation of the property right in the marketplace.

In terms of the remedies available to patent owners for violations of their property rights, there was a period of transitional development in the first few decades of the U.S. patent system. Given general concerns arising from federalism and related constitutional constraints on the federal government in the Federalist Period, Congress did not expressly provide in the patent statutes for an injunction as a remedy for patent infringement until 1819.[20] Yet, there is evidence that courts awarded injunctions to patent owners (and copyright owners) who met the requirements for this equitable remedy before the 1819 amendment to the patent statutes.[21]

This made sense. Since early courts recognized that infringement of a patent is a violation of a property right,[22] they conceptualized patent infringement as a species of trespass.[23] This of course provides a remedy for damages, which patent owners could obtain, just as all other property owners. Some courts recognized that the ongoing or willful trespasses inherent in a defendant’s commercial infringement of a patent are properly the subject of an equitable remedy, as evidenced in Antebellum case law.[24] The 1819 amendment was in effect a declaratory act.

This is further confirmed by other private law doctrines and rhetoric that courts invoked as legal reference points for patent infringement. For example, Chief Justice Marshall, riding circuit, characterized as “fraud” a defendant’s efforts at avoiding liability by making minor changes in copying a patented invention.[25] Moreover, judges and commentators alike repeatedly embraced the rhetoric of “piracy” in characterizing the act of patent infringement.[26]

The unique U.S. approach in securing patents as private property rights, especially in comparison to the more general public law model in the English patent system, is exemplified in securing patents under the Takings Clause of the U.S. Constitution.[27] Again, the cases are not all uniform, as no legal doctrine is entirely “pure” in this way, but the dominant jurisprudence weighed in favor of constitutional security for the private property rights in patents.[28] For example, in 1878 in McKeever v. United States, which arose from a lawsuit against the federal government for compensation for an unauthorized use of a patented cartridge box by the federal government, the Court of Claims engaged in a wide-ranging, historical analysis of how U.S. patents are “private property,” as opposed to the English definition of a patent as a “grant” that issues by “royal favor” and thus do “not exclude a user by the Crown.”[29]

The McKeever court first analyzed the text of the Patent and Copyright Clause as evidence of this fundamental difference between the English Crown’s personal privilege and the U.S. private property right. The court explained that the language in the U.S. Constitution—the use of the terms “right” and “exclusive,” the absence of the well-established English legal term “patent,” and the absence of any express reservation in favor of the government—established that the private property rights in a U.S. patent were not on the same legal footing as the personal privileges in a patent granted by the English Crown.[30] The McKeever court further observed that this conclusion was buttressed by the fact that the Framers empowered the Legislature, not the Executive, to secure an inventor’s rights—placing this constitutional provision in Article I, not in Article II. This indicated that they viewed patents as private property rights secured by the people’s representatives, not as a special grant rooted in the discretionary prerogative powers of the Executive (the U.S. analog to the English Crown).[31] The McKeever court concluded that the Framers “had a clear apprehension of the English law, on the one hand, and a just conception, on the other, of what one of the commentators on the Constitution has termed ‘a natural right to the fruits of mental labor.’”[32]

As a segue to the second key private law feature of U.S. patent law—alienability of patents in the marketplace—the McKeever court further explained that the U.S. approach in securing patents as private property rights was confirmed by the federal government’s well-established practice since the Founding Era in using patented inventions by “express contracts” with patent owners.[33] This was in contrast to the power claimed by the English government to the free use of any patent issued by the Crown.[34]

U.S. courts secured to patent owners their rights to dispose of their property by importing into patent law longstanding common law doctrines securing the free alienation of real property. This was not achieved through a public lawmaking mode of top-down regulatory directive; rather, early U.S. patent owners alienated their property interests in the marketplace by drafting conveyances to successors and assigns (using property concepts and terms),[35] using patents as collateral in obtaining financing from investors,[36] selling security interests in their patents to obtain third-party financing for lawsuits against infringers,[37] and otherwise slicing and dicing their property into myriad sets of exclusive rights in follow-on owners, successors, and assigns in making, using, and selling the patented property throughout the United States.[38]

In adjudicating disputes over licenses and assignments of patent rights, Justice Joseph Story explicitly relied on real property case law as binding precedent in his many patent opinions that he issued while riding circuit.[39] In fact, the willingness of early federal courts to import into patent law the common law property concepts of assignment and license for defining the quantum of estate conveyed to a successor in interest in a patent is one more data point indicating that the United States implemented a private law model in creating its patent system.[40] Notably, President George Washington chose to acquire a license in 1791 from Oliver Evans, the recipient of the third U.S. patent issued under the 1790 Patent Act, for use of Evans’ invention in Washington’s mill at Mount Vernon.[41] Of course, Congress already made this fundamental institutional design choice itself in 1790 by providing in the first patent statute that a patent may issue to an inventor or to “his, her or their heirs, administrators or assigns” (and retaining the codification of this right to transfer to “assigns” in subsequent patent statutes).[42]

Similar to the earlier contrast of a U.S. patent as a private property right against an English patent as a personal privilege, courts and commentators further contrasted U.S. and English patents in terms of their permissive alienation to third parties. This is reflected in an anonymous note in the Federal Cases Reporter, which explains that an English patent is a “privilege” conferred by a “grant by the crown,” and thus the patent owner’s “right has been regarded [as] a personal privilege, inalienable unless power to that effect is given by the crown.”[43] Although the legal rule was that an English patent was “a mere naked right, inseparable from the person of the grantee,” legal and commercial practice evolved such that this power was typically conferred in patent grants.[44] In the U.S., however, the patent statutes and courts provided as a matter of law and right that patents could be conveyed by their owners, which meant that the patent is “defined as an incorporeal chattel, which the patent impresses with all the characteristics of personal estate . . . .”[45] As one federal court later put the point: “the rights conferred by the patent law, being property, have the incidents of property, and are capable of being transmitted by descent or devise, or assigned by grant.”[46]

In conclusion, the U.S. patent system was initially crafted by Congress and courts along a private law model, which diverged in key respects from the mostly public law model that prevailed in England in the eighteenth and nineteenth centuries. There are many aspects of the U.S. patent system that reflect this basic institutional design choice, including the creation of a Patent Office that operated along set rules of procedure in issuing patents (and then after 1836, examining patent applications).[47] Here, I identify two key private law features of U.S. patents: (1) providing remedies in court against both private citizens and public officials for violations of patent rights, and (2) securing the free alienation of patent rights in the marketplace. These are exemplars of the unique U.S. approach in securing patent rights as private property rights—as an intellectual property right similar to the nonpossessory “incorporeal rights” like easements and other property rights long secured at common law.[48] Justice Levi Woodbury, riding circuit, captured the essence of this institutional design choice in the U.S. patent system in an 1845 case, writing that “we protect intellectual property, the labors of the mind, . . . as much a man’s own, and as much the fruit of his honest industry, as the wheat he cultivates, or the flocks he rears.”[49]

II.  The Significance of the U.S. Patent System
as a Private Law System

As economists and historians have recognized, the U.S. approach to defining its patent system as a system of property rights within a private law framework has contributed to the United States’ thriving innovation economy. This is unsurprising. When defined by clear legal requirements and secured within stable political and legal institutions governed by the rule of law, private property rights are a key ingredient for growing economies and flourishing societies.[50]

This general insight by economists and political scientists applies as much to property rights in inventions as it does to property rights in land and in other assets, whether tangible or intangible. For example, Hernando de Soto’s research shows the importance of title recordation and clear rules for transferring property to economic growth.[51] He recognized that this fundamental insight applies to patents just as much as it does to real estate, although many miss this point in de Soto’s analysis.[52] The prior Part described some of these key legal characteristics of the early U.S. patent system, including the security of patents as private property rights that are recorded in a legal institution functioning under the rule of law (the Patent Office), and the alienability of patents in the marketplace under the same rules as other long-standing property rights.

Economists, such as Professor Zorina Khan, have identified that this choice in institutional design by Congress and courts was a key factor in promoting thriving innovation markets in the United States in the nineteenth century.[53] Other economists have also identified features of these robust nineteenth-century innovation markets—such as an increase in “venture capital” investment in patent owners, the rise of a secondary market in the sale of patents as assets, and the embrace of specialization via licensing business models—as indicators of value-maximizing economic activity made possible by securing patents as private property rights.[54] This remains true today: a twenty-first-century startup with a patent more than doubles its chances of securing venture capital financing when compared to a startup without a patent.[55]

Historically, U.S. patent owners also innovated the franchise business model via licensing of their patent rights to businesspersons. This included Samuel Morse, the inventor of the electro-magnetic telegraph,[56] and Alexander Graham Bell, the inventor of the telephone,[57] among others. Other innovations in new corporate forms and cross-licensing agreements, such as the invention of the patent pool in 1856, made it possible for patent owners to use their property rights to overcome transaction-cost barriers in the commercialization of their property; in the case of patent pools, this was the private-ordering solution to widespread litigation by multiple owners of patents on multiple components of a single product or service sold in the marketplace.[58] All of these developments and activities confirm de Soto’s insight that a “good legal property system is a medium that allows us to understand each other, make connections, and synthesize knowledge about our assets to enhance our productivity.”[59]

Even when patent owners engaged in strategic, rent-seeking behavior in the nineteenth century, this problem arose in the context of legal disputes over patents and thus it was addressed by courts who responded appropriately within the procedural and substantive legal rules governing the scope of property rights in patents. For instance, starting in the early nineteenth century, the Patent Office began permitting patent owners to surrender patents that had inadvertent formal defects in their patents that had unintended substantive, negative effects on the scope of the property rights secured to them.[60] The Patent Office would “reissue” a corrected patent. Consistent with the private law model in the U.S. patent system, this practice was not left solely to administrative discretion. First, the Supreme Court upheld the validity of reissue patents in 1832 in Grant v. Raymond,[61] and then Congress codified the reissue practice in the 1836 Patent Act.[62]

Some patent owners began to exploit their right to obtain reissue patents to expand ex post the scope of their property rights solely to capture newly invented technologies, which was not the initial function of the reissue right (and it was explicitly prohibited).[63] Courts reined in this strategic behavior by patent owners in extending a property right beyond the metes and bounds in one’s title deed.[64] This was done for the same reasons that all property owners are delimited in the use of their property by other property owners’ equal rights.[65] In the case of property rights in inventions, courts sought to secure as clear title as possible in the context of new innovation to facilitate licensing and to provide proper notice to other innovators and commercial actors of the legal boundaries in which they could operate without incurring liability.[66]

Ultimately, the private law model embraced by the U.S. for its patent system, which differentiated it from its predecessor in the English patent system, has been identified by Professor Khan as serving a key role in the “democratization of invention.”[67] As she explains:

The tendency to democratization was manifested in unique features of the U.S. patent system such as the examination of patent applications by technically qualified Patent Office employees, the award of property rights only to the first and true inventor, low fees, and few restrictions on the ability of patentees to exploit their inventions in the marketplace.[68]

Professor Stephen Haber also surveys the economic and historical evidence and finds the weight of evidence supporting a finding of a “causal relationship between strong patents and innovation.”[69] Here, a “strong patent” means a property right enforceable in courts and freely alienable to third parties such that it facilitates specialization and the division of labor in innovation markets. Professor Haber concludes that “there are no wealthy countries with weak patent rights, and there are no poor countries with strong patent rights.”[70] This establishes the same presumptive burden on behalf of patents that is established by the same overwhelmingly positive correlations between other private property rights and economic growth—those who claim otherwise bear the burden of proof.[71]

III.  Historical Convergence and Modern Divergence
in Patent Law Systems

Key elements of modern patent systems around the world today were copied from the U.S. patent system, including the most widely adopted institutional feature: examining patent applications at a Patent Office according to predetermined legal standards in both process and substance.[72] This convergence is notable, especially among the world’s leading economies. The United States became a leading world economy only in the latter half of the nineteenth century after having a per capita gross domestic product on par with Brazil at the start of the eighteenth century.[73]

Yet jurisdictions throughout the world did not adopt all aspects of the U.S. private law model for their patent systems. While adopting examination processes and rules regarding title recordation, among others, they balked when it came to securing patents as private property rights that were freely alienable in the marketplace and enforceable against all infringers in court. For example, in addition to the “Crown right” that permitted free use of patents by the English government, England adopted a compulsory licensing scheme in the late nineteenth century.[74] As noted, this was in stark contrast to the property and contract doctrines generally relied on in the United States to define the freedom of patent owners to convey their rights in the marketplace.[75] In fact, the United States repeatedly has considered and rejected compulsory licensing requirements in its patent system.[76]

The U.S. patent system thus has been identified as the “gold standard” for world patent systems given its comparative advantages in securing private property rights in technological innovations,[77] but this has begun to change in the twenty-first century. In recent years, the United States has slowly shifted through court decisions, legislation, and the creation of a new administrative tribunal for reviewing and canceling patents. It has moved from a predominantly private law model to one that has significant institutional features of a public law model.

In terms of reliable and enforceable patent rights, courts have muddied the doctrinal waters in awarding either equitable or legal remedies for violations of these private property rights. In 2006 in eBay v. MercExchange, the U.S. Supreme Court reframed the test for awarding injunctions to patent owners on a finding of infringement by a defendant in terms of an allegedly historical four-factor test (which was not in fact a historical test).[78] Justice Anthony Kennedy concurred in the decision, arguing that there now exists a new business model of “obtaining licensing fees” and that patent licensing companies should not be permitted to “charge exorbitant fees” by threatening manufacturers with an injunction if they do not take a license.[79] Within a few years, many district courts conflated Justice Kennedy’s concurrence with the holding in eBay itself, citing not the majority opinion, but Justice Kennedy’s concurrence.[80] As a result, patent owners, including both manufacturers and licensors, are now less likely to obtain an injunction against infringers.[81] In effect, patent owners are forced into compulsory licensing schemes via judicial decisions that deny them injunctions, requiring them to accept court-ordered “reasonable royalties” for ongoing infringement. In terms of determining these “reasonable royalties,” courts have further lowered the baseline for assessing damages to the “smallest saleable patent practicing unit,”[82] and are using this standard for damages even when it does not match the market-based rate for licensing patented innovation.[83]

The result of the weakening of the ability to obtain an injunction—the backstop for all market-based negotiations of conveyances of property rights—and the further limiting of damages awarded to patent owners below market-set rates has led to an increasingly common commercial practice referred to as “efficient infringement.”[84] This occurs when a company decides that it “economically gains from deliberately infringing [on a] patent[]” because it knows the patent owner will not receive an injunction and thus it will pay less in legal fees and in court-ordered damages than it would have paid in a license obtained from the patent owner.[85]

For instance, in its patent infringement lawsuits against Apple—a multi-year, worldwide legal dispute that spanned numerous court cases—Qualcomm claimed in late 2018 that Apple was in arrears for as much as $7 billion (and counting) for refusing to make royalty payments under its previous licensing agreements for use of the 4G digital transmission technologies invented at Qualcomm.[86] In April 2019, the two companies settled all worldwide litigation with Apple paying an undisclosed sum and entering into a new license to use Qualcomm’s next-generation 5G technologies in future iPhones.[87] By itself, the refusal to pay royalties might not fall within the scope of strategic behavior labeled as “efficient infringement,” but internal documents disclosed in one of the legal cases shortly before the settlement revealed that Apple engaged in a deliberate legal campaign to devalue Qualcomm’s patents for the sole purpose of reducing its royalty payments in previously agreed-upon licenses.[88] This is consistent with economic and theoretical analyses of what happens when injunctions are not an available remedy for infringement of property rights, which incentivizes “hold out” by licensees or infringers.[89] The only jurisdiction in which Apple was not enjoined in the patent infringement lawsuits brought by Qualcomm was the United States, although injunctions were issued against Apple in Germany and in China.[90]

Given the increasingly high costs of patent litigation as a result of both efficient infringement practices and diminished chances of success for many patent owners in seeking protection of their rights in court, patent litigation is now referred to as the “sport of kings.”[91] This directly undermines the “democratization” effects that accessible, reliable, and effective property rights have historically achieved via the private law model of the U.S. patent system. This is important given that the “great inventors” in the nineteenth century were individuals who mostly relied on patent licensing and other features of market specialization facilitated by enforceable and tradeable property rights.[92]

In addition to the shift in U.S. courts in treating patents less like private property rights, Congress has similarly adopted changes to the patent system that comprise a public law model, such as discretionary, administrative adjudication of patent rights by regulatory officials. In 2011, Congress enacted the largest revision to the U.S. patent system since 1836, called the America Invents Act (AIA).[93] Among many transformations in the U.S. patent system, including shifting to a first-to-file system from a first-to-invent system, Congress created a new administrative tribunal to review and cancel previously issued patents.[94] This tribunal, called the Patent Trial and Appeal Board (PTAB), began its administrative hearings in 2012. Unfortunately, Congress imposed very few substantive or procedural limits on this tribunal in the AIA, and thus the PTAB quickly became an example of an administrative agency run amok.

There are innumerable due process and related concerns at the PTAB. One prominent issue has been the practice of “panel stacking” administrative judges at the PTAB to obtain preordained results.[95] Moreover, anyone in the world can file a petition at any time during a patent’s twenty-year term to challenge it regardless of the personal financial gain that may motivate the petition, leading to strategic behavior by hedge-fund managers who would short stocks of companies in which they then file PTAB petitions seeking to invalidate the respective companies’ patents.[96] In fact, anyone can file as many petitions as they wish; numerous patents have been subject to “serial filings” of multiple petitions,[97] and serial petitions are sometimes filed concurrently in order to keep the patent under an administrative, legal, and commercial cloud. The PTAB also initially adopted a lower legal standard for construing patent claims in its administrative hearings than what is used in a lawsuit in an Article III court; this has resulted in inordinately high “kill rates” that range almost as high as 100% for some types of patents.[98] This difference in legal rules in interpreting patents has resulted in cases in which the PTAB cancels a patent after an Article III court construes a patent as valid and enforceable. The Court of Appeals for the Federal Circuit has held that this is an acceptable contradiction in legal decisions concerning the validity of the same property right reached between two state institutions governing the patent system.[99]

These are just a few examples of the new regulatory mode of legal governance in a patent system that was once defined by relatively clear legal requirements, the rule of law, and stable legal institutions. The newly appointed Director of the U.S. Patent & Trademark Office has issued new regulations to reverse course on some of these practices.[100] But these new rules are not legally mandated; thus, there is nothing that can prevent a new Director from reversing course and reinstituting as a matter of regulatory fiat all of these problematic practices at the PTAB, whose administrative panels one former federal judge has characterized as “death squads . . . killing property rights.”[101]

Significantly, many patent owners raised constitutional challenges to the PTAB on the basis of due process and takings concerns, but the Supreme Court agreed to hear a challenge to the PTAB in Oil States Energy v. Greene’s Energy Group[102] on whether the PTAB violated the Seventh Amendment rights of patent owners to receive a jury trial. In its opinion in May 2018, the Oil States Court did not reach the Seventh Amendment question, because it held that the legal determination of the validity of an issued patent was entirely a matter of “public right,” and thus a patent is not a private right secured by the separation of powers and other structural protections afforded to citizens by the Constitution.[103] This is the first time that the Supreme Court held that a patent that had vested in an owner after an examination and grant by the Patent Office is a public right, as opposed to construing patents as private rights.[104] Oil States represents a radical shift from the private law model in which the U.S. patent system has secured patents as private property rights and provided them the relevant constitutional protections as other private rights.

The PTAB is widely recognized as contributing to a legal and policy environment in which patents owned by individuals or other under-capitalized entities, such as startups or universities, are now significantly devalued as commercial assets. This patent owner must first navigate the increasingly difficult process to obtain a patent, especially in the biopharmaceutical and high-tech industries that have been hit the hardest by recent court decisions that have severely restricted the patent eligibility of innovations in these sectors of the innovation economy.[105] If a patent issues, the patent owner is then faced with the prospect of efficient infringement, as companies do not pursue a license and instead infringe a patent given their economic calculation that a denial of an injunction and a below-market-rate “reasonable royalty” awarded by a court will result in a smaller compulsory license fee than if they negotiated a license directly with the patent owner. Companies, or the special companies hired anonymously to file petitions in the PTAB,[106] then file multiple petitions in the PTAB, which is an expensive process and time consuming.[107] Through its administrative processes, which are nothing like the legal processes in court, the PTAB can cancel a patent. The odds favor the petitioner. This regulatory cancelation is valid regardless of panel stacking or other concerns. It is also valid even if the patent owner was lucky enough to survive a validity challenge in court, prove infringement, and then receive an injunction or damages high enough to justify its legal fees. The U.S. patent system is now characterized by inordinately high costs, high legal hurdles, and discretionary and even contradictory legal processes and decisions. In sum, patents are now more like public rights awarded and adjudicated according to the discretionary, regulatory decisionmaking processes of the political branches, as opposed to stable private rights in property secured in courts.

The judicial, legislative, and administrative developments in the U.S. patent system in the last ten years represent a demonstrable shift away from the private law model that was the hallmark of the early U.S. patent system. In the early twenty-first century, the U.S. patent system has the institutional traits of the public regulatory model that first animated the English patent system, and from which the United States diverged. This is not merely a divergence in the U.S. patent system over time, as foreign jurisdictions are adopting elements of the private law model for their own patent systems. One jurisdiction in particular is China, which has begun a substantial reform of its patent system over the past decade, but unlike the United States, it is creating a private law system.

Among other reforms it has implemented in contract law and in other fields of private law,[108] China has begun reforming its patent system within a private law model. First, it is implementing new rules at the State Intellectual Property Office (SIPO) that “provide for the streamlined examination of patent applications” on inventions in the high-tech sector, such as those in cloud computing, AI, the Internet, and Big Data.[109] As one legal news source reported, “China’s opening up [of its patent system to new high-tech innovation] contrasts with the United States’ move to cut back on business method patents and software patents.”[110] In terms of its judicial institutions, China enacted reforms in 2014, creating three specialized IP courts in Beijing, Shanghai, and Guangzhou, and creating another fifteen IP tribunals in other regions of the country.[111] China authorized these courts to award both injunctions and damages on a finding of patent infringement.[112] Patent owners in Chinese courts typically seek injunctions against infringing products, which, unlike their U.S. counterparts, judges are “generous in awarding.”[113] Finally, following the United States’ lead in creating the Court of Appeals for the Federal Circuit, a specialized single appellate court that hears all patent cases, China has announced that it is considering creating a single national IP appeals court.[114] This would create much-valued national uniformity in judicial decisions that resolve disputes and which ultimately govern the private decision-making and private-ordering institutions in its innovation economy.

Although China initially used its patent laws and institutions to promote its own domestic economic interests, it is showing signs that it is embracing the basic tenets of equal protection under the rule of law in its patent system. As reported in early 2018, “[p]atent holders in China are likely to prevail in infringement actions . . . with specialized IP courts said to have found for foreign plaintiffs in nearly every case tried to date.”[115] In December 2018, for example, a Chinese court issued a preliminary injunction against Apple selling older iPhone models in China in a patent infringement lawsuit filed by Qualcomm.[116] Two months earlier and in stark contrast to the Chinese court issuing an injunction on a finding of infringement, the U.S. International Trade Commission refused to issue an exclusion order against imports of older models of the iPhone, despite the administrative law judge finding that Apple was infringing Qualcomm’s patents.[117]

A key feature of a private law model is that owners of property rights receive the same remedies as other owners of property rights, including injunctive relief for ongoing or willful infringement. The importance of these archetypical private law reforms in China’s patent system is confirmed by the response from innovators themselves. As the New York Times has reported, patent-intensive “Big Pharma is shrugging off its long-held fears of China’s rampant counterfeiting and cumbersome bureaucracy. . . . Executives say that the government has made inroads in toughening protections of pharmaceutical patents.”[118]

Of course, all is not entirely well with China, as there are legitimate concerns about its government’s authoritarianism more generally, which has ramped up in recent years in other areas of its society.[119] This effects its private law reforms in its patent system, because, as the historical and economic evidence consistently finds, private property rights only work in stable political and legal institutions defined by the rule of law. Yet, the success of China’s reform of its patent system within a private law model, and any resulting economic success in its fledgling innovation economy, may provide an incentive for political and legal actors elsewhere in the Chinese government to implement further reforms in the rule of law and limited government throughout its political and legal institutions. With the United States embracing the public law model of regulatory entitlements and discretionary decisionmaking processes in its own patent system, the United States arguably no longer has the comparative advantage to China in this key driver of its innovation economy.


Although scholars typically focus on the pendulum swings over time when courts and Congresses are either more favorable or more skeptical of patents, there is a more fundamental institutional distinction between defining patents as private property rights or regulatory entitlements. This institutional divide was a key difference between the early U.S. patent system, that was put into effect in the early republic and developed by Congress and the federal courts throughout the nineteenth century, and the early English patent system whence it arose. The success of the U.S. patent system, as evidenced in part by the explosive economic growth in the U.S. innovation economy in the nineteenth century, led to an international convergence on aspects of the U.S. private law model in its patent system. Today, though, the United States is diverging from this private law model and is returning once more to a public law model of regulatory entitlements, as evidenced in part by the creation of the PTAB, the denial of core remedies for violations of private property rights, heightened legal costs, and devaluing of patent rights in the marketplace. Other jurisdictions, such as China, are diverging from the United States today in implementing the private law model for their patent systems. Given the substantial historical and economic evidence correlating private law models of patent systems with innovation and economic growth, this divergence between the United States and other countries today is concerning.


[*] *. Professor of Law, Antonin Scalia Law School, George Mason University. Thank you to Marcus Cole, Charles Delmotte, Richard Epstein, Henry Smith, Saul Levmore, Arial Porat, Mario Rizzo, Aaron Simiwicz, and Yun-chien Chang for their helpful comments. Thank you also to Yun-chien, Richard, and Mario at the Classic Liberal Institute at NYU for inviting me to present this paper at the Convergence and Divergence in Private Law Symposium held at the New York University School of Law in November 2018. Dylan Campbell provided valuable research assistance.

 [1]. See Graham v. John Deere Co., 383 U.S. 1, 5 (1966) (“[The Copyright and Patent Clause] was written against the backdrop of the practices—eventually curtailed by the Statute of Monopolies—of the Crown in granting monopolies to court favorites in goods or businesses which had long before been enjoyed by the public.”); see also Oil States Energy Servs., LLC v. Greene’s Energy Grp., LLC 138 S. Ct. 1365, 1377 (2018) (“The Patent Clause in our Constitution ‘was written against the backdrop’ of the English system.” (quoting Graham v. John Deere Co., 383 U.S. 1, 5 (1966))); Bilski v. Kappos, 561 U.S. 593, 626–27 (2010) (Stevens, J., concurring) (“The Constitution’s Patent Clause was written against the ‘backdrop’ of English patent practices, and early American patent law was ‘largely based on and incorporated’ features of the English patent system.” (citations omitted)).

 [2]. See Ford W. Hall, The Common Law: An Account of Its Reception in the United States, 4 Vand. L. Rev. 791, 798–800 (1951) (identifying the fact that all of the original thirteen states except Connecticut enacted either reception statutes or provided expressly in their new state constitutions for the authoritative force of the common law).

 [3]. See B. Zorina Khan, Trolls and Other Patent Inventions: Economic History and the Patent Controversy in the Twenty-First Century, 21 Geo. Mason L. Rev. 825, 830 (2014) (“The American patent system was deliberately designed to be different [from the British patent system].”); see also Adam Mossoff, Who Cares What Thomas Jefferson Thought About Patents? Reevaluating the Patent “Privilege” in Historical Context, 92 Cornell L. Rev. 953, 967 (2007) (“The provenance of the American patent system, as the American property system generally, is found in the English feudal system. . . . But an American patent in the late eighteenth century was radically different from the royal monopoly privilege dispensed by Queen Elizabeth or King James in the early seventeenth century.”).

 [4]. See B. Zorina Khan, The Democratization of Invention: Patents and Copyrights in American Economic Development, 1790–1920, at 51 (Claudia Goldin ed., 2005). In contrast to British patent law, “U.S. doctrines emphatically repudiated the notion that the rights of patentees were subject to the arbitrary dictates of government.” Id.

 [5]. See generally id. (examining the unique institutional and legal approach in the United States in securing patents as private property rights as compared to England and France, and identifying the positive impact this had on the U.S. innovation economy in the nineteenth century). For further discussion on the shift in defining and securing patents as private property rights in the United States, see Oren Bracha, The Commodification of Patents 1600-1836: How Patents Became Rights and Why We Should Care, 38 Loy. L.A. L. Rev. 177, 181 (2004) (“Patents changed from case-specific discretionary policy or political grants of special privileges designed to achieve individually defined public purposes, to general standardized legal rights conferring a uniform set of entitlements whenever predefined criteria are fulfilled.”).

 [6]. See Kevin Madigan & Adam Mossoff, Turning Gold Into Lead: How Patent Eligibility Doctrine is Undermining U.S. Leadership in Innovation, 24 Geo. Mason L. Rev. 939, 940 (2017) (identifying the “gold standard” label for the U.S. patent system as compared to the rest of the world).

 [7]. See, e.g., United States v. Am. Bell Tel. Co., 167 U.S. 224, 239 (1897).

[T]he purpose of the patent is to protect him in this monopoly, not to give him a use which, save for the patent, he did not have before . . . . The patentee, so far as a personal use is concerned, received nothing which he did not have without the patent, and the monopoly which he did receive was only for a few years.


 [8]. See, e.g., Seymour v. Osborne, 78 U.S. 516, 533 (1870) (“Inventions secured by letters patent are property in the holder of the patent, and as such are as much entitled to protection as any other property, consisting of a franchise, during the term for which the franchise or the exclusive right is granted.”); Rubber Co. v. Goodyear, 76 U.S. 788, 798 (1869) (“[T]here is no distinction between . . . a patent [for land] and one for an invention or discovery.”).

 [9]. Crown Die & Tool Co. v. Nye Tool & Mach. Works, 261 U.S. 24, 33–44 (1923).

 [10]. Id. at 36–41.

 [11]. See Richard A. Posner, Economic Analysis of Law 6 (1973).

[M]any areas of the law, especially the great common law fields of property, torts, and contracts, bear the stamp of economic reasoning. Few legal opinions, to be sure, contain explicit references to economic concepts and few judges have a substantial background in economics. But the true grounds of decision are often concealed rather than illuminated by the characteristic rhetoric of judicial opinions.


 [12]. See, e.g., McKeever v. United States, 14 Ct. Cl. 396, 420–21 (1878) (observing that “a patent in England was nothing more than a grant dependent in contemplation of law upon royal favor,” in contrast to the U.S. patent system which “recognizes an invention as property”); Belding v. Turner, 3 F. Cas. 84, 85 (C.C.D. Conn. 1871) (No. 1,243) (discussing the history of patents as a “privilege” granted by the “crown” as distinguished from the “personal estate” now secured in U.S. law); Motte v. Bennett, 17 F. Cas. 909, 913–14 (C.C.D.S.C. 1849) (No. 9,884).

 [13]. See Sean Bottomley, Did the British Patent System Retard the Industrial Revolution?, 1 Criterion J. on Innovation 65, 73–81 (2016) (detailing licensing activities by English patent owners and English courts applying property and contract doctrines to patent owners).

 [14]. See Patent Act of 1870, ch. 230, § 22, 16 Stat. 198, 201 (repealed 1952) (“[E]very patent shall . . . grant to the patentee, his heirs or assigns, for the term of seventeen years, of the exclusive right to make, use, and vend the said invention or discovery throughout the United States and the Territories thereof . . . .”); Patent Act of 1836, ch. 357, § 11, 5 Stat. 117, 121 (repealed 1870) (“[E]very patent shall be assignable in law . . . [and every] conveyance of the exclusive right under any patent, to make and use, and to grant to others to make and use, the thing patented [must be recorded in the Patent Office] . . . .”); Patent Act of 1793, ch. 11, § 1, 1 Stat. 318, 321 (repealed 1836) (“[A patent secures] the full and exclusive right and liberty of making, constructing, using, and vending to others to be used, the said invention or discovery . . . .”); Patent Act of 1790, ch. 7, § 1, 1 Stat. 109, 110 (repealed 1793) (“[A patent secures] the sole and exclusive right and liberty of making, constructing, using and vending to others to be used, the said invention or discovery . . . .”).

 [15]. See generally Adam Mossoff, What is Property? Putting the Pieces Back Together, 45 Ariz. L. Rev. 371 (2003) (explaining how the exclusive rights of acquisition, possession, use, and disposal are the core rights of property from the Roman Law up through the Anglo-American common law).

 [16]. Ball v. Withington, 2 F. Cas. 556, 557 (C.C.S.D. Ohio 1874) (No. 815); see also Carew v. Boston Elastic Fabric Co., 5 F. Cas. 56, 57 (C.C.D. Mass. 1871) (No. 2,398) (“[T]he rights conferred by the patent law, being property, have the incidents of property . . . .”); Chambers v. Smith, 5 F. Cas. 426, 427 (C.C.E.D. Pa. 1870) (No. 2,582) (analogizing to land sales as the basis for framing scope of patent rights); Ayling v. Hull, 2 F. Cas. 271, 273 (C.C.D. Mass. 1865) (No. 686) (discussing the “right to enjoy the property of the invention”); Hayden v. Suffolk Mfg. Co., 11 F. Cas. 900, 901 (C.C.D. Mass. 1862) (No. 6,261) (instructing the jury that a “patent right, gentlemen, is a right given to a man by law where he has a valid patent, and, as a legal right, is just as sacred as any right of property”); Gay v. Cornell, 10 F. Cas. 110, 112 (C.C.S.D.N.Y. 1849) (No. 5,280) (“[A]n invention is, within the contemplation of the patent laws, a species of property . . . .”); Hovey v. Henry, 12 F. Cas. 603, 604 (C.C.D. Mass. 1846) (No. 6,742) (“An inventor holds a property in his invention by as good a title as the farmer holds his farm and flock.”).

 [17]. Evans v. Jordan, 8 F. Cas. 872, 873 (C.C.D. Va. 1813) (No. 4,564) (Marshall, Circuit Justice), aff’d, 13 U.S. 199 (1815); see also Pennock v. Dialogue, 27 U.S. (2 Pet.) 1, 18 (1829) (stating that a patent is a “title” and thus an act of invention before applying for a patent is “like an inchoate right to land, or an inceptive right to land, well known in some of the states, and every where accompanied with the condition, that to be made available, it must be prosecuted with due diligence, to the consummation or completion of the title”).

 [18]. Ex parte Wood, 22 U.S. (9 Wheat.) 603, 608 (1824).

 [19]. See Orin S. Kerr, Rethinking Patent Law in the Administrative State, 42 Wm. & Mary L. Rev. 127, 129 (2000) (“The [U.S.] patent system operates not through regulation, but rather through the private law mechanisms of contract, property, and tort.”).

 [20]. See Patent Act of 1819, ch.19, 3 Stat. 481, 481–82. Federal courts could hear all cases under the patent laws between residents of the same state, and thus this law was declaratory in settling that courts could also hear all cases between citizens of different states. See Binns v. Woodruff, 3 F. Cas. 421, 421 (C.C.D. Pa. 1821) (No. 1,424). The Federal Cases reporter provided the following synopsis for the Binns decision:

This case was before the court at April term, 1819, and then was dismissed; it having been decided, that, although in patent causes the courts of the United States have jurisdiction when both parties reside in the same state, the same did not exist in cases of copyright. On the 15th of February, 1819, [3 Stat. 481, c. 19,] congress passed a declaratory law, giving original any bill in equity; filed by any party aggrieved in any such cases, giving authority to grant injunctions according to the course and principles of courts of equity, . . .

Id.; see also James Ryan, A Short History of Patent Remedies, 6 Cybaris Intell. Prop. L. Rev. 150, 158–61 (2015) (discussing the federalism concerns animating why Congress did not authorize injunctions in early federal statutes).

 [21]. See Motte v. Bennett, 17 F. Cas. 909, 914–17 (C.C.D.S.C. 1849) (No. 9,884) (reviewing “the course pursued in the courts of the United States in granting injunctions in patent cases” reaching back to the early nineteenth century); see also Whitney v. Carter, 29 F. Cas. 1070, 1071 (C.C.D. Ga. 1810) (No. 17,583) (“[T]he plaintiff’s counsel cited . . . the opinion of the court, delivered by Judge Johnson, in December term, 1807, in the case of Whitney and others v. Fort, upon a bill of injunction.” (footnote omitted)); Morse v. Reed, 17 F. Cas. 873, 873 (C.C.D.N.Y. 1796) (No. 9,860) (issuing a permanent injunction for infringement of a patent). The Morse case is apparently mistakenly classified as a patent case when it was actually a copyright case. See Ryan, supra note 20, at 160.

 [22]. See Lightner v. Kimball, 15 F. Cas. 518, 519 (C.C.D. Mass. 1868) (No. 8,345) (“[E]very person who intermeddles with a patentee’s property . . . is liable to an action at law for damages . . . .”); Gray v. James, 10 F. Cas. 1019, 1021 (C.C.D. Pa. 1817) (No. 5,719) (stating that patent infringement is “an unlawful invasion of property”); see also supra note 16 (citing cases referring to patents as property rights).

 [23]. See, e.g., Goodyear Dental Vulcanite Co. v. Van Antwerp, 10 F. Cas. 749, 750 (C.C.D.N.J. 1876) (No. 5,600) (stating that patent infringement is equivalent to a “trespass” of horse stables); Burleigh Rock-Drill Co. v. Lobdell, 4 F. Cas. 750, 751 (C.C.D. Mass. 1875) (No. 2,166) (noting that the defendants “honestly believ[ed] that they were not trespassing upon any rights of the complainant”); Livingston v. Jones, 15 F. Cas. 669, 674 (C.C.W.D. Pa. 1861) (No. 8,414) (accusing defendants of having “made large gains by trespassing on the rights of the complainants”); Eastman v. Bodfish, 8 F. Cas. 269, 270 (C.C.D. Me. 1841) (No. 4,255) (comparing evidentiary rules in a patent infringement case to evidentiary rules in a trespass action); Reutgen v. Kanowrs, 20 F. Cas. 555, 557 n. (C.C.D. Pa. 1804) (No. 11,710) (“In all cases of trespass, the jury may find one defendant guilty, and the other not guilty.”).

 [24]. See Poppenhusen v. N.Y. Gutta Percha Comb Co., 19 F. Cas. 1056, 1057 (C.C.S.D.N.Y. 1858) (No. 11,281) (“[I]n [the] future, there will be an infringement, unless such infringement is restrained by injunction. It is, under such circumstances, almost a matter of course, that the injunction should be allowed.” (citation omitted)); Blanchard v. Reeves, 3 F. Cas. 638, 640 (C.C.E.D. Pa. 1850) (No. 1,515) (“We can not shut our eyes to the fact that the defendants have pirated the invention . . . . The complainant is therefore entitled to his injunction . . . .”); Ogle v. Ege, 18 F. Cas. 619, 620 (C.C.D. Pa. 1826) (No. 10,462) (“I take the rule to be, in cases of injunctions in patent cases, that where the bill states a clear right to the thing patented, which, together with the alleged infringement, is verified by affidavit; if he has been in possession of it by having used or sold it in part, or in the whole, the court will grant an injunction, and continue it till the hearing or further order, without sending the plaintiff to law to try his right.”); Buck v. Cobb, 4 F. Cas. 546, 547 (C.C.N.D.N.Y. 1847) (No. 2,079) (“[T]o secure inventors the rewards of their genius against the incursions of pirates . . . . And so the injunction was granted.”); Sullivan v. Redfield, 23 F. Cas. 357, 360–61 (C.C.D.N.Y. 1825) (No. 13,597) (denying a motion for an injunction for the alleged infringement of a patent that issued in 1819 given plaintiff’s failure to meet the legal and equitable preconditions).

 [25]. See Davis v. Palmer, 7 F. Cas. 154, 159 (C.C.D. Va. 1827) (No. 3,645) (Marshall, Circuit Justice) (instructing the jury that if “the imitator attempted to copy the [patented] model” and made an “almost imperceptible variation, for the purpose of evading the right of the patentee,” then “this may be considered as a fraud on the law”); see also Dixon v. Moyer, 7 F. Cas. 758, 759 (C.C.D. Pa. 1821) (No. 3,931) (Washington, Circuit Justice) (explaining that an attempt to make a “mere formal difference” between a patented device and an infringing copy is “a fraudulent evasion of the plaintiff’s right”).

 [26]. See, e.g., Pennock v. Dialogue, 27 U.S. (2 Pet.) 1, 12 (1829) (recognizing that “if the invention should be pirated, [this] use or knowledge, obtained by piracy,” would not prevent the inventor from obtaining a patent); Batten v. Silliman, 2 F. Cas. 1028, 1029 (C.C.E.D. Pa. 1855) (No. 1,106) (decrying defendant’s “pirating an invention”); Motte, 17 F. Cas. at 917 (referring to the defendant’s actions as “piracy of [the patentholder]’s combination” in his patented lathe); Buck, 4 F. Cas. at 547 (recognizing goal of patent laws in “secur[ing] to inventors the rewards of their genius against the incursions of pirates”); Dobson v. Campbell, 7 F. Cas. 783, 785 (C.C.D. Me. 1833) (No. 3,945) (concluding that patent-assignee has been injured by “the piracy of the defendant”); Grant v. Raymond, 10 F. Cas. 985, 985 (C.C.S.D.N.Y. 1829) (No. 5,701) (noting that the patented machine had “been pirated” often); Earle v. Sawyer, 8 F. Cas. 254, 258 (C.C.D. Mass. 1825) (No. 4,247) (instructing the jury that an injunction is justified by defendant’s “piracy by making and using the machine”).

 [27]. See, e.g., Cammeyer v. Newton, 94 U.S. 225, 234 (1876) (holding that a patent owner can seek compensation for the unauthorized use of his patented invention by federal officials because “[p]rivate property, the Constitution provides, shall not be taken for public use without just compensation”); United States v. Burns, 79 U.S. (12 Wall.) 246, 252 (1870) (“[T]he government cannot, after the patent is issued, make use of the improvement any more than a private individual, without license of the inventor or making compensation to him.”); McKeever v. United States, 14 Ct. Cl. 396, 420–24 (1878) (rejecting the argument that a patent is a “grant” of special privilege, because the text and structure of the Constitution, as well as court decisions, clearly establish that patents are private property rights that are secured under the Takings Clause).

 [28]. See Adam Mossoff, Patents as Constitutional Private Property: The Historical Protection of Patents Under the Takings Clause, 87 B.U. L. Rev. 689, 701–11 (2007).

 [29]. McKeever, 14 Ct. Cl. at 417–20.

 [30]. Id. at 421.

 [31]. Id. at 420.

 [32]. Id. The McKeever court did not cite a source for this quote, but it may have been paraphrasing a recently published treatise. See Theodore D. Woolsey et al., The First Century of the American Republic 443 (1876) (discussing how inventors are given “some control over the reproductions of the fruits of mental labor . . . in addition to the natural right to property”).

 [33]. McKeever, 14 Ct. Cl. at 421.

 [34]. See United States v. Palmer, 128 U.S. 262, 271 (1888) (“The United States has no such prerogative as that which is claimed by the sovereigns of England, by which it can reserve to itself, either expressly or by implication, a superior dominion and use in that which it grants by letters-patent to those who entitle themselves to such grants.”).

 [35]. One example from a prominent nineteenth-century telecommunications technology is Samuel Morse’s multiple conveyances of rights in his patent issued for his invention of the electro-magnetic telegraph. See Bill of Complaint at 6, Morse v. O’Reilly, 56 U.S. 62 (1848) (No. 224) (quoting 1844 agreement between Samuel Morse and Alfred Vail in which Morse agreed to “sell, assign, set over, and convey to . . . Vail, his heirs and assigns, one undivided eighth part of his said invention”); Id. at 5 (quoting 1838 agreement between Morse and Francis O.J. Smith in which Morse promised to “execute sufficient deeds of transfer” in his patent); Id. at 6 (quoting an 1848 agreement between Leonard Gale and Morse in which Leonard D. Gale agreed to “sell, assign, set over, and reconvey [back] to . . . Morse, the said one-sixteenth part of the right, title, and interest in the said invention of an electro-magnetic telegraph”).

 [36]. See Adam Mossoff, O’Reilly v. Morse 33 (George Mason Law & Econ. Research Paper No. 14-22, 2014),

Even before Morse’s first patent would issue in 1840, he had entered into several agreements in which he conveyed multiple ownership interests in his imminent patent rights. When Vail began assisting Morse in 1837, for instance, it was not out of altruistic motives by Vail. Morse and Vail executed an agreement that year providing that Vail would construct ‘at his own proper costs and expense’ Morse’s telegraph and would pay the costs of applying for foreign patents in exchange for a 25% interest in the U.S. patent and a 50% interest in any foreign patents.


 [37]. See Adam Mossoff, The Rise and Fall of the First American Patent Thicket: The Sewing Machine War of the 1850s, 53 Ariz. L. Rev. 165, 182–83 (2011) (detailing how Elias Howe sold a one-half interest in his patent on the lockstitch to George W. Bliss to fund his first patent infringement lawsuit against Isaac Singer).

 [38]. See generally Adam Mossoff, Patent Licensing and Secondary Markets in the Nineteenth Century, 22 Geo. Mason L. Rev. 959 (2015) (detailing extensive licensing and assigning practices of patent rights by inventors and follow-on patent owners).

 [39]. See, e.g., Brooks v. Byam, 4 F. Cas. 261, 268–70 (C.C.D. Mass. 1843) (No. 1,948) (Story, Circuit Justice) (analogizing a patent license to “a right of way granted to a man for him and his domestic servants to pass over the grantor’s lands,” citing a litany of real property cases and commentators at common law, such as Lord Coke’s Institutes, Coke’s Littleton, Viner’s Abridgment, and Bacon’s Abridgement); Dobson v. Campbell, 7 F. Cas. 783, 785 (C.C.D. Me. 1833) (No. 3,945) (Story, Circuit Justice) (relying on real property equity cases in which “feoffment is stated without any averment of livery of seisin” in assessing validity of patent license).

 [40]. See Potter v. Holland, 19 F. Cas. 1154, 1156–57 (C.C.D. Conn. 1858) (No. 11,329) (surveying in extensive detail how the common law real property doctrines of “assignment” and “license” had been incorporated into U.S. patent law to define the legal interest that a patent owner conveys to a third party); see also Moore v. Marsh, 74 U.S. 515, 520 (1868) (“An assignee is one who holds, by a valid assignment in writing, the whole interest of a patent, or any undivided part of such whole interest, throughout the United States.” (footnote omitted)); Suydam v. Day, 23 F. Cas. 473, 474 (C.C.S.D.N.Y. 1846) (No. 13,654) (distinguishing between “an assignee of a patent [who] must be regarded as acquiring his title to it, with a right of action in his own name,” and “an interest in only a part of each patent, to wit, a license to use”).

 [41]. See Edward G. Lengel, First Entrepreneur: How George Washington Built His—and the Nation’s—Prosperity 159–60 (2016).

 [42]. See Patent Act of 1790, ch. 7, § 1, 1 Stat. 109, 110 (repealed 1793); see also supra note 14 (quoting same language from the Patent Acts of 1793, 1836, and 1870).

 [43]. Belding v. Turner, 3 F. Cas. 84, 85 n. (C.C.D. Conn. 1871) (No. 1,243).

 [44]. Id.; see also H.I. Dutton, The Patent System and Inventive Activity During the Industrial Revolution 1750–1852, at 122–69 (1984) (detailing commercial practices by English patent owners and investments in English patents); Bottomley, supra note 13, at 73–81 (discussing licensing and assignments of English patent rights).

 [45]. Belding, 3 F. Cas. at 85 n.

 [46]. Carew v. Boston Elastic Fabric Co., 5 F. Cas. 56, 57 (C.C.D. Mass. 1871) (No. 2,398).

 [47]. See               Khan, supra note 4, at 182.

 [48]. See Leonard A. Jones, A Treatise on the Law of Easements § 20 (1898) (“Only incorporeal rights pass as appurtenant to land or under the description of ‘appurtenances.’ Land cannot pass as appurtenant, nor can the actual and exclusive possession of land pass as appurtenant, for such possession does not differ in effect from title in fee.”); see also id. § 13 (“An easement is not a right to the soil of the land or to any corporeal interest in it.”); Tinicum Fishing Co. v. Carter, 61 Pa. 21, 29, 3738 (1869) (referring to “an incorporeal easement on the land of the riparian owner” as one type of “incorporeal hereditaments”); Edward Coke, 1 The First Part of the Institutes of the Laws of England § 184, 121b–122a (London, W. Clarke & Sons 19th ed. 1832) (1628) (explaining that “incorporeall” interests are necessarily “appurtenant” to corporeal interests); Emory Washburn, A Treatise on the American Law of Easements and Servitudes 37 (2d ed. 1867) (identifying an easement appurtenant as “an incorporeal hereditament”).

 [49]. Davoll v. Brown, 7 F. Cas. 197, 199 (C.C.D. Mass. 1845) (No. 3,662) (citation omitted); see also Hovey v. Henry, 12 F. Cas. 603, 604 (C.C.D. Mass. 1846) (No. 6,742) (“An inventor holds a property in his invention by as good a title as the farmer holds his farm and flock.”).

 [50]. See Stephen Haber, Patents and the Wealth of Nations, 23 Geo. Mason L. Rev. 811, 811 (2016) (“There is abundant evidence from economics and history that the world’s wealthy countries grew rich because they had well-developed systems of private property. Clearly defined and impartially enforced property rights were crucial to economic development . . . .”).

 [51]. See Hernando de Soto, The Mystery of Capital: Why Capitalism Triumphs in the West and Fails Everywhere Else 83 (2000).

 [52]. See id. at 74.

Perhaps the most significant cost was caused by the absence of institutions that create incentives for people to seize economic and social opportunities to specialize within the marketplace. We found that people who could not operate within the law also could not hold property efficiently or enforce contracts through the courts . . . . Being unable to raise money for investment, they could not achieve economies of scale or protect their innovations through royalties and patents.


 [53]. See Khan, supra note 4, at 9–10 (“[P]atents and . . . intellectual property rights facilitated market exchange, a process that assigned value, helped to mobilize capital, and improved the allocation of resources. . . . Extensive markets in patent rights allowed inventors to extract returns from their activities through licensing and assigning or selling their rights.”).

 [54]. See, e.g., Naomi R. Lamoreaux, et al., Patent Alchemy: The Market for Technology in US History, 87 Bus. Hist. Rev. 3, 4–5 (2013).

 [55]. See Joan Farre-Mensa, et al., What Is a Patent Worth? Evidence from the U.S. Patent “Lottery” 26–27 (USPTO Econ. Working Paper No. 2015-5, 2018),

 [56]. See Kenneth Silverman, Lightning Man: The Accursed Life of Samuel F.B. Morse 261–67 (2003) (discussing Amos Kendall’s franchise business model based on licenses of rights in Morse’s patent).

 [57]. See Christopher Beauchamp, Invented by Law: Alexander Graham Bell and the Patent That Changed America 49–51 (2015) (detailing Bell’s use of licensing and the franchise business model after failing to sell his patents to Western Union or obtain venture capital to support his own full-service company).

 [58]. See Mossoff, supra note 37, at 194–97.

 [59]. See de Soto, supra note 51, at 168; see also Khan, supra note 4, at 96 (“The development of trade is predicated on recognized rights of property . . . . Patent Office assignment records and law reports both reveal that an extensive and deep market in patent assignments and licenses functioned during the antebellum period.”).

 [60]. See Mossoff, supra note 3, at 1001–02.

 [61]. Grant v. Raymond, 31 U.S. (6 Pet.) 218, 242 (1832).

 [62]. See Patent Act of 1836, ch. 357, § 13, 5 Stat. 117, 122 (repealed 1870).

 [63]. See Mfg. Co. v. Ladd, 102 U.S. 408, 411 (1880) (“The real object and design of a reissue of a patent have been abused and subverted.”); see also Christopher Beauchamp, The First Patent Litigation Explosion, 125 Yale L.J. 848, 885–92 (2016) (detailing this abusive practice).

 [64]. See Beauchamp, supra note 63, at 891 (“A string of decisions in the 1870s began to rein in reissue practice and to cast doubt on broadened grants. By 1880, the Supreme Court’s disfavor was clear.” (footnote omitted)).

 [65]. See Campbell v. Seaman, 63 N.Y. 568, 576–77 (1876) (“[E]very person may exercise exclusive dominion over his own property, and subject it to such uses as will best subserve his private interests. . . . But every person is bound to make a reasonable use of his property so as to occasion no unnecessary damage or annoyance to his neighbor.”); Keeble v. Hickeringill (1707) 103 Eng. Rep. 1127, 1128 (Holte, C.J.) (holding that a malicious use of one’s property solely to deprive a neighbor of the productive use of his property is sufficient to justify liability under a writ for trespass on the case); see also Dig. 47.10.44 (Javoleneus, Posthumous Works of Labeo 9) (Alan Watson trans., 1985) (stating that there ought to be a right of legal action against a property owner who interferes with someone else’s property with intention to injure).

 [66]. See McClain v. Ortmayer, 141 U.S. 419, 424 (1891) (“The object of the patent law . . . is not only to secure to [the inventor] all to which [the inventor] is entitled, but to apprise the public of what is still open to them.”).

 [67]. Khan, supra note 4, at 51.

 [68]. Id. at 182.

 [69]. Haber, supra note 50, at 834.

 [70]. Id. at 815.

 [71]. See id. at 834 (“Evidence and reason therefore suggest that the burden of proof falls on those who claim that patents frustrate innovation.”); Letter from Jonathan Barnett, Professor, USC Gould School of Law, et al., to Assistant Attorney Gen. Makan Delrahim (Feb. 13, 2018), https://cpip.gmu.
trust-Enforcement-of-IP.pdf (“It bears emphasizing that no empirical study has demonstrated that a patent-owner’s request for injunctive relief after a finding of a defendant’s infringement of its property rights has ever resulted either in consumer harm or in slowing down the pace of technological innovation.”).

 [72]. See B. Zorina Khan, An Economic History of Patent Institutions, Econ. Hist. Ass’n (2008), (“The German patent system was influenced by developments in the United States, and itself influenced legislation in Argentina, Austria, Brazil, Denmark, Finland, Holland, Norway, Poland, Russia and Sweden. . . . The first national patent statute in Japan was passed in 1888, and copied many features of the U.S. system, including the examination procedures.”).

 [73]. See Haber, supra note 50, at 822.

 [74]. See Khan, supra note 4, at 38 (“Compulsory licenses were introduced [in England] in 1883 (and strengthened in 1919 as ‘licenses of right’) . . . .”).

 [75]. A few special patent doctrines were used to define the outer boundaries of this general reliance on private law doctrines, such as scire facias actions for fraud in obtaining a patent. See Beauchamp, supra note 57, at 86–108 (discussing “a thoroughly ad hoc mobilization of government power” by interest groups who lobbied the federal government to bring a (unsuccessful) case against Alexander Bell in their efforts to invalidate Bell’s patent on the telephone).

 [76]. See, e.g., Bruce W. Bugbee, Genesis of American Patent and Copyright Law 143–44 (1967) (discussing the rejection of a Senate proposal for a compulsory licensing requirement in the bill that eventually became the Patent Act of 1790); Kali Murray, Constitutional Patent Law: Principles and Institutions, 93 Neb. L. Rev. 901, 935–37 (2015) (discussing the introduction of legislation in 1912 requiring compulsory licensing for patent owners not manufacturing a patented invention, which received twenty-seven days of hearings, but was not enacted into law).

 [77]. See Madigan & Mossoff, supra note 6, at 939–40.

 [78]. eBay Inc. v. MercExchange L.L.C., 547 U.S. 388, 390–91f (2006); see, e.g., Doug Rendleman, The Trial Judge’s Equitable Discretion Following eBay v. MercExchange, 27 Rev. Litig. 63, 76 n. 71 (2007) (“Remedies specialists had never heard of the four-point test.”).

 [79]. eBay, 547 U.S. at 396–97 (Kennedy, J., concurring).

 [80]. See Ryan T. Holte, The Misinterpretation of eBay v. MercExchange and Why: An Analysis of the Case History, Precedent, and Parties, 18 Chap. L. Rev. 677, 721–22 (2015).

 [81]. See Kirti Gupta & Jay P. Kesan, Studying the Impact of eBay on Injunctive Relief in Patent Cases 38 (Univ. of Ill. Coll. of Law, Legal Studies Research Paper No. 17-03, 2016),

We find that both for preliminary and permanent injunctions, [patent licensing companies] are less likely to obtain an injunction, after controlling for patent characteristics and the length of the case (from filing to termination) throughout the 2000-2012 time period. We also find that the eBay ruling reduced the likelihood of all firms [including manufacturers] receiving either preliminary or permanent injunctions.


 [82]. Cornell Univ. v. Hewlett-Packard Co., 609 F. Supp. 2d 279, 283–86 (N.D.N.Y. 2009).

 [83]. See Jonathan D. Putnam & Tim A. Williams, The Smallest Salable Patent-Practicing Unit (SSPPU): Theory and Evidence 12 (Sep. 8, 2016) (unpublished manuscript),

 [84]. See Adam Mossoff & Bhamati Viswanathan, Explaining Efficient Infringement, Antonin Scalia L. Sch.: CPIP Blog (May 11, 2017),

 [85]. Id.

 [86]. See Reuters, Apple Reported to Be $7 Billion Behind in Patent Royalty Payments by Qualcomm, Tech2 (Oct. 27, 2018, 10:05 AM), One analyst estimated that Apple paid $5 to $6 billion in its settlement with Qualcomm, which indirectly confirms the amount claimed in arrears. See Kif Leswing, Apple Paid Up to $6 billion to Settle with Qualcomm, UBS Estimates, CNBC (Apr. 18, 2019, 11:49 AM),

 [87]. See Don Clark & Daisuke Wakabayashi, Apple and Qualcomm Settle All Disputes Worldwide, N.Y. Times (Apr. 16, 2019),

 [88]. See Reed Albergotti, Apple Said Qualcomm’s Tech Was No Good. But in Private Communications, It Was ‘the best,’ Wash. Post (Apr. 19, 2019),

 [89]. See Richard A. Epstein & Kayvan B. Noroozi, Why Incentives for “Patent Holdout” Threaten to Dismantle FRAND, and Why It Matters, 32 Berkeley Tech. L. J. 1381, 1414–15 (2017).

 [90]. See Adam Mossoff, Apple Pays for Its Patent Infringement, But Important Legal Cases Continue, IPWatchdog (Mar. 19, 2019),

 [91]. See The Impact of Bad Patents on American Businesses: Hearing Before the Subcomm. on Courts, Intellectual Prop., and the Internet of the H. Comm. on the Judiciary, 115th Cong. (2017) (statement of J. Paul R. Michel, former C.J. of the U.S. Court of Appeals for the Federal Circuit) (“Indeed, most owners of patents can no longer afford to enforce them. . . . Experts opine that to enforce a small portfolio an owner needs $15 million in cash and $3 billion in market cap. So, wages now say that the ‘sport of kings’, horse racing, has been replaced by patent litigation.”).

 [92]. See Khan, supra note 3, at 833–35.

 [93]. See David Kappos, Under Sec’y of Commerce for IP and Dir. of the USPTO, Keynote Address at the Center for American Progress: An Examination of Software Patents (Nov. 20, 2012), (“[T]he AIA is the most significant reform to the U.S. patent system since 1836.”).

 [94]. See 35 U.S.C. § 6 (2018) (patent trial and review board); id. § 101 (patentable subject matter; utility); id. § 102 (novelty); id. § 103 (nonobviousness); id. § 112 (written description and enablement).

 [95]. See Adam Mossoff & David Lund, The Problems with the PTAB, IAM, Nov.Dec. 2017, at 29, 32–33 (discussing Target Corp. v. Destination Maternity Corp., in which the PTAB panel was increased from 3 to 5, and ultimately to 7, judges before the panel finally reached the “right” result of invalidating the patent).

 [96]. See id. at 30.

The most notorious example has been hedge fund manager Kyle Bass, who has repeatedly filed PTAB petitions targeting patents in the biopharmaceutical industry. Neither his hedge fund nor his PTAB-filing organisation makes generic drugs or commercialises any products or services in the pharmaceutical industry. Instead, Bass simply shorts the stock of companies that own the patents he challenges at the PTAB, because the market is aware of the PTAB death squad statistics.


 [97]. See Anne S. Layne-Farrar, The Cost of Doubling Up: An Economic Assessment of Duplication in PTAB Proceedings and Patent Infringement Litigation, Landslide, MayJune 2018, at 52, 55 (“On a per-patent basis, out of 3,460 patents with an IPR challenge filed, 842 (24 percent) were ‘serially petitioned patents.’ Among the patents with three or more IPR challenges, the serial petitions involved an overlap in claims, an overlap in the prior art asserted, or both.” (footnotes omitted)).

 [98]. See Mossoff & Lund, supra note 95 at 29 (reporting that 97.8% of the business method patents reviewed in the Covered Business Method (CBM) hearings at the PTAB were canceled).

 [99]. See Novartis AG v. Noven Pharms., Inc., 853 F.3d 1289, 1293–94 (Fed. Cir. 2017); see also Matthew Bultman, PTAB Nixes Part of Garage Door Opener Patent Upheld By ITC, Law360 (Oct. 25, 2018),

ld-by-itc (reporting a patent canceled by PTAB after it was construed as valid by the ITC, which applies the same legal standard in construing patents as Article III courts).

 [100]. See Changes to the Claim Construction Standard for Interpreting Claims in Trial Proceedings Before the Patent Trial and Appeal Board, 83 Fed. Reg. 51340, 51340 (Oct. 11, 2018) (to be codified at 37 C.F.R. pt. 42) (changing the legal rule for construing patents at the PTAB to be the same as the rule used in Article III courts).

 [101]. Ryan Davis, PTAB’s “Death Squad” Label Not Totally Off-Base, Chief Says, Law360 (Aug. 14, 2014) (quoting Former Chief Judge of the PTAB, Randall Rader),

 [102]. Oil States Energy v. Greene’s Energy Grp., 138 S. Ct. 1365 (2018).

 [103]. Id. at 1373–74.

 [104]. See Adam Mossoff, Statutes, Common-Law Rights, and the Mistaken Classification of Patents as Public Rights, 104 Iowa L. Rev. (forthcoming 2019) (manuscript at 2) (available at Professor Richard Epstein has meticulously reviewed the cases quoted or cited by the Oil States Court in support of its decision, and he found that the Court quoted or cited the cases out of context, or, in some cases, the quotes elided language that contradicted the propositions for which the Court claimed they supported; See Richard A. Epstein, Inter Partes Review Under the AIA Undermines the Structural Protections Offered by Article III Courts, in The Supreme Court Tackles Patent Reform, 19 Federalist Soc’y Rev. 132, 133–39 (2018).

 [105]. See Madigan & Mossoff, supra note 6. at 946–60 (identifying how four Supreme Court decisions between 2010 and 2014 have destabilized and diminished U.S. innovation, particularly in the biopharmaceutical and advanced technology industries).

 [106]. See Rob Sterne, PTAB Challenges Are a Costly, Uphill Battle for Patent Owners, IPWatchdog (Apr. 22, 2018), (“[C]ompanies like Unified Patents were formed to aggregate the PTAB opportunity . . . . These PTAB aggregators offer several benefits to accused infringers, including reduced PTAB cost, no estoppels, and the ability to circumvent the one-year challenge requirement. They act as a surrogate for the accused infringer, who never files a PTAB challenge.”).

 [107]. Id. (“PTAB challenges are very expensive, often topping [over $1 million] through Federal Circuit appeal. They add 2-4 years to most district court suits.”).

 [108]. See G. Marcus Cole, The Long Convergence: “Smart Contracts” and the “Customization” of Commercial Law, 92 S. Cal. L. Rev 851, 85354 (2019) (“In 1999, the National People’s Congress of the People’s Republic of China adopted the New Contract Law . . . . [I]ts contract law [now] reflects the law of commerce developed over centuries in the common law of the United States, England, and before that, the Law Merchant and the jus commune of continental Europe.”); Aaron D. Simowitz, Convergence and the Circulation of Money Judgments, 92 S. Cal. L. Rev 1031, 1036 (2019) (“On June 30, 2017, a Chinese court recognized a U.S. commercial money judgment—a first in Sino-U.S. history.”). 

 [109]. Steve Brachmann, China Streamlines Patent Examination for Internet, Big Data Patent Applications, IPWatchdog (Aug. 1, 2017),

 [110]. Elizabeth Chien-Hale, A New Era for Software Patents in China, Law360 (May 25, 2017, 11:55 AM),; see also Jack Ellis, China Relaxes Rules on Software Patentability – And the United States Loses More Ground, IAM (Mar. 3, 2017),
ability-and-united-states-loses-more-ground (“China’s apparent embrace of software patents stands in stark contrast to the situation in the United States, which many would see as the traditional home of the software industry.”).

 [111]. Ryan Davis, What You Need to Know About Patent Litigation in China, Law360 (Aug. 9, 2018),

 [112]. See id.

 [113]. Id.

 [114]. See Bing Zhao, China Introduces Legislation to Create a National IP Appeals Court, IAM (Oct. 24, 2018),

 [115]. Grant Clark & Shelly Hagan, What’s Intellectual Property and Does China Steal It? Bloomberg: Quicktake (Mar. 22, 2018, 4:58 AM),

 [116]. See Don Clark & Jack Nicas, Chinese Court Says Apple Infringed on Qualcomm Patents, N.Y. Times (Dec. 10, 2018),

 [117]. See Kristen Jakobsen Osenga, Making Important Patents Worthless, Wash. Times (Oct. 15, 2018),

 [118]. Sui-Lee Wee, Made in China: New and Potentially Lifesaving Drugs, N.Y Times, Jan 3, 2018, at B1.

 [119]. See Simowitz, supra note 108, at 1033 (“China has decisively opened its courts to foreign judgments at the same time the Xi government has dramatically closed other economic doors. For example, the Xi government has imposed Maoist-era currency controls—an act of profound economic self-sabotage, in the view of most observers.”); Jonathan Tepperman, China’s Great Leap Backward, Foreign Pol’y (Oct. 15, 2018, 8:00 AM), (reporting on China’s return to authoritarianism).


Torts and Restitution: Legal Divergence and Economic Convergence – Article by Robert Cooter & Ariel Porat


From Volume 92, Number 4 (May 2019)


Torts and Restitution: Legal Divergence and Economic Convergence

Robert Cooter[*] & Ariel Porat[†]

This Article explores the divergence in law and convergence in economics in dealing with harms and benefits. While tort law usually makes the injurer internalize wrongful harms through damages, restitution law does not enable the benefactor to internalize the benefits she confers on others without their request. In both harm and benefit cases, however, internalization seems to make economic sense for the same reason: injurers and benefactors alike will behave efficiently if they internalize the externalities that they create. The Article’s main goal is to develop eight liability rules for harm and benefit cases and to point out the symmetry between the rules relating to harms and the rules relating to benefits. It also provides an explanation for the legal divergence between tort law and restitution law and makes the claim that the gap between these two fields should be narrowed. Finally, the Article relates these eight rules to the main relevant categories of harm and benefit cases in positive law and appraises their advantages and disadvantages.


Tort law usually makes the injurer internalize wrongful harms through damages. In contrast, restitution law does not enable the benefactor to internalize the benefits she confers on others without their request, through damages, and only seldom allows her to recover the costs she incurs in creating those benefits. Thus, law is divergent in dealing with harms and benefits. In both kinds of cases, however, internalization seems to make economic sense for the same reason: injurers and benefactors alike will behave efficiently if they internalize the externalities that they create.[1] Since the economics is convergent, why is the law divergent? Can efficiency explain the law’s divergent treatment of harms and benefits?[2]

This Article provides a detailed analysis of economic convergence in actual and possible rules of torts and restitution. A better understanding of economic convergence will lead to better understanding of legal divergence, as well as a critique of it. We will argue that legal divergence mostly makes sense, but a modest expansion in restitution’s scope, which would increase convergence, would also increase efficiency.

In Part I we develop eight liability rules for harm and benefit cases and point out the symmetry between the rules relating to harms and the rules relating to benefits. Part II presents and discusses the divergence of tort and restitution laws and provides an explanation for this divergence. It makes the claim that the gap between the two fields should be narrowed. Part III relates the eight rules developed in Part I to the main relevant categories of cases in positive law and appraises their advantages and disadvantages.

I.  Liability Rules for Harms and Benefits

In this Part we discuss and develop eight liability rules—half for harm cases and half for benefit cases. We start by presenting the eight rules by using two examples.

A.  Introducing the Rules

Consider the following cases:

Example 1: Omitting a Test. Doctor in a public hospital performs a beneficial procedure for a patient. In addition to the benefit, the procedure causes harmful side effects of 100. A test that costs Doctor 20 can prevent the harmful side effects. Doctor omits the test and the harm materializes.

Example 2: Constructing a Garden. Builder considers constructing a garden on her land that will increase the market value of her house and five Neighbors’ houses. The garden costs Builder 15. The increase in the value of Builder’s house is 10, and the increase in the value of each Neighbor’s house is 2.[3] The benefits are a public good: Builder cannot prevent Neighbors from enjoying the garden’s benefits once it is created. Since each Neighbor knows that their own benefit from the public good does not depend on their contribution to its costs, they contribute nothing, hoping that Builder and the other Neighbors will pay for the garden. However, since all Neighbors reason in the same way, nobody pays. Nevertheless, Builder constructs the garden, conferring a total benefit to Neighbors of 10.

In both harm and benefit cases the law could make the actor—the injurer or the benefactor—internalize the externalities she creates. One possibility for the law is to make internalization unconditional on the behavior of the actor. In Example 1, unconditional internalization is a rule of strict liability for harm with compensatory damages (Rule H1). Under this rule Doctor is liable for the harm she causes, at the amount of that harm, regardless of whether she behaves negligently. Thus, even if the costs of administering the test were higher than expected harm and therefore there was no negligence on Doctor’s part,[4] Doctor would bear liability for the harm caused to the patient. In Example 2, unconditional internalization is a rule of strict restitution for benefit with disgorgement damages (Rule B1). Under this rule Builder is entitled to restitution at the amount of the benefit she confers, regardless of whether she behaves reasonably. Thus, even if the costs of constructing the garden were higher than expected benefit, Builder would be entitled to disgorgement damages from Neighbors.

Another possibility is to condition internalization on whether the behavior of the actor is reasonable or not. In harm cases, this is a rule of negligent liability for harm with compensatory damages (Rule H3). According to this rule, in Example 1, Doctor will be liable for the harm she causes, at the amount of that harm, only if she is negligent, namely, only if her costs of care are lower than expected harm.[5] In benefit cases, this is a rule of reasonable restitution for benefit with disgorgement damages (Rule B3). According to this rule, in Example 2, Builder will be entitled to damages at the amount of the benefits she confers, only if she behaves reasonably, namely, only if her costs of constructing the garden are lower than expected benefit.

To summarize, under the four rules discussed so far, both negative and positive externalities are internalized by their creators. While under the first two rules (H1 and B1) internalization is unconditional on the character of the creator’s behavior, under the other two rules (H3 and B3) internalization is conditional on the reasonableness of her behavior (under Rule H3 unreasonableness entails internalization, while under Rule B3 reasonableness entails internalization).

Instead of internalization, the law could aim to deter injurers from causing harms or encourage benefactors to confer benefits by removing their incentives to cause harms or not to confer benefits. In harm cases, the law could make the injurer disgorge her benefits from creating risks, thereby deterring her from engaging in such a behavior. It could be unconditional on the injurer’s negligence (Rule H2) or conditional upon it (Rule H4). The first rule (H2) is strict liability for harm with disgorgement damages: damages are not at the amount of the harm caused but rather at the amount of the injurer’s benefits from engaging in the risky behavior. The second rule (H4) is negligent liability for harm with disgorgement damages: damages are at the amount of the injurer’s benefit from engaging in the negligent behavior. Thus, in Example 1, under both Rules H2 and H4, Doctor’s liability is at the amount of 20, rather than 100.

In benefit cases, there are parallels to Rules H2 and H4. Thus, the law could make the benefactor entitled to damages at the amount of her costs in creating the benefits, thereby encouraging her to confer them, either unconditional (Rule B2) or conditional on her behavior being reasonable (Rule B4). Rule B2 is strict restitution for benefit with compensatory damages, and Rule B4 is reasonable restitution for benefit with compensatory damages. Thus, in Example 2, under both Rules B2 and B4, Builder is entitled to damages at the amount of 7.5 from Neighbors (1.5 from each), which is their relative share in the costs incurred by Builder.

The table below summarizes the eight liability rules (marking with an asterisk (*) those rules which currently exist under the law). The next Section analyzes the eight rules in more detail.

B.  Strict Liability and Internalization (Rules H1 and B1)

Under a rule of strict liability for harm with compensatory damages (Rule H1), the injurer is liable whenever his activity causes an accident, regardless of his level of care. Strict liability with perfectly compensatory damages causes the injurer to internalize the harm from accidents that he causes to victims. Consequently, the self-interested injurer has an incentive to take socially efficient precautions and maintain a reasonable activity level.[6] Conversely, under this rule, the victim externalizes the effects of her precautions and activity level. Consequently, the victim has no incentive to take precaution or restrain her activity levels. The victim’s precaution is deficient and her activity is excessive relative to the social optimum. To illustrate, with strict liability with perfect compensatory damages, drivers take efficient precautions (for example, installing cost-justified safety devices in their cars) and their activity level is efficient (for example, driving at efficient frequency). Pedestrians, however, as potential victims, have no incentives to take precautions or restrain their activity, because they are fully compensated.[7]

Now we turn from torts to the equivalent analysis of restitution. Strict liability for harm with compensatory damages (Rule H1) corresponds to strict restitution for benefit with disgorgement damages (Rule B1). Disgorgement by the beneficiary causes the benefactor to internalize the effects on the beneficiary. Consequently, the benefactor has an incentive for the socially efficient benefaction. As in the standard tort model, internalization by one party causes externalization by the other, so Rule B1 makes the beneficiary externalize the value of the gains from the benefaction. Consequently, the beneficiary has no incentive to increase the benefaction’s value. The beneficiary’s activities are deficient relative to the social optimum.[8]

To illustrate by Example 2, under Rule B1, Builder has efficient incentives to construct the garden in the most efficient way (for example, using adequate materials and labor). Also, her ancillary activity (or activity level)—which is mostly relevant if Builder is in the business of constructing gardens—will be efficient (for example, investing in finding adequate places for gardens). At the same time, however, Neighbors lack incentives to take steps that increase the value which they might derive from the garden (for example, by constructing the windows of their homes to face the garden), since the entire value would be disgorged to Builder.[9]

C.  Strict Liability and Deterrence or Encouragement (Rules H2 and B2)

Now we turn from internalizing harms and benefits to deterring harms and encouraging benefits. First, consider a rule of strict liability for harm with disgorgement damages (Rule H2). Disgorgement damages under this rule make the injurer give up his gain from imposing risk on the victim. If the injurer does not expect to gain by imposing risk on the victim, he might as well not impose any. Consequently, disgorgement damages are the minimum damages that deter the injurer from imposing the risk of an accident on the victim. However, efficiency usually requires the injurer to impose some risk on the victim, in which case damages are inefficient—they cause excessive precaution or deficient activity by the injurer. Also, with Rule H2, victims have deficient incentives for precaution and their activity is excessive compared to the social optimum because injurers do not impose any risks on them. To illustrate with Example 1, suppose the test necessary to prevent the side effects to the patient cost Doctor 200 rather than 20. Under Rule H2, Doctor would administer the test—although efficiency-wise, she should not—because not administering the test would cost her 200.[10]

Equivalently, consider the rule of strict restitution for benefits with compensatory damages (B2). Compensatory damages for unrequested benefits are the minimum damages that encourage the benefactor to maximize benefits to the beneficiary. When damages are perfectly compensatory, they exactly offset the benefactor’s cost of supplying an unrequested benefit. Since the benefactor expects to bear no net cost from creating benefits for the beneficiary, the benefactor will maximize the benefaction without regard to the cost of doing so.[11] This inefficiency, however, might disappear if the benefactor creates at the same time benefits for herself and for others and is entitled only to the relative share of her costs proportionate to the benefits she confers on others. To illustrate with Example 2, under Rule B2, Builder would not invest excessively in constructing the garden because Neighbors compensate her for only a relative share of her costs, so that Builder bears the rest of it.[12]

Besides the benefaction, the benefactor’s ancillary activities may increase the benefits to others without increasing her compensatory damages. Consequently, the benefactor’s ancillary activity level will be deficient.[13] As to the beneficiary, his incentives would be efficient because he internalizes the benefits he creates.

D.  Negligent Liability and Internalization (Rules H3 and B3)

Now we turn from strict liability to negligence, beginning with negligent liability for harm with compensatory damages (Rule H3). The incentive effects of a rule of negligence with compensatory damages are well known in torts literature. In the basic model, a negligence rule causes the injurer to avoid liability by satisfying the legal standard, which is assumed to be the efficient level of care. Having escaped liability, the injurer has no incentive to restrain his activity level. When the injurer escapes liability, the victim internalizes the harm from accidents, so she has incentives for socially efficient precaution and activity.[14]

The equivalent rule is reasonable restitution for benefits with disgorgement damages (B3). Under this rule, the benefactor enjoys restitution for her benefaction up to the legal standard, which is assumed to be efficient, and no restitution for additional benefaction beyond it. Therefore, the benefactor satisfies the legal standard and her benefaction is at the socially efficient level. Since she internalizes all the benefits she reasonably creates, her ancillary activity is also efficient. However, the beneficiary, on his part, has no incentives to increase the value produced by the benefactor since he disgorges any value he gains from reasonable benefaction.[15] To illustrate with Example 2, under Rule B3, Builder invests efficiently in constructing the garden and Neighbors have no incentives to increase its value even if they can do so.

E.  Negligent Liability and Deterrence or Encouragement (Rules H4 and B4)

We conclude the analysis of negligent liability by considering damages that deter or encourage reasonable behavior, instead of internalizing it. Instead of compensation, consider disgorgement for unreasonable harms. Under a negligence rule, disgorgement damages make the injurer give up his expected gain from imposing unreasonable risk on the victim. This can be accomplished if damages amount to the savings in untaken precautions. Since the injurer does not expect to gain by imposing unreasonable risk on the victim, he might as well take reasonable care. Consequently, a rule of negligence for harm with disgorgement damages (Rule H4) causes efficient care by the injurer. To illustrate, in Example 1, Doctor’s liability is 20, and this amount (plus epsilon) is enough to deter her from negligently omitting the test for the patient. The injurer’s activity level, however, is excessive,[16] while the victim’s incentives and activity levels are efficient.[17]

Now consider the equivalent rule of restitution, which is reasonable restitution for benefit with compensatory damages (Rule B4). Under this rule, the benefactor is compensated for the cost of conveying unrequested benefits to the beneficiary that are reasonable. So long as the benefaction is reasonable, damages exactly offset the benefactor’s cost of supplying unrequested benefits. Since the benefactor expects to bear no net cost from creating benefits for the beneficiary up to the reasonable level, he might as well supply the reasonable level of benefits.

The rule of reasonable restitution with compensatory damages creates incentives for efficient benefaction. Although the benefactor receives compensatory damages for the benefaction, the benefactor receives no damages for ancillary activities that increase its value to the beneficiary, so he has socially deficient incentives for ancillary activities. The beneficiary, however, internalizes the benefits from her activities, so she has incentives for socially efficient activities.

F.  Summary

Table 2 summarizes the incentive effects of all eight liability rules. The rules are arranged to show the symmetry between liability for harm and for benefits. As the table shows, the symmetry is not perfect, especially when it comes to Rules H3 (negligent liability for harm with compensatory damages) and B3 (reasonable restitution for benefits with disgorgement damages).

The efficiency of the different rules depends crucially on the information available to the parties involved, as well as to courts applying the different rules. Because of space constraints we cannot analyze the informational hurdles systematically. Instead, we refer to them sporadically in the next Parts of this Article, whenever necessary.
II.  Torts and Restitution—A Convergence?

Having explained economic convergence in harms and benefits, we will now explain legal divergence. With zero transaction costs, legal rules do not affect efficiency, as explained by Professor Ronald Coase.[18] With few parties, however, transaction costs are typically low but not zero. When transaction costs are low, the law often encourages the parties to negotiate a contract rather than act unilaterally. In harm cases with two pre-identified parties, as in conversion and trespass cases, the injurer is not allowed to act unilaterally against the victim and pay for the harm done. Instead, the law deters the harm, notably through injunctions against trespass or conversion and disgorgement of benefits,[19] thereby channeling the parties into negotiations. The same is true with benefits. The benefactor is not allowed to paint the beneficiary’s fence and charge her accordingly. Instead, the law deters the benefactor from conferring the unrequested benefit by denying him any recovery, thereby channeling the parties into negotiations.[20]

Whereas the legal rule is symmetrical with respect to harm and benefits in these low transaction cost cases, it is asymmetrical in high transaction cost cases. Assume that high transaction costs preclude market transactions in harm and benefit cases, so the law cannot successfully channel the parties to negotiate. Without negotiations, it seems that injurers and benefactors alike should be allowed to act unilaterally, and the law should make them internalize the consequences or else deter them from behaving inefficiently (in harm cases) or encourage them to behave efficiently (in benefit cases). In fact, however, the law allows the unilateral imposition of harms and often requires internalization by the injurer, whereas the law allows the unilateral conferral of benefits, but does not require internalization by the benefactor, and seldom requires reimbursing her costs.[21]

Can efficiency explain the law’s divergent treatment of harms and benefits?[22] One possible reason could be difficulties in measuring benefits. Thus, in harm cases the plaintiff-victim possesses information about the negative externalities (the harms), while in benefit cases the defendant-beneficiary possesses information about the positive externalities (the benefits). Perhaps courts can measure the former easier than the latter so that courts allow recovery more readily for harms than for benefits.[23]

This argument, however, cannot survive scrutiny. Calculating the harm to the victim of an injury is not systematically easier for the court than calculating the benefit to the beneficiary. Differences in the difficulty of measuring damages seem too random and small to explain systematic and large differences in the scope of liability for harms and benefits.[24]

A more plausible reason for the systematic legal differences is enforcement and litigation costs. If the legal rule for harms is negligence then most injurers do not behave negligently, so few victims can claim damages.[25] In contrast, if the legal rule for benefits is strict restitution or reasonable restitution, many benefactors can claim damages. Thus, we expect many claims by benefactors in the few types of cases where restitution law allows recovery.[26] Perhaps restitution law restricts recovery to a few types of cases in order to avoid a flood of claims.

This explanation of the difference between harm and benefit cases works best when small and unequal benefits accrue to many beneficiaries. However, this difference cannot explain the large asymmetry between torts and restitution. It works poorly when uniformly high benefits accrue to a small group of well-defined beneficiaries.[27] Also, the assertion that harms induce fewer claims applies to a negligence rule but not to a rule of strict liability where many victims of harm can claim damages.[28]

The next reason, in our view, is convincing and more complete. It concerns the difference in costs of market transactions in harm and benefit cases. In a typical harm case with high transaction costs, there is one injurer and many victims. If the law prevents injurers from acting unilaterally without first obtaining consent from the victims, each victim will have veto power over the risky activity. Each victim has an incentive to hold out for a high payment as a condition for consenting. Thus, holdouts will block many socially efficient activities that risk harm to multiple victims.[29] Therefore, the law allows injurers to act unilaterally. However, it also forces them to compensate the victims for the resulting harm or wrongful harm. With permission to act unilaterally, but with no duty to compensate, injurers would not restrain their injurious activities.[30]

Switching from harms to benefits, in a typical benefit case with high transaction costs, there is one benefactor and many beneficiaries. If the law allows the benefactor to act unilaterally without requiring the beneficiaries to pay damages to the benefactor, each beneficiary will have an incentive to free ride on the contributions of others. The free-riding problem will reduce the supply of benefits but not block them.[31] To illustrate, in cases represented by Example 2 (Constructing a Garden), if three out of the five neighbors would share in the costs of construction, even with no liability imposed on the other two (free-riding) neighbors, the garden might be constructed.

As explained, the typical transaction costs in harm cases are holdout, while the typical transaction costs in benefit cases are free riding. Free riding on benefits is less socially destructive than holding out consent to risky activities. The greater legal scope of liability for harms relative to liability for benefits is explained by the greater destructiveness of withholding consent to risky activities compared to free riding on benefits. This fact could provide an explanation for why there are broad rights in the law for the unilateral creation of harms coupled with their internalization and broad rights for the unilateral creation of benefits but only rarely coupled with liability on the part of the beneficiaries.

In our view, however, the law would better promote social welfare with a broader liability for unrequested benefits. In Part I we explained how different liability rules could be applied to harm and benefit cases. In the next Part we apply those rules to the main categories of cases of torts and restitution and show how, by allowing broader liability for unrequested benefits, the asymmetry between torts and restitution should be narrowed.

III.  Applications: Compensate or Disgorge?

In this Part we analyze the main types of cases that pose two questions: (1) Should the law compensate or disgorge? And (2) should liability depend on reasonableness? The first type of cases involves accidental harms, and the second type involves benefits, either accidental or intentional. For all cases, we assume that transaction costs preclude contracts.

A.  Accidental Harms

The most common harm cases that tort law deals with are accidents. Under current law, liability for accidental harms is either strict or conditioned on the injurer’s negligence. If liable, the injurer must compensate the victim for the resulting harm, which implies the internalization of harms (either Rule H1 or H3). The choice between strict liability and negligence rules has been thoroughly discussed in law and economics (and other) literature.[32] In contrast, the choice between compensatory and disgorgement damages for accidents went unanalyzed until a few years ago. Is disgorgement of the injurer’s gains from omitting precaution an adequate remedy? The following example, discussed in the Introduction of this Article (with a small adjustment relating to the probability of infliction of harm) and borrowed from a previous article,[33] illustrates the dilemma whether to allow disgorgement damages for accidents.

Example 1A. Omitting a Test. Doctor in a public hospital performs a beneficial procedure for a patient. In addition to the benefit, the procedure risks harmful side effects. A test that costs Doctor 20 can prevent the harmful side effects. Omitting the test causes harm of 1,000 to the patient in 10 percent of cases. Doctor omits the test and the harm materializes.

In this example, courts apply Rule H3 (negligent liability for harm with compensatory damages) and award damages of 1,000. With this rule doctors have efficient incentives to take care, so the doctor in Example 1A will administer the test as efficiency requires. Theoretically, the law could adopt instead Rule H1: strict liability for harms. With this rule, the doctor in Example 1A will also administer the test.

Consider now the possibility of applying the rules of disgorgement damages for accidents (DDA) to Example 1A: either Rule H4 (a negligence rule) or Rule H2 (a strict liability rule). Under Rule H4 Doctor’s liability is 200, rather than 1,000.[34] With DDA (plus epsilon), the doctor will administer the test as efficiency requires. Liability for 200 instead of 1,000 might provide doctors with incentives to increase their activity level. On many occasions this is a shortcoming of Rule H4, but with doctors’ liability it might be a virtue, since doctoring produces positive externalities.[35] Also, if doctors are subject to chilling effects and as a result are overdeterred or practice defensive medicine, liability of 200 rather than 1,000 would ameliorate the problem.[36]

Rule H4 would also improve victims’ incentives to take precautions and reduce their activity levels. In Example 1A, liability of 200 (undercompensation) would provide patients with stronger incentives than liability of 1,000 to take precautions and reduce their risks.[37]

In order to apply Rule H4, courts need information about the costs of untaken precautions and the probability of harm if precautions are not taken.[38] In Example 1A this information might be available to courts. In other cases, it is not available and the compensatory negligence rule (H3) might be easier to implement.

Returning to accidental harm, suppose now that liability for disgorgement damages is strict (Rule H2) rather than conditioned upon the doctor’s negligence (Rule H4). In accident cases, would strict liability with disgorgement damages (Rule H2) have advantages over strict liability with compensatory damages (Rule H1)? Under Rule H2, the injurer’s liability is the cost of untaken precautions divided by the probability of harm. Thus, assume that the doctor could have reduced the risk to the patient to zero by taking tests that cost 200 rather than 20. Under Rule H2, if Doctor omits the tests and harm materializes, Doctor’s liability would be 2,000 (which is twice the harm caused to the patient). As precautions are taken, Doctor’s liability continues to fall even when precaution exceeds the efficient level. Consequently, there are excessive incentives to take care. Indeed, Doctor has an incentive to take care up to the accident-eliminating level of care, which is 200 and reduces the patient’s risk by only 100. Rule H2 is therefore inefficient: it provides excessive precautions for injurers to take care and reduce their activity level. It also encourages victims not to take care, since  injurers will eliminate any risk they create (assuming no contributory or comparative negligence defense is available).

B.  Rescue Cases

1.  Reasonable Restitution for Benefits

The rule that benefactors who conferred unrequested benefits on beneficiaries are not entitled to any compensation from them has a few exceptions. One is rescue cases, including cases in which the benefactor protected the recipient’s life, health, property, or other economic interest when the latter’s timely consent could not be obtained. Timely consent is impossible in emergencies. Under certain conditions, the law allows the benefactor to recover a reasonable charge for beneficial actions.[39]

Consider the following case:

Example 3. Rescuing a Car. During a storm Rescuer, a bystander, observes Recuee’s car being swept into the river. Getting Rescuee’s consent is impractical, so Rescuer takes reasonable steps and saves the car. Rescuer’s efforts cost 20, while the value of the car which was saved is 100. The probability of the rescue’s success at the time it took place was 100 percent.

Under current law Rescuer is entitled to compensation of 20, which equals the reasonable costs he spent for saving the car (Rule B4).[40] Under an alternative rule, Rescuer would be entitled to disgorgement of 100 (the value of the car), given his reasonable efforts in rescuing the car (Rule B3).

Under Rule B4 Rescuer has efficient incentives to save the car because he would be able to recover his cost of 20. Alternatively, if precautions had cost, say, 200, so that the rescue had been inefficient, Rescuer would not have saved the car because he could not have recovered more than reasonable costs.

Note that in Example 3 the probability of the success of the rescue is 100 percent. If instead it were less than 100 percent, Rule B4 would allow Rescuer to recover more than his costs. Specifically, he would recover his costs divided by the probability of success. Rule B4 deviates from prevailing law under which the magnitude of Rescuer’s damages does not depend on the probability of success.[41] (We do not consider another possibility with equivalent incentives: the rescuer recovers his costs whenever he attempts a rescue, regardless of whether the attempt succeeds or fails; the parallel alternative in harm cases is to impose liability for expected rather than materialized harm.)[42]

Rescuer, however, under Rule B4, does not have efficient incentives for his ancillary activity of rescue since he gains nothing from saving the car. Thus, if Rescuer is a professional rescuer, who could invest in equipment for rescue before any specific rescue becomes concrete or increase his rescuing activity by, say, making intensive searches to find people in need of a rescue, with only compensation for his reasonable efforts, he would not do any of those activities.

What about Rescuee’s incentives? When Rescuer makes efficient efforts to rescue, Rescuee internalizes the increases in the rescue’s worth due to his own actions, so Rescuee has efficient incentives for precautions. Thus, if reasonable efforts by Rescuer will leave the saved car with some harm, and Rescuee could take steps and prevent that harm, Rescuer would take those precautions if they cost less than the expected harm to be saved by them.

Rescuee would also have an efficient activity level. In conducting his activity, Rescuee will take into account that he might need a rescue, and that he would bear the costs of such a rescue (by compensating Rescuer). Internalizing the costs of rescue thus provides him with incentives for an efficient activity level.

Applying Rule B4 requires the court to observe the burden of the rescue, the probability that the benefit materializes, and whether the rescuer’s efforts do not exceed the efficient level. This information is often available to courts.

Imagine now that instead of Rule B4 (compensation), courts apply Rule B3 (disgorgement). According to this rule, as long as Rescuer invests efficiently in rescuing, he is entitled to disgorgement damages at the amount of 100 (the car’s value). Under this rule, Rescuer’s incentives are efficient: he invests in the rescue at the efficient level, which in Example 3 is 20, but would not invest 200. Furthermore, Rescuer’s ancillary activity (investing in equipment and conducting searches for people in need of rescue) is also efficient since under Rule B3 Rescuer fully internalizes the benefits of his rescuing activity.

So far it seems that Rule B3 is more efficient than Rule B4. This impression changes once Rescuee’s incentives are considered. With Rule B3 (disgorgement), Rescuee has no incentives to take precautions to increase the rescue’s value (such as preventing some harm to the car if rescued) since that value would go to the rescuer. Furthermore, he would take excessive precautions to rescue himself to avoid being in need of rescue in the first place and might also take too low of an activity level. The reason for this is that if he is in a need of rescue, he is rescued, but still loses the value which has been rescued instead of just paying for the costs of the rescue (as under Rule B4 (compensation)).

Applying Rule B3 requires the court to observe the value saved and assess whether the rescuer’s efforts do not exceed the efficient level. This information is often available to courts.

In sum, while Rule B3 is better than Rule B4 with respect to Rescuer’s incentives for his ancillary activity, this rule is much worse with respect to Rescuee’s incentives for both his precautions and activity level. Our comparison between the two rules might explain why professional rescuers—such as doctors who provide first aid—are entitled to more than just costs of rescue.[43] By allowing damages higher than costs, professional rescuers’ activity levels are improved.

Our discussion in this Section has two policy implications:

First, when Rule B4 (compensation) is applied, Rescuer should recover more than his costs if the rescue’s probability of success was less than 100 percent (or alternatively, Rescuer would be allowed to recover his costs regardless of success).

Second, the choice between Rule B4 (compensation) and Rule B3 (disgorgement) should depend on the tradeoff between better incentives for Rescuer’s ancillary activity (Rule B3), and better incentives for Rescuee (Rule B4). An amount between compensation and disgorgement might sometimes be a good compromise, as in cases of professional rescuers.

Our recommendations for higher compensation than actual costs, either according to the first or second policy implications above, are limited to cases in which there are no prior relationships or interactions between the parties and manipulation is not plausible. If this is not the case, other considerations should count as well. If Rule B3 (disgorgement) applies, there is a risk that rescuers would put rescuees in peril and then rescue them and gain profits.[44] If Rule B4 (compensation) applies and allows recovery which is higher than actual costs (when probability of success is less than 100 percent), rescuers might also put rescuees in peril, then rescue them, and manipulate the court by underestimating the probability of success.

2.  Strict Restitution for Benefits

Suppose now that rules of strict restitution for benefits are applied. According to Rule B2 (compensation), Rescuer is entitled to recover any costs, reasonable or not, that he spent on the rescue; according to Rule B1 (disgorgement), Rescuer is entitled to recover disgorgement regardless of the costs he spent on the rescue.

Rule B2 (compensation) provides incentives for rescuers to invest too much in the rescue, since the rescuer is entitled to compensation for all his costs divided by the probability of rescue. Thus, Rescuer is indifferent to all levels of efforts, reasonable or not, and if he is paid a bit more than his costs divided by the probability of rescue, he has excessive incentives to rescue (still, his ancillary activity is deficient for the reasons elaborated on above[45]). Rescuee’s incentives are also inefficient: knowing he would pay for rescue beyond reasonable costs, Rescuee would overinvest in rescuing himself or avoiding the need of rescue and might even reduce his activity level. Thus, Rule B2 has no advantages whatsoever.

Rule B1 (disgorgement), in contrast, provides efficient incentives for rescuers with respect to both precautions and ancillary activity. The reason for this is simple: with full internalization of costs and benefits, Rescuer will behave efficiently.

Rule B1, however, is problematic for Rescuee’s incentives for the same reason that Rule B3 is problematic:[46] Rescuee knows that when he is in need of a rescue and is rescued, he still loses the value which was rescued instead of paying for the social costs of his rescue. As a result, he would not try to increase the value of the rescue; he would take excessive precautions to rescue himself or avoid the need for rescue and would reduce his activity level.

C.  Common Funds and Analogous Cases

Another category of cases in which the law allows benefactors to recover for unrequested benefits is “common funds.” Common funds are monies obtained through legal proceedings initiated by one party (or the party’s attorney) against which others can assert claims.[47] Under certain conditions, the initiator of the legal proceedings who incurred expenses to benefit a group of people can collect an equal share from each of them, even if they refused to back these efforts at the outset.[48] An illustration is the case of an heir who initiates legal proceedings resulting in an increase in the value of the estate, to the benefit of the other heirs.[49] Liability in common fund cases is aimed at overcoming the free-riding problem which might hinder the preservation or creation of a common fund; without legal intervention each beneficiary would hope to free ride on other beneficiaries’ efforts, so no one would act to preserve or create the common fund.

In previous publications[50] we argued that efficiency considerations justify expanding the duty of restitution beyond common fund cases to require compensating benefactors for unrequested benefits when the following conditions are met: (1) high transaction costs preclude reaching an agreement for payment of benefits between the benefactor and beneficiaries; (2) risk of overvaluation is low; (3) enforcement costs do not exceed the benefit of the expanded duty of restitution; (4) the benefits will not be created either by other state action or by market mechanisms; and (5) the beneficial activity does not have offsetting welfare-reducing effects.[51]

The main application for this expanded duty of restitution is the private production of public goods when, absent legal intervention, free riding and other transaction costs bar their production.

Consider the following example discussed in the Introduction:[52]

Example 2: Constructing a Garden. Builder considers constructing a garden on her land that will increase the market value of her house and five Neighbors’ houses. The garden costs Builder 15. The increase in the value of Builder’s house is 10, and the increase in the value of each Neighbor’s house is 2. The benefits are a public good: Builder cannot prevent Neighbors from enjoying the garden’s benefits once it is created. Since each Neighbor knows that her benefit from the public good does not depend on her contribution to its costs, she contributes nothing, hoping that Builder and the other Neighbors will pay for the garden. However, since all Neighbors reason in the same way, nobody pays. Nevertheless, Builder constructs the garden, conferring a total benefit to Neighbors of 10.

Legal intervention under restitution law could take several forms, including the adaptation of any of Rules B1–B4. To avoid repetition, we will consider two rules only: Rule B4 (compensating for reasonable costs) and Rule B3 (disgorging the benefits accrued due to the benefactor’s reasonable efforts).

Under Rule B4 (compensation) Builder should recover costs of 7.5 from Neighbors (1.5 from each) because they are reasonable. Consequently, she has efficient incentives to construct the garden.[53]

Things become more complicated if Builder could affect the distribution of the benefits between her and Neighbors in unverifiable ways: she is likely to construct the garden in such a way that more benefits go to her rather than to Neighbors, even if such construction is inefficient. We assume that such behavior would be verifiable and if she does so it would adversely affect her amount of recovery from Neighbors.

Also, Builder’s activity level might be inefficient. To see why, imagine that Builder is in the business of developing residential areas and creating public goods, such as gardens. She needs to make investments in locating the right places for development. Since she does not internalize the full benefits she creates, she will invest inefficiently in locating the right places. In contrast, Rule B3 (disgorgement) would provide Builder with efficient incentives for both constructing the garden efficiently and for her activity level. Therefore, if it were just for Builder’s incentives, Rule B3 would be more efficient than Rule B4.

But when it comes to Neighbors’ incentives, the efficiency effects of the two rules reverse: Rule B4 (compensation), rather than Rule B3 (disgorgement), is the one providing Neighbors with more efficient incentives.

To see why, imagine that Neighbors can take steps and enhance the benefits of the garden for them (say, by constructing the windows of their homes to face the garden). Also, new neighbors could come and build homes in the area. If Rule B3 (disgorgement) applies, Neighbors should disgorge all the benefits created by Builder, so they would not incur costs in constructing windows to face the garden, and some new neighbors that would have come to the neighborhood if they had been allowed to retain at least some of the garden’s benefits would not come.

Things would be different under Rule B4 (compensation). Under this rule, Neighbors pay just for the costs of creating the benefits for them. Given this, they will take efficient measures to enhance their benefits, since those benefits will be fully internalized by them. Also, Neighbors’ decisions whether to live in the area will be efficient.[54]

To summarize, the choice between the two rules depends on whether Builder’s activity level incentives are less or more important than Neighbors’ incentives. Thus, if Builder is a professional in the business of developing residential areas, the optimal solution would be more than just covering costs. A compromise between the two rules might be to allow Builder a recovery somewhere between compensation and disgorgement.

Note that difficulties in verifying the benefits and the probability of their creation (in cases of probabilistic benefits), and whether Builder’s efforts are lower or higher than the efficient level might change the conclusion and affect the choice between the two rules.


This Article developed eight liability rules for harm and benefit cases and pointed out the symmetry between the rules relating to harms and the rules relating to benefits. This Article also provided an explanation for the legal divergence between tort law and restitution law and made the claim that the gap between these two fields should be narrowed. Finally, this Article applied the eight rules to the main categories of harm and benefit cases and appraised their advantages and disadvantages. The simplest model of a liability rule, which this Article uses (most of the time), assumes two actors (injurer and victim, or benefactor and beneficiary) and two actions (precaution and activity level, or benefaction and ancillary activity level). One future extension of our model would increase the number of actors and actions. Instead of two-by-two, the extension would encompass collective choice.[55]

As noted, this Article assumes that transaction costs preclude bargaining among the parties. Consequently, this Article is framed in terms of liability rules in the law of torts and restitution. Another future extension would relax this assumption and allow bargaining among the parties. Instead of framing the eight liability rules as mandatory rules of torts or restitution, the future extension would frame them as alternative contracts. We hope to consider circumstances in which parties can contract into each of the eight liability rules.

[*] *. Herman Selvin Professor of Law, Berkeley Law School.

[†] †. Alain Poher Professor of Law, Tel Aviv University; Fischel-Neil Distinguished Visiting Professor of Law, University of Chicago. We thank Omri Ben-Shahar, Vanessa Casado-Perez, Yun-chien Chang, Daniel Hemel, Alon Klement, Omer Pelled, and the participants at the law and economics workshop at the University of Chicago Law School for very helpful comments. We are grateful to Tom Zur who provided superb research assistance.

 [1]. Later we explain that sometimes compensation for costs incurred would be enough, or even better than full internalization, in encouraging efficient creation of benefits. See infra Sections I.C, I.E.

 [2].               We do not discuss non-efficiency reasons, such as protecting autonomy. See Ariel Porat, Private Production of Public Goods: Liability for Unrequested Benefits, 108 Mich. L. Rev. 189, 215–17 (2009) (discussing the concern that restitution would infringe on recipients’ autonomy and suggesting various possible methods to mitigate it).

 [3]. We assume that the increase in the value of the houses fully capitalizes the value of the garden.

 [4].               This is so under the Hand formula, first articulated in United States v. Carroll Towing Co., 159 F.2d 169, 173–74 (2d Cir. 1947); see also Restatement (Third) of Torts: Liability for Physical and Emotional Harm § 3 cmt. e (Am. Law Inst. 2005) (suggesting that negligence can be asserted by a “risk-benefit test,” where the benefit is the advantage that the actor gains if she refrains from taking precautions, a balancing approach that is identical to the Hand formula).

 [5]. See Carroll Towing, 159 F.2d at 173–74.

 [6]. Steven Shavell, Foundations of Economic Analysis of Law 80179 (2004) (explaining that under a strict-liability rule injurers have incentives to minimize total social costs).

 [7]. The common intuition is that, with a risk of severe bodily injury, victims will take care even if they are fully compensated. This intuition is right because with severe bodily injury compensation is in fact never perfect.

 [8]. Things might be different if it were possible to distinguish between the value produced by the benefactor and the value produced by the beneficiary.

 [9]. This assumes that it is not possible to distinguish between the values produced by each actor.

 [10]. More accurately, she is indifferent toward administering or not administering the test. If, however, injuring the patient entails some additional costs (such as costs of reputational sanctions), she will probably administer the test.

 [11].               More accurately, she is indifferent toward providing or not providing the benefit.

 [12]. In more detail: because for each dollar of more benefit for herself, Builder bears the corresponding costs of creating it, she stops creating benefits when marginal costs equal marginal benefits. See Omer Y. Pelled, The Proportional Internalization Principle in Torts, Contracts, and Unjust Enrichment 34–37 (2019) (unpublished manuscript) (on file with authors) (discussing such rule in a similar context).

 [13]. This argument is valid under the assumption that the benefactor is not also the beneficiary as in Example 2. Otherwise, things would be different. See supra note 12 and accompanying text. Deficient ancillary activities by the benefactor correspond to excessive activity levels by the injurer. In more detail: strict restitution for benefits with compensatory damages causes deficient ancillary activities by the benefactor in the restitution model, and, equivalently, strict liability for harm with disgorgement damages causes excessive activity levels by the injurer in the torts model. Note, however, that under strict restitution for compensatory damages, the benefactor continues the benefaction until its marginal value is zero. If no more benefits are possible, there may be no need for more ancillary activities by the benefactor.

 [14]. Robert Cooter & Thomas Ulen, Law and Economics 207 (6th ed. 2012) (explaining how a negligence rule provides efficient incentives for both the injurer and the victim).

 [15]. Things might be different if it were possible to distinguish between the value produced by the benefactor and the value produced by the beneficiary.

 [16]. This is because he bears less than the social harm he creates (if he is not negligent, he bears no liability).

 [17]. Once the injurer takes efficient care, the victim bears all the residual harm. For further discussion of the incentive effects of Rule H4, see generally Robert Cooter & Ariel Porat, Disgorgement Damages for Accidents, 44 J. Legal Stud. 249 (2015).

   [18].               See R.H. Coase, The Problem of Social Cost, 3 J.L. & Econ. 1, 15 (1960).

 [19]. See Dan B. Dobbs et al., The Law of Torts §§ 56, 73, 687 (2d ed. 2011).

 [20]. See Restatement (Third) of Restitution & Unjust Enrichment ch. 3, intro. (Am. Law Inst. 2011) (explaining that a person who seeks compensation for benefits intentionally conferred needs to show that the benefits were requested and that the recipient has agreed to pay for them).

 [21]. See Robert D. Cooter & Ariel Porat, Getting Incentives Right: Improving Torts, Contracts, and Restitution 151–64 (2014) (providing a full account of the categories of cases in which the prevailing law of restitution imposes liability for the conferral of unrequested benefits); Porat, supra note 2, at 195–98 (same). For the argument to the contrary, see generally Saul Levmore, Explaining Restitution, 71 Va. L. Rev. 65 (1985) (justifying the law’s different approaches to harm and benefit cases).

 [22]. See supra text accompanying note 2.

 [23]. See Richard A. Epstein, Positive and Negative Externalities in Real Estate Development, 102 Minn. L. Rev. 1493, 1512–13 (2018) (arguing that the differences in people’s location, view, and preferences make it hard to treat all individuals as though they were the same).

 [24]. See               Porat, supra note 2, at 210–13 (suggesting the various possible methods of mitigating the risk of overvaluation).

 [25]. See infra text accompanying note 28.

 [26]. See generally Giuseppe Dari-Mattiacci, Negative Liability, 38 J. Legal Stud. 21 (2009) (arguing that, under a rule of negligence, it is sufficient for the law to have one sanction at its disposal since in equilibrium, there is no negligence and the sanction is never implemented; in contrast, arguing that, in benefit cases, the subsidy should be implemented again and again whenever a benefit is created by one person for another person).

 [27]. See Cooter & Porat, supra note 21, at 161 (“[W]hen the group of recipients is tightly defined and the benefits uniformly high . . . enforcement costs should not preclude restitution.”).

[28]. See William M. Landes & Richard A. Posner, The Economic Structure of Tort Law 65 (1987).

 [29]. Porat, supra note 2, at 201 (“[A]llowing injurers to force transactions on victims by unilaterally creating risks for them and then bearing all or a substantial proportion of the costs associated with those risks is essential for the occurrence of many important activities in modern society.” (emphasis omitted)).

 [30]. But see Epstein, supra note 23, at 1512–13. Professor Richard Epstein argues that occasionally injurers are constrained by the risks their injurious activities impose on themselves, while such a constraint is absent when benefactors create benefits for which they are compensated by the beneficiaries. Id. We disagree: first, very often injurers do not impose risk on themselves, and even if they do, just bearing their self-risk is not deterring enough; second, there is no reason for benefactors to create excessive benefits as long as they are compensated for the costs they incurred rather than the benefits they conferred.

 [31]. Porat, supra note 2, at 201–02.

 [32]. See, e.g., Steven Shavell, Strict Liability Versus Negligence, 9 J. Legal Stud. 1, 1 (1980) (comparing the incentive effects of strict liability and negligence rules); see also Landes & Posner, supra note 28, at 54–84.

 [33]. Cooter & Porat, supra note 17, at 250–51.

 [34]. Such a liability rule would be economically equivalent to disgorging the gains to the doctor from omitting the test regardless of whether harm materializes or not.

 [35]. See Robert D. Cooter & Ariel Porat, Liability Externalities and Mandatory Choices: Should Doctors Pay Less?, 1 J. Tort L. 1, 1 (2006) (arguing for reducing liability of doctors because of the positive externalities they create).

 [36]. See id. at 6 (“For activities with positive externalities like some medical specialties, incentives are optimal when damages are less than 100% of the victim’s actual harm.”).

 [37]. See Cooter & Porat, supra note 17, at 261–62 (arguing that under DDA, victims internalize more of the costs of their activities so they engage in less activity, and their activity levels are more efficient).

 [38]. To apply this rule, courts must know the probability that harm will occur, but it is not necessary to establish causation between omitting the test and the harm suffered by the patient. See id. at 267.

 [39]. Restatement (Third) of Restitution & Unjust Enrichment §§ 20–21 (Am. Law Inst. 2011) (discussing situations of protection of another’s life or health and protection of another’s property, in which the law allows the benefactor to recover a reasonable charge for his beneficial actions); 2 George E. Palmer, The Law of Restitution 374–83 (1st ed. 1978). See generally Hanoch Dagan, In Defense of the Good Samaritan, 97 Mich. L. Rev. 1152 (1999) (analyzing rescue cases and supporting a broad duty of restitution).

 [40]. Restatement (Third) of Restitution & Unjust Enrichment § 21(2) (Am. Law Inst. 2011) (“Unjust enrichment under this section is measured by the loss avoided or by a reasonable charge for the services provided, whichever is less.”).

 [41]. See id.

 [42]. See Ariel Porat & Alex Stein, Tort Liability Under Uncertainty 103–10 (2001) (discussing the possibility of imposing liability for creating risk and arguing that this substitution of the traditional damage-based liability might provide the solution for a number of problems that remain unsolved under the prevalent tort law doctrine).

 [43]. Restatement (Third) of Restitution & Unjust Enrichment §§ 20(1) (Am. Law Inst. 2011) (“A person who performs, supplies, or obtains professional services required for the protection of another’s life or health is entitled to restitution from the other as necessary to prevent unjust enrichment, if the circumstances justify the decision to intervene without request.”).

 [44]. See Saul Levmore, Waiting for Rescue: An Essay on the Evolution and Incentive Structure of the Law of Affirmative Obligations, 72 Va. L. Rev. 879, 886–87 (1986) (arguing that one of the reasons for the prevailing law not providing large rewards to rescuers is the moral hazard that potential rescuers will create the demand for their own services).

 [45].               See supra Section III.A.

 [46]. See supra Section III.B.1.

 [47].               John P. Dawson, Lawyers and Involuntary Clients: Attorney Fees from Funds, 87 Harv. L. Rev. 1597, 1603–12 (1974) (presenting the development of the “common fund” mechanism); Levmore, supra note 21, at 95–99 (presenting attorney-creators of common funds under prevailing law).

 [48]. Restatement (Third) of Restitution & Unjust Enrichment § 30(2)(b) (Am Law Inst. 2011) (allowing recovery in cases where “the recipient obtains a benefit in money,” thereby substantially broadening the common-funds category of cases); id. § 29 (setting out specific conditions under which a person who has incurred expenses or rendered services to preserve or create a “fund” in which others are interested may require the others, in the absence of contract, “to contribute to the reasonable and necessary expense of securing the common fund for their benefit, in proportion to their respective interests therein, as necessary to prevent unjust enrichment”).

 [49]. For examples of suits brought by an heir against his or her co-heirs, see id. § 29 illus. 23–25; Palmer, supra note 39, at 428–30.

 [50].               Porat, supra note 2, at 194.

 [51]. Another condition requires the finding that the beneficiary’s autonomy interest is not unduly compromised, a criterion not strictly relevant to the efficiency analysis we pursue here. For discussion on the beneficiary’s autonomy interest, see Porat, supra note 2, at 215–17.

 [52]. For discussion of a similar example, see Porat, supra note 2, at 191.

 [53]. Since Builder creates at the same time benefits for herself and for others, also under Rule B2 (strict restitution for benefits with compensatory damages), Builder has efficient incentives to construct the garden as long as she is compensated for a relative share of her costs. See supra note 12 and accompanying text.

 [54]. Note that Neighbors would have efficient incentives to enhance the value of living near the garden if they paid Builder a fixed amount, unrelated to their actual benefits from the garden. If this fixed amount were set at the level of Neighbors’ expected benefits from the garden given an efficient level of efforts to enhance their benefits from the garden, both Builder and Neighbors would have efficient incentives to increase social welfare. Still, Neighbors’ activity levels (their incentive to move to the area) would be too low.

 [55]. See, e.g., Ariel Porat & Robert E. Scott, Can Restitution Save Fragile Spiderless Networks?, 8 Harv. Bus. L. Rev. 1, 5 (2018) (developing an informal model that specifies rights of restitution for network members).


The Long Convergence: “Smart Contracts” and the “Customization”of Commercial Law – Article by G. Marcus Cole

From Volume 92, Number 4 (May 2019)


The Long Convergence:
“Smart Contracts” and
the “Customization” of Commercial Law

G. Marcus Cole[*]


The rise of “smart contracts”—self-executing agreements built into computer code across distributed, decentralized blockchain networks—is the most recent step in the long convergence of contract law around the world. Smart contracts permit what has only been approximated before. Namely, they allow for the “customization” of contract law itself to fit the precise needs and circumstances of the parties to the transactions. This customization of contract law is only part of the long convergence. Indeed, for generations, all of commercial law has been moving towards satisfying the demand in the market for an efficient, effective law of commerce. This convergence is the natural result of an increasingly competitive market for the provision of the “product” we call commercial law. Like any other market, as it becomes more competitive, the products offered by suppliers—in this case, contract law—tend toward convergence.

Bespoke law is the natural end product of this competition and the resultant long convergence.

While smart contracts may be signaling that the convergence towards customized contract law is nearly complete, it is not a new or isolated development. In fact, it is at least several hundred years old and has been occurring across most of commercial law. Since the emergence of the lex mercatoria, or the Law Merchant, along the commercial crossroads and marketplaces of medieval Europe, merchants, their suppliers, and their customers have sought and shaped an efficient commercial law to meet the needs of trade.[1] Although the jus commune of the Middle Ages provided a common law throughout continental Europe, it was the merchants themselves who developed their own specialized—if not customized—law for commerce.[2]

The wealth generated by these merchants and their courts caused states to take notice. It should come as no surprise that the Law Lords of England embraced and adopted the Law Merchant at the dawn of the Industrial Revolution.[3] When England’s colonies formed states of their own, they too saw the need for a common or universal commercial law.[4] The disaggregated nineteenth-century states that would ultimately unite to form modern Germany, as well as the United States of America, confronted the same problem: how to conduct trade across multiple jurisdictions with their differing laws of commerce.[5] Although the German legal scientists were able to craft the German Commercial Code in 1861, their counterparts in the United States failed to develop a universal, all-encompassing commercial code until the codification movement resulted in the Uniform Commercial Code (the “UCC”) in the twentieth century.[6] 

Although the conscious effort to bring about harmony in American commercial law can be traced back to the common law codification movement’s origins in the early nineteenth century, success was not achieved until the middle of the twentieth century.[7] As transportation and communications technology improved the ability of large businesses to engage in interstate commerce, a need arose to reduce the transaction costs associated with disparate legal regimes among the various states. The UCC arose as the triumphant product of coordinated efforts to harmonize business law, all while preserving the dignity of state sovereignty within the United States.[8]

The last four decades have seen considerable movement toward a universal law of contracts across disparate legal regimes. This movement spread beyond the borders of the United States, with the promulgation of the Vienna Convention on the International Sale of Goods (the “CISG”) in 1980.[9] The CISG accelerated the progress of a centuries-old arc of convergence of the various legal regimes governing commercial law over the last four-hundred years. The CISG was itself the spitting-image offspring of its forebearer, the UCC, originally submitted to the legislatures of the fifty United States back in 1951.[10]

Both the UCC and CISG were answers to a sticky problem: how can business be efficiently conducted across political borders without violating the sovereign integrity and law-provision authority of the states involved? The answer, embodied in the UCC and the CISG, was to humbly ask the relevant states to adopt uniform laws for transactions within each of their respective jurisdictions, so as to lower the costs associated with all transactions.[11]

This movement towards convergence has progeny. In 1999, the National People’s Congress of the People’s Republic of China adopted the New Contract Law, which becomes effective on January 1, 2000.[12] This law effectively adopted key structures and principles underlying the Vienna Convention.[13] This means that, while China is a decidedly civil-law regime, its contract law reflects the law of commerce developed over centuries in the common law of the United States, England, and before that, the Law Merchant and the ius commune of continental Europe.[14]

This Article will argue that, while much of the convergence in commercial law between civil-law systems and common law regimes has been purposive and deliberate, the overwhelming movement towards convergence has not been so intentional. Instead, it is the natural progression towards efficient “shortcuts” to solving the common problems for which commercial law has been developed. Convergence, in other words, characterizes the movement to provide a better, more efficient product in “the market for law.”

Furthermore, technological advancements have accelerated this convergence. The invention of the computer and word processing have made possible the proliferation of “boilerplate,” namely, standard form contracts and standard contract clauses.[15] Computer search engines have also made it possible, cheap, and even effortless for consumers and business people to carefully compare contract terms and wording between standard form contracts.[16] At no time in history has the marginal consumer of contract prices, terms, and language been so empowered to compare and insist upon the prices and non-price terms he or she desires. As “smart contracts” provide parties and their transactions with the ability for self-enforcing terms and conditions, the law of contract is becoming increasingly “privatized.” Parties to an agreement can now not only insist upon the terms they desire but they can also actually determine—within limits—how those terms will be enforced. Smart contracts permit parties to enforce their own terms themselves, without consulting governmental authorities, police, or courts.[17] In a very real sense, “choice of law” is now migrating towards “choice of algorithm.”

In the market for contract law, the traditional suppliers of law—namely, states—are increasingly encountering stiff competition from a variety of sources. Competitors are no longer limited to competing jurisdictions. They now include computer programmers and “artificially intelligent” computers. Although states enjoy a competitive advantage in the form of a monopoly over the legitimized use of physical violence, states and market participants are becoming increasingly aware that violence is not the only way to enforce contracts. Engineers, programmers, coders, miners, and other tech-savvy entrepreneurs are devising new, cheaper, nonviolent, and “stateless” ways of enforcing bargains.

These alternatives are presenting consumers of contract law with more choices than ever before. Just as competition in other competitive markets leads to a convergence of price and quality of the underlying commodities bought and sold, the competition to capture the consumers of efficient contract law has led to a convergence of its content. In short, in the same way that commodities around the world obey “the law of one price,” efficient contract law around the world is beginning to obey “the law of one law.”[18] Part I of this Article will describe “smart contracts” and blockchain technology. It will then explain the use of smart contracts in commercial transactions. This Part will then explain the three defining characteristics of smart contracts, namely, that they are “immutable,” “automated,” and “distributed.”[19] It is these three characteristics that allow smart contracts on the blockchain to substitute for the function of courts and armed officers to enforce contracts.

Part II describes the market for commercial law and, in particular, the market for an efficient law of contracts. It will illustrate the historical market forces that have led suppliers of law—governments, the Catholic Church, medieval synagogues, as well as more modern private associations—to service this market with law as demanded by market participants themselves. These competitive forces, in turn, have led to the convergence we have witnessed and are currently witnessing. Part II will also trace the path of convergence in commercial law from the Law Merchant and Ecclesiastical Law through the common law and into the civil law systems of today. It will emphasize both the historical competition between law-providers, like the state and the Catholic Church, as well as modern jurisdictional competition between states in the market for law-provision. It will also point out how the purposive coordination between institutions has acted as “concrete blocks” dropped into a “sea” with the expectation that “coral reefs” of law will form around them.[20] In this way the codification movement, while a coordinated product of central planning, has resulted in further “spontaneously-ordered” law.[21]

Part III of this Article will assert that the convergence we are witnessing in contract law is the natural result of the increasing competitiveness in the market for the provision of contract law. It visits one of the fundamental concepts of price theory, namely, the phenomenon of price convergence. It extends price convergence to non-price characteristics to argue that the convergence we are witnessing in the market for contract law mirrors price convergence in commodities markets.

Part III also illustrates how state-provided contract law, in the form of the UCC, the CISG, and the New Contract Law of the People’s Republic of China, actually permits and invites customized contract law through the use of default and penalty-default rules. As already indicated, some of the convergence we witness today was conscious and deliberate, as when the New Contract Law of China imported the structure and content of the Vienna Convention.[22] While adoption of these modern codes was largely driven by industry, the replication of the rules, and especially the internal structure of the codes themselves, were driven by jurisdictional competition. Much, if not most, of this convergence, however, has been privately driven. For example, parties around the world have employed choice of law clauses to funnel the commercial law of the State of New York into agreements having nothing else to do with New York, the United States, or even the common law.[23]

Part IV will explore the broader convergence of commercial law in areas beyond the law of contracts. In particular, it will consider the effect that blockchain technology has had, and will continue to have, on the other Articles of the UCC beyond Article 2 contracts for the sale of goods. As technology is brought to bear on the central questions at the heart of commercial law, parties are increasingly empowered to provide their own solutions. This Part will show how commercial law is not only increasingly customized and privatized, but that it is also beginning to converge with its origins in the Law Merchant.[24]

In other words, commercial law is about to come “full circle.”

I.  The Market for Contract Law

A.  An Old Company in a New Market

Barclays is a bank. In fact, it is an iconic financial firm. Founded in 1690, it is the sixth oldest existing bank in the world and the second oldest English bank.[25] In addition to being old, Barclays is quite large. It operates branches in forty different countries and has over 120,000 employees. With €1.3 trillion in assets, it is Britain’s second largest bank and the sixth largest bank in Europe.[26] Because banks must satisfy regulators and concerns of investors and depositors, Barclays is, like most banks, very conservative.

Furthermore, Barclays is powerful. According to one study, Barclays is the most powerful transnational corporation in terms of ownership of global financial institutions.[27] As a result, Barclays exercises substantial corporate control and influence over global financial stability and market competition.[28]

Despite being very old, very large, very English, very powerful, and very conservative, Barclays has developed a reputation for being among the first to spot key technological innovations in the marketplace. Barclays financed the world’s first industrial steam railway.[29] Barclays also introduced the first credit card issued in the United Kingdom, the “Barclaycard,” on June 29, 1966.[30] The first cash machine (now known as an “automatic teller machine” or “ATM”) ever deployed anywhere in the world was installed by Barclays at one of its branches in Enfield, north of London, in 1967.[31] In short, Barclays has long been a leader in innovation and financial technology or “FinTech.”[32]

So, it should come as no surprise that Barclays has become a leader in the world of “smart contracts.” In 2016, Barclays initiated a pilot program to standardize derivatives transactions between banks on a “smart contracts” platform.[33] A derivative is essentially a trading contract between two or more parties that can take many forms and is based on an underlying asset.[34] Using blockchain technology, Barclays could engage in self-enforcing derivatives transactions with other financial institutions employing the same smart contract platform to complete the transactions without the intervention of lawyers, courts, or law enforcement officers.[35]

In 2017, the International Swaps and Derivatives Association (the “ISDA”) issued a whitepaper entitled Smart Contracts and Distributed Ledger – A Legal Perspective.[36] In it, the ISDA called for standardized smart contract templates and distributed ledger platforms for all financial institutions participating in such trades.[37] Known as the “Common Domain Model” (the “CDM”), it would reduce the time associated with drafting and implementing derivative and swap agreements and their associated disclosures from approximately twenty days to about four hours.[38] Barclays is leading the effort to employ the CDM by drafting and promulgating standard form smart contracts to dramatically increase the efficiency of derivative finance.[39] Barclays is also exploring ways to expand the use of smart contracts to other financial services.[40] It is true that even standard derivative contracts require extensive paperwork.[41] This paperwork, however, is largely required by financial regulators and not by the transactions or transactors themselves.[42]

In short, one of the oldest, largest, most venerable, most regulated, and, therefore, most conservative companies on the planet has adopted smart contracts and blockchain technology to pursue one of its core business lines. Today, transactions in the form of smart contracts already number in the hundreds of millions.[43] The Ethereum platform, one of the many platforms for the development of smart contracts, has already processed over one trillion dollars in smart contract transactions, averaging over $2 billion per day.[44] Like ATMs, smart contracts are suddenly “mainstream.”

B.  What Is a “Smart Contract?”

As smart contracts are increasingly employed to substitute, or supplement, traditional contracts, it is important to know two things about them. First, it is important to have an understanding of what smart contracts are. Second, it is important to know what a smart contract can and cannot do.

A “smart contract” is a piece of executable computer code that stores rules of a transaction and automatically verifies the fulfillment of those rules on a network of computers which execute the contract logic.[45] To substitute for traditional legal enforcement, most smart contracts rely upon blockchain technology.[46] Blockchain technology enables businesses to build self-executing agreements, allowing them to electronically program a contract to execute a transaction or payment only when the conditions of that business’s contract have been met.[47] Smart contracts are written in several high-level programming languages and are most often used to implement a contract between two parties where the execution is guaranteed by each node on the network.[48] This allows enterprises to transact directly with each other on private blockchains, using select terms and agreements, without having to utilize a third party—or courts of law—for enforcement.[49]

The key characteristics of smart contracts are that they are:

Immutable. Thanks to the blockchain, smart contracts can never be changed or altered unless agreed upon by the proper parties.[50] Furthermore, the contracts are visible to the entire blockchain network. No one can break or change the contract without permission, because any change would require changes to all other blocks in the sequence. And since the blockchain is continuously being built, changes or “hacks” become increasingly difficult with each additional block.[51] This builds trust and reduces opportunities for fraud.[52]

Automated. By eliminating the intermediaries required to validate a typical business contract, businesses running private enterprise blockchains can process and settle more transactions than traditional exchanges.[53] In other words, smart contracts are automated.

Distributed. In order for the smart contract to be validated, every member of the network has to agree as to the terms of the transaction and that the called-upon performance has been rendered.[54] This means that funds are always released when—and only when—the terms of a contract are met.[55]

By using blockchain technology, then, the parties to a smart contract are without the need for governmental institutions to enforce their terms. Smart contracts are said to be self-enforcing because satisfaction of the required performance triggers the counterparty’s performance automatically. We can think of a smart contract as a type of “electronic escrow,” but without a human escrow agent.[56]

The existence of self-executing agreements does not, in itself, suggest that there is no role at all for governmentally-based law enforcement. The law of property, for example, undergirds the resultant product of electronic assets transformed into tangible ones. Nevertheless, even the law of property has substitutes made possible by blockchain technology, since cryptocurrency assets can be kept under lock and key through digital cryptography.[57] In fact, of the ten most transacted smart contracts, four represent the issuance of securities or shares in companies through what have come to be known as initial coin offerings (“ICOs”).[58] An ICO is the blockchain equivalent of an initial public offering (“IPO”), except that, instead of shares of stock in the listed company, investors receive tokens—assets representing a share of the issuing company—that have value because of the self-executing code built into the ICO smart contract.[59] When the issuing company hits the encoded benchmarks or performance targets, the ICO smart contract triggers payment on the tokens.[60] Like shares of stock, tokens can be traded on exchanges, or bought back by the issuing company.[61] Even these secondary transactions are typically governed by and executed through subsequent smart contracts.[62]

In sum, smart contracts are self-executing computer codes, set in motion by parties to a transaction which is witnessed and validated by third parties at nodes on a blockchain network. If one party to the transaction performs its duties required under the contract, the performance is observed and validated by third parties, which then triggers the counterparty’s performance (payment) automatically. If, however, the first party fails to perform as called for in the agreement, this breach will likewise be observed by third parties to the transaction, and payment by the counterparty will be blocked. This all occurs without the guns, gunpowder, bullets, and threat of physical violence that is the essential characteristic of traditional governmentally-enforced law.[63]

II.  Competition in the Market to Supply Contract Law

A.  The History of Competition in the Market for Contract Law

Smart contracts are just the latest competitor to state-provided contract law. This competition is nothing new. In his recent book, The Dignity of Commerce, contract scholar Nathan Oman traces the origins of modern contract law to the Elizabethan era and a court decision known as Slade’s Case in 1603.[64] This is a common—but odd—choice of a starting point for a few reasons. First, the choice of Slade’s Case as the birth of modern contract law treats the enforcement of informal promises, known as assumpsit at the time, as though it occurred to the Law Lords from a bolt of divine inspiration, entirely ignoring the historical and legal context which led to the Slade’s Case decision. Second, and more importantly, to locate the enforcement of informal promises in the hands of Royal Courts of the Strand in London is to look at it through the distinctly twenty-first century perspective of state-created law. In other words, Oman sees Slade’s Case as the beginning, because he, and other modern contract scholars like him, cannot contemplate that modern contract law and its enforcement might have originated outside of the institutions of the state.

In fact, it did.

Modern contract law is the product of competition between law providers in the market for law. The medieval common-law action of assumpsit arose at a time when plaintiffs had grown increasingly frustrated with the rigidities of the common law courts and its writ system.[65] Initially, in order to bring suit in the king’s courts of law, a plaintiff needed to assert a cause of action.[66] This phrase was the shorthand that evolved from the understanding that the king had a monopoly on the legitimized use of physical violence, and if one wanted him to exercise violence on one’s behalf, a plaintiff would have to show just cause as to why the king should take such action.[67]

The original causes of action reflected the principle concern of the Norman kings, namely, the quiet enjoyment of profits from their lands.[68] After William the Conqueror saw victory at the Battle of Hastings, he ordered that all of his newly acquired lands be recorded.[69] The Domesday Book became the first land title recording system in the Western world in 1086, just twenty years after the Norman conquest.[70]

In keeping with this obsession with land and the wealth it generated, the earliest actions in the king’s courts were actions involving land. As Theodore Frank Thomas Plucknett put it in A Concise History of the Common Law:

Of these civil pleas, then, those which first received the attention of the King’s Court were pleas of land. Reasons of state demanded that the Crown through its court should have a firm control of the land; the common law, therefore, was first the law of land before it could become the law of the land.[71]

The purpose and function of these writs in the Norman courts are obvious; if someone was improperly in possession of land, such possession interfered with the wealth-generating ability of the rightful holder, who could then no longer support the king with taxes.[72] The writ of trespass was clearly a “just cause as to why the king should take such action.”

Trespass was soon expanded because it became apparent that the wealth-generating capacity of land could be interfered with by more than just the wrongful taking of possession. If an ox and cart were necessary to till the soil, and if an interloper destroyed or disabled the rightful holder’s ox and cart, then tax revenue would be lost once again. So, the writ of trespass was further expanded to an additional writ, namely, the writ of trespass-on-the-case.[73]

After the initial actions in trespass and trespass-on-the-case were expanded to entertain complaints of injuries not rooted in real property, three promise-based writs emerged, namely, the writs of debt, detinue, and covenant.[74] The “just cause as to why the king should take such action” in these promise-based cases is less obvious. Still, if a land holder had arranged to have crops stored at harvest time, and the mill which promised to store the grain failed to make the space available, resulting in the loss of the grain, then the use of the land to generate wealth had gone to waste.[75] These three writs provided a remedy in such cases.[76]

The writ of debt was the first of the three to emerge.[77] It allowed a plaintiff to bring an action rooted in the notion that if a defendant had borrowed money and failed to pay it back, then the plaintiff could petition the king’s courts to force the defendant to do so.[78] Soon, the king’s judges found it impossible to preclude similar treatment when a plaintiff’s chattels were borrowed and detained, like an unrepaid debt. The writ of detinue was born to address wrongful detention of such property.[79]

In addition to these two types of writs, which dealt with physical property, in the form of money (specie) or chattels, that was improperly held by one who had promised to return them, a third writ arose. This writ involved a solemn, formal promise to do or sell something. Such promises, written out on parchment at a time when few could read or write, involved considerable time, thought, and resources. A scribe would be hired to write out the promises exchanged, and a wax seal was dripped onto the parchment.[80] For identification, one or both of the parties making the promise would impress the wax seal with his “signet” ring bearing his family crest and thereby assuring authenticity.[81] This “signet-ture” provided yet another just cause as to why the king should take such action, namely, to avoid a breach of an oath taken before God.[82] Accordingly, this third promissory writ came to be known as covenant.[83]

While these extensions and additions to the original writ of trespass expanded the channels through which promises might be enforced, they remained so rigid that they put legal enforcement of promises out of the reach of all but a few. The principle mechanism for enforcing promises for those who could afford to resort to the courts was through an action in debt.[84] But the writ of debt was in itself a circuitous route to enforcement of a promise. The writ required the demonstration that a debt was owed by the defendant to the plaintiff.[85] This was accomplished through the use of a conditional bond.[86] When the original promise was made, the defendant also promised that if the promise was not performed, such lack of performance would give rise to a penal bond.[87] The penal bond was the debt that would serve as the basis for the writ.[88] In short, promises were not enforced directly; they were enforced indirectly, the breach of which served as the condition precedent for the owing of the penal bond.

The other avenue available to plaintiffs was an action in deceit.[89] This attenuated writ of trespass-on-the-case required a demonstration that the defendant had made a promise designed to induce the plaintiff to rely upon it.[90] The writ also required a showing that the promise was a false one, made so as to deceive the plaintiff to his detriment.[91] This use of the action in deceit came to be known as assumpsit, for the enforcement of obligations freely assumed.[92] By the late sixteenth century, actions in deceit had become a routine, if indirect, method for enforcing informal promises.[93]

These indirect methods of promise enforcement did not arise in isolation. At the same time that the Royal Courts of Justice on the Strand in London were insisting upon the rigidities of the writ system, plaintiffs began to avail themselves of an alternative source of enforcement, namely, the Ecclesiastical Courts of the Roman Catholic Church, and later, the Church of England.[94]

The Church courts had long maintained jurisdiction over spiritual matters.[95] Although the Gallicanism movement sought to diminish the power of the Church relative to states throughout the Middle Ages, the Church succeeded in preserving its spiritual jurisdiction.[96] Accordingly, matters deemed spiritual—marriage, education, and clerical authority—were brought to them for resolution.[97] Soon, plaintiffs frustrated by the rigidities of the writ system began to realize that the breach of a promise could be viewed as more than just a civil wrong. Indeed, it could reveal something much deeper about the party in breach. A promise could be seen as a vow, and a vow as a type of oath. As famously noted in the historical fictional account of Saint Thomas More, A Man for All Seasons, “[w]hat is an oath then but words that we say to God?”[98]

In other words, a breach of a promise could reveal a very serious sin. That sin came to be known as a “breach of faith,” an action available in the ecclesiastical courts.[99]

The bishops and priests who heard these actions soon developed an appropriate remedy for plaintiffs bringing these cases.[100] If found guilty of a breach of faith, a defendant could be ordered to do penance. Penance, in the Middle Ages, would be unfamiliar to the faithful of the twentieth century. It often involved public displays of self-mutilation, flagellation, or other forms of physical punishment. It was to be avoided at all costs.[101]

Fortunately, the clerics of the ecclesiastical courts made available to guilty defendants an alternative to public penance. For the right price, a penitent could purchase an indulgence.[102] These documents declared that the Church had determined that the sin of the penitent had been “indulged” and therefore forgiven.[103] Early on, the fees for indulgences bore an uncanny resemblance to the harm claimed by the plaintiffs in breach of faith cases, with a slight “upcharge,” presumably for the costs of administration.[104] The fees were then paid to the plaintiffs who brought the breach of faith actions to make them whole for being so victimized by the sin of the defendants.[105]

Soon, plaintiffs realized that the action in breach of faith was a more direct and affordable mechanism for enforcing promises. They fled in droves to the Church courts. The king’s courts of law, which were fiscally supported entirely by (and dependent upon) the fees generated from the cases brought, felt the sting of this competition.[106] By 1596, when John Slade brought his case against Humphrey Morley, the writing was on the wall.[107] The decision to recognize the action in assumpsit without the filing of a writ of debt was necessary to the survival of the courts of law. In other words, the recognition and creation of the action in assumpsit, the result of Slade’s Case, was little more than a competitive response to the market movement toward the ecclesiastical courts.[108] The courts of law recognized informal promises because their chief competitor, the ecclesiastical courts, already did. Failure to enforce informal promises would mean an end to the courts of law themselves.[109]

With the decision in Slade’s Case, the state won back its market share.[110] It further entrenched its market position by becoming a subsidized provider of law. While Tudor and Elizabethan courts relied on fees from litigants for support, modern courts of law are largely supported by taxpayers. So, unlike the church courts of the Middle Ages, competitors in the market of supplying contract law today must overcome a competitive cost advantage held by the state and its monopoly on the legitimized use of physical violence.[111] It is precisely this subsidy that makes it impossible for Oman and other contemporary contracts scholars to envision the supply of contract law as a market, let alone a competitive one.[112]

B.  Competition at the Margins in the Market for Contract Law

Until recently, such a competitive advantage seemed insurmountable, except in very narrow circumstances. Those circumstances exist at the margins, where the contracts to be enforced are either so small as to make even the subsidized enforcement untenable, or so large as to make enforcement by the state untrustworthy.

Examples of small contract enforcement are ubiquitous. They typically involve what have come to be called “micro-contracts”—agreements measured in pennies or very small dollar amounts.[113] These kinds of agreements typically involve self-enforcing mechanisms that are relatively inexpensive to deploy, particularly over millions or billions of transactions.[114] The Chinese behemoth Tencent, the largest company in all of Asia by market capitalization and revenue, was founded as a start-up just a few short years ago in 1998.[115] Its meteoric growth has been due, in large part, to its ingenious, scalable business model—the inspiration for its name.[116] As described by one of Tencent’s five founders, billionaire Charles Chen, the company was designed to make as little as “ten cents per transaction, but with a billion customers making hundreds of ten cent transactions each.”[117] As the largest producer of games in the world, the leading mobile communications application in the world (WeChat), and the second leading payment system in the world (WeChat Pay), Tencent has created an addictive environment deemed essential to life in the twenty-first century.[118] Failure to comply with Tencent terms of use or to pay a bill on the system results in suspension or termination of service.[119] No court costs are necessary when the product has its own enforcement mechanism.

Examples of contracts at the other end of the spectrum are not as numerous, but they exist nevertheless. The most commonly cited example is the enforcement of bargains within the New York diamond dealers association.[120] As University of Chicago Law School Professor Lisa Bernstein has documented, the diamond dealers have established their own “extralegal” system for enforcement of contracts.[121] Diamond dealers agree to settle their disputes regarding transactions with each other within their own private tribunals.[122] The desire for continued, intergenerational participation in the diamond business motivates conformity to this agreement. Dealers who violate this system by bringing suit in state courts are effectively banished from further participation in the industry.[123] The diamond courts apply their own laws of contract and impose their own remedies and penalties.[124] For diamond dealers within a closed community such as theirs, the private system of enforcement is an effective competitor to the taxpayer-subsidized contract regime of the state.

Private contract enforcement systems are not, themselves, new. The system described by Bernstein mirrors the medieval trans-Mediterranean contract enforcement system uncovered by Stanford economist Avner Greif.[125] According to Greif, an effective and efficient system of contract enforcement emerged among a community of traders across the Maghreb in North Africa during the eleventh century.[126] Records discovered in a recovered genizah of a synagogue excavated in Cairo in the late nineteenth century document the details of a trans-Mediterranean network of traders and their agents, all of whom conducted trade across the Mediterranean world for over one hundred years.[127] The Maghribi merchants would engage agents to transport their wares across the Mediterranean to Europe, sell them, and return with the proceeds of the sale.[128] This system persisted because of enforcement of the agency contracts through a reputation mechanism and a network of synagogue-based tribunals.[129] If a trader-agent were to abscond with the proceeds of sale, the aggrieved merchant would bring his case before the Maghribi tribunal. An adjudication against the trader-agent would result in banishment from the trans-Mediterranean trade network.[130]

This punishment was effective for two reasons. First, the network of synagogues across the Maghreb allowed for transmission of the news of the offending trader-agent and his description.[131] Second, the trans-Mediterranean trade was so profitable that most trader-agents would not risk losing participation due to an adverse judgment in the tribunals.[132] In fact, intergenerational continuation of the trade effectively curtailed “end-game” behavior of trader-agents, since most hoped to pass the business down to their children.[133]

What is most important to remember about the trans-Mediterranean trade and contract enforcement within it is that it was not, and could not be, provided by any state.[134] No state controlled the Mediterranean during the eleventh century, and no governmental authority could be appealed to in order to gain effective enforcement of contracts. The law of the Maghribi traders was private and associational, enforced by reputation mechanisms and private sanctions.[135]

In sum, the market for the provision of contract law has long been characterized by competition. This competition often came from non-state suppliers of contract law, chosen both ex ante (the Maghribi traders and diamond dealers) or ex post (the ecclesiastical courts and the action for breach of faith). As if this were not enough, states themselves competed—and continue to compete—in the market for the provision of contract law.

C.   Jurisdictional Competition in the Market for Contract Law

As demonstrated above, there is increasing competition in the market for the supply of contract law. Although the market for the supply of contract law is not, as of yet, in a state of perfect competition, it is clear that it is trending in that direction. To be sure, the taxpayer-subsidized advantage of state providers of contract law tends to distort this competition, at least in the short run. Potential market participants are discouraged from market entry by the mere existence of the cost advantage afforded to the state. Even in the absence of competition between state and private providers of contract law, there has long been competition between state providers of contract law.[136] This jurisdictional competition has perhaps provided more momentum towards convergence in contract law than any technological advancement to date.

There is ample evidence that, when the Founding Generation drafted the Constitution of the United States, they were intimately familiar with Adam Smith’s arguments in favor of jurisdictional competition between courts systems, as well as the jurisdictional competition between the ecclesiastical courts and the law courts of the Tudor and Elizabethan eras.[137] Although constitutional historians and scholars generally agree that the Founders never clearly articulated a theory of jurisdictional competition during the convention or the debates leading up to it, it is nonetheless inescapable that they were familiar with the concept from English and continental law and history.[138] In fact, the structure of American federalism reflects the admiration and trust the Founders had for jurisdictional competition. This trust is evident in the Federalist Papers, as well as in the structure of the Constitution itself.[139]

The Framers of the American Constitution demonstrated their admiration for jurisdictional competition by limiting the federal government’s ability to encroach on common law causes of action. By establishing a government of limited, enumerated powers, the Founders left most of day-to-day jurisdictional authority to the states.[140] In fact, Hamilton and Madison characterized jurisdictional competition through federalism in The Federalist Papers “as a form of government that encourages two sovereigns to compete for the people’s affection.”[141] In such a system, it would be necessary to have a capable judiciary to referee the inevitable disputes that would arise between these competitive sovereigns. Even before the powers of taxation and the military, the courts were the primary institution through which the authority of the state and national governments were made manifest in the early Republic. According to Hamilton, the courts were the medium through which the states and the federal government brought their agency to the people. Therefore, in Hamilton’s view, the courts were the

most powerful, most universal and most attractive source of popular obedience and attachment. It is [the judicial branch,] which[,] . . . being the immediate and visible guardian of life and property[,] . . . contributes more than any other circumstance to impressing upon the minds of the people affection, esteem, and reverence towards the government.[142]

This jurisdictional competition envisioned by the Founders has played out in the area of contract law. In fact, it played out so well that, throughout the nineteenth and early-twentieth centuries, neighboring states developed disparate laws of commerce.[143] As transportation technology improved, however, the wide range of commercial regimes across the United States proved problematic for the growth of interstate commerce.[144] It was in response to these differences in commercial laws from state to state that led business leaders to push for a uniform law of commerce.[145] The result was the UCC.[146]

The UCC can be thought of as the product of the nineteenthcentury movement to harmonize and make uniform the laws of the states. The UCC is a joint product of the American Law Institute (theALI”), a private nonprofit group of law professors, practicing lawyers, and judges, and the National Conference of Commissioners on Uniform State Laws (the “NCCUSL”).[147] It took ten years to draft the UCC and another fourteen years to see it adopted by the legislatures of every state except Louisiana, which still uses a version of the Napoleonic Code.[148] The end product was a type of “forced convergence” of the commercial law of the states. While there are minor differences in contract and commercial law across the United States today, these are largely a product of differing court interpretations and applications of the UCC.[149]

Despite this forced convergence imposed upon the states by the UCC, the law of contracts has not stood still. Both jurisdictional competition around the world and competition from technological change have shaken the market forces shaping contract law out of their centuries-long slumber.

III.  The Market for Contract Law is Converging

A.  Competitive Markets Tend Toward Convergence

Given the historic and continued competition in the market for the provision of contract law, we should not be surprised that we are witnessing the convergence of it. After all, a fundamental precept of price theory that is that competitive markets tend toward convergence.[150] To see why this is so, consider the following thought experiment. Assume that sellers directly decide both the price and the total quantity produced, and buyers respond by deciding how much to buy. This situation is asymmetric between buyers and sellers. Sellers are the ones taking action first—by changing price and quantity produced—and buyers respond to the sellers’ decisions. Despite this, none of the conclusions in our thought experiment hinge on this asymmetry.[151]

For simplicity, assume that both buyers and sellers are able to perceive shortages and gluts and adjust accordingly. In the real world, price fluctuations and increases in demand may be due to inflation or other factors, and this may lead to inappropriate adjustments.[152] Nevertheless, even in the real world, with its deviations from perfect information, non-negligible transaction costs, and irrational or less-than-fully-rational behavior, there is a significant tendency to converge towards a market price.[153]

When the price of a good exceeds the market price, supply exceeds demand. This is a situation of excess supply, or surplus. For instance, in Figure 1 the surplus is given by the length of the segment AB. A situation of surplus has the following effects:

Sellers, experiencing unsold inventory, will tend to reduce the quantity supplied as well as reduce their price. In other words, they move downward and leftward along the supply curve. This may typically happen in two ways: sellers cut down their individual production, and some sellers go out of business.[154] As sellers lower their price, buyers become willing to buy more. In other words, buyers move downward and rightward along the demand curve.[155] This process is expected to continue until the price equals the market price (Pe), at which point the quantity demanded equals the quantity supplied.[156]

When the price of a good is less than the market price, demand exceeds supply. This is a situation of excess demand, shortfall, or scarcity. For instance, in Figure 2, the shortfall (or scarcity) is the length of the segment AB. A situation of scarcity has the following effects:

Sellers, seeing the competition among buyers for the commodity, will tend to raise the price. Simultaneously, seeing the unmet demand, they will tend to increase the quantity produced. In other words, they move upward and rightward along the supply curve. This may typically happen in two ways: existing sellers will increase their individual production, and new sellers will enter the market.[157] As sellers increase their price, demand falls. In other words, buyers move upward and leftward along the demand curve.[158] This process is expected to continue until the price equals the market price (Pe), at which point demand equals supply.[159]

In other words, in a market characterized by competition, the goods or services available for sale are subject to price convergence.[160] As the information about competitors and the prices of their products become known, market participants act to out-compete their competitors, whether they be suppliers or consumers.[161] How rapidly convergence occurs depends on the amount of market information available to sellers and buyers, as well as the frequency with which they interact and collect information.[162]

B.  Contract Law Is Converging Toward “Customization”

Like any market characterized by competition, the market for contract law is tending toward convergence. While perfectly competitive markets move toward price convergence relatively quickly, other markets, including the market for contract law, may move more slowly. This is because consumers often require more time, expertise, or intermediaries to become aware of disparities in non-price terms and to then act in a way that results in convergence.[163] In short, just as competitive markets result in price convergence over time, all competitive markets result in non-price convergence.

What exactly does non-price convergence mean? Price theory provides an implicit answer to this question. Since in a market that approaches perfect competition all goods are indistinguishable and suppliers are “price takers,” all characteristics of the goods in question, including all terms, must be the same.[164] In other words, in a competitive market in which suppliers are term and price takers, all products by all suppliers will tend towards fungibility and substitutability on all margins.[165]

To see why this must be so, reconsider our thought experiment above. If, instead of prices, we use some non-price characteristic of the good, say, length, we can see that competitive markets respond in precisely the same way as they do when prices deviate from the competitive level. Sellers whose product is too long or too short will not sell as much as those whose product is the “right” length. Over time, competition will cause suppliers of the product to migrate toward the length that sells best. In other words, although convergence is most transparent on the margin of price, in a competitive market, all products converge to conform on all margins.[166]

Let us return once again to the examples used with Figures 1 and 2. But instead of prices that are too high or too low, let’s think about a market involving warranty terms. If we are truly in a competitive market, then all terms of the contracts in the market—price, length, and warranty, for example—would converge toward each other.

We can demonstrate this with an example involving a warranty term that is too restrictive (meaning that if something goes wrong with the goods sold, the seller will, at best, refund only the purchase price). When the warranty for a good is more restrictive than the market warranty, supply exceeds demand. This is a situation of excess supply, or surplus. In Figure 3, the surplus is given by the length of the segment AB.

We can depict such a circumstance as follows:

Sellers, experiencing unsold inventory, will tend to reduce the quantity supplied as well as reduce the restrictiveness (in other words, increase the generosity) of their warranty. In other words, they move downward and leftward along the supply curve. This may typically happen in two ways: sellers cut down their individual production, and some sellers go out of business.[167] As sellers increase the generosity of their warranties, buyers become willing to buy more. In other words, buyers move downward and rightward along the demand curve.[168]

On the other hand, when the warranty for a good is more generous than the market warranty, demand exceeds supply. This is a situation of excess demand, shortfall, or scarcity. For instance, in Figure 4, the shortfall (or, scarcity) is the length of the segment AB. A situation of scarcity has the following effects:

Sellers, seeing the competition among buyers for the commodity, will tend to make their warranty less generous (more restrictive). Simultaneously, seeing the unmet demand, they will tend to increase the quantity produced. In other words, they move upward and rightward along the supply curve. This may typically happen in two ways: existing sellers will increase their individual production, and new sellers will enter the market.[169] As sellers increase the restrictiveness of their warranties, demand falls. In other words, buyers move upward and leftward along the demand curve.[170] This process is expected to continue until the warranty term equals the market warranty term (We), at which point demand equals supply.[171]

In other words, in a market characterized by competition, the goods or services available for sale are subject to term convergence in the same way that they are subject to price convergence. As the information about competitors and the warranties for their products become known, market participants act to outcompete their competitors, whether they be suppliers or consumers.[172] How rapidly convergence occurs depends on the amount of information available to sellers and buyers about their market, as well as the frequency with which they interact and collect information.[173]

While it is not the case that the market for contract law is characterized by perfect competition, it is the case that the market for contract law is becoming increasingly competitive. If this is true, then it stands to reason that as the market for contract law becomes ever more competitive, the characteristics of contract law will converge upon an equilibrium of contract law. And since, to date, the process of creating and enforcing contracts has become ever more deferential to the will and needs of the transactors, the resultant convergence will be upon a form of law replete with humility. In short, contract law is becoming ever more “customized” or “bespoke.”

IV.  Custom” Contracting in the UCC, the CISG, and China

A.  The Humility of the UCC

If merchants were to design a code of law to promote trade while deferring to their own superior knowledge and experience, they could do worse than what they currently have with the UCC. In fact, it may be argued that merchants did, indirectly, have a hand in its design. The UCC is the product of a longstanding movement to codify commercial law.[174] But commercial law did not appear out of nowhere. Commercial law in the United States has its origins in the common law of England, which drew its principles of commercial law from the Law Merchant.[175]

The Chief Reporter of the UCC was Columbia University Law Professor Karl Llewelyn.[176] Professor Llewelyn was chosen by the commissioners by consensus.[177] He had a reputation for being a careful and widely respected scholar of commercial law. As one of the commissioners put it, Professor Llewelyn

insisted that the provisions of the Code should be drafted from the standpoint of what actually takes place from day to day in the commercial world rather than from the standpoint of what appeared in statutes and decisions.[178]

In short, the UCC was designed to reflect the expectations of merchants, just as those expectations had been shaped by prior law and practice.

What shaped merchant expectations, however, were the already existing norms and rules associated with merchant law found both in the common law and its predecessor. The association of the common law to the Law Merchant is largely credited to one Scotsman, namely, William Murray, Lord Mansfield.[179] Lord Mansfield became Chief Judge of the Court of King’s Bench in 1756.[180] Before Lord Mansfield, merchant issues were decided by judges “who thought in terms of haystacks and horses,” and who conferred upon “the central area of commercial law for more than a century the flavour of land and manure rather than of commerce.”[181] Through Lord Mansfield, the “appropriate incorporation of the customs of merchants into the common law became an established fact.”[182]

As both the UCC and the common law incorporation of the Law Merchant look to the actual practices of merchants themselves, it is not a stretch to claim that both reflect a certain humility. Rather than impose the will and understandings of central planners upon merchant transactions, the UCC—like the Law Merchant before it—constantly seeks to be informed by the customs and practices of the merchants themselves.

Nowhere does the UCC reflect this humility more than in the Article 2 provisions governing contracts for the sale of goods.[183] Various rules within Article 2 defer to “usage of trade” to determine unwritten or unspoken terms of an agreement.[184] When it comes to interpretation of open or ambiguous terms, the drafters of the UCC make this deference explicit. In Official Comment 1 to section 2-208, the drafters explain that the purpose of the statute is to discover what the parties themselves had in mind when they entered into their agreement.[185] According to Comment 1:

The parties themselves know best what they have meant by their words of agreement and their action under that agreement is the best indication of what that meaning was. This section thus rounds out the set of factors which determines the meaning of the “agreement” and therefore also of the “unless otherwise agreed” qualification to various provisions of this Article.[186]

In other words, after centuries of crafting law to meet the needs of merchant commerce, the interpretive provisions of the UCC “tailor” the law to the specific understandings and meanings of the merchant parties to the transaction themselves. If the law can be said to be “tailored” to the customs, understandings, practices, and behavior of the parties, can “bespoke” law be far behind?

B.  The Conformity of the CISG

The success of the UCC in the United States led multinational corporations around the world wanting more. Toward this end, a global push was initiated for the adoption of a body of international law that would do for global trade what the UCC had done for the American economy. That initiative resulted in the CISG in 1980, which came into effect in 1988.[187]

The CISG is a uniform law governing the international sale of goods in much the same way that Article 2 of the UCC governs the sale of goods within the United States. It has been adopted by 89 states to date, albeit with the glaring absences of the United Kingdom, Hong Kong, and Taiwan.[188] Although the United States was the eleventh country to accede to the terms of the CISG, it would be misleading to suggest that the “late” adoption by the United States reflects its lack of influence in the drafting of the convention. Nothing could be further from the truth.

The truth is that multinational corporations, most of which were based in the United States, pined for a uniform law governing the international sale of goods which would lower the costs of transactions in a way similar to that which occurred after the adoption of the UCC. In response to the demand for a uniform law of sales for international trade, the Vienna Convention adopted an approach that, for the most part, embraces the UCC.[189] Indeed, as one commercial law scholar put it, “one may view the Convention as a triumph of the [UCC]’s approach to contract law.”[190]

To be sure, there are some differences between the CISG and the UCC. For example, the UCC incorporates a variant of the Statute of Frauds for the sale of goods over the statutory limit of $500.[191] Contracts involving goods valued beyond that amount must be evidenced by a signed writing or other documentary record.[192] The CISG has no writing requirement resembling the Statute of Frauds and leaves the parties to prove the existence of a contract through witnesses or other evidence. Along the same lines, the UCC contains its own version of the parol evidence rule.[193] The UCC’s version of the rule, it’s other provisions, is very deferential to the specific understandings of the parties. It allows even “a final expression of their agreement” to “be explained or supplemented (a) by course of performance, course of dealing, or usage of trade (Section 1-303); and (b) by evidence of consistent additional terms unless the court finds the writing to have been intended also as a complete and exclusive statement of the terms of the agreement.”[194] The CISG has no similar parol evidence rule, and the United States Court of Appeals for the Eleventh Circuit has ruled that the parol evidence rule does not apply to contracts governed by the CISG.[195]

Nevertheless, the CISG reflects the same deferential approach to contract formation and interpretation embodied in the UCC. Neither body of law has specific minimum requirements for contract formation, and both will find the existence of a contract where the actions of the parties demonstrate an understanding that a contract was formed.[196] In fact, the CISG is so deferential that it has been criticized for leaving too much to local interpretation.[197] Still, the CISG reflects a type of convergence, namely, the desire to tailor the law of commercial transactions to the needs and desires of merchants.

C.  The New Contract Law of the People’s Republic of China

In 1999, the National People’s Congress of the People’s Republic of China enacted the New Contract Law (officially referred to as the “Uniform Contract Law”) to take effect on October 1, 1999.[198] The purposes of the law were three-fold. First, the New Contract Law was designed to eliminate the inconsistencies that characterized the “three pillars” of contract law which preceded it.[199] Second, the New Contract Law was a required step in the full restoration of the contract law regime that existed prior to Mao Zedong’s rule and the Cultural Revolution.[200] This restoration was deemed a necessary prerequisite for China’s membership in the World Trade Organization.[201]

Third, and most importantly, the New Contract Law was designed to replicate the success of the more advanced economies found in the United States and Europe.[202] China was the ninth signatory to the CISG, and with ratification by the United States and Italy, the treaty came into force on January 1, 1988.[203]

The goal of the New Contract Law was simple, namely, to rebuild the legal infrastructure of an economy devastated by Mao Zedong’s Cultural Revolution. In 1966, after a long series of failed communist “five-year-plans” that left China one of the poorest nations in the world, it became clear to Mao Zedong that forces had been arrayed to replace his leadership.[204] In response, Mao initiated a purge of his political rivals. He employed the youth of the nation to root out more senior, established political leaders at the local, regional, and national levels.[205] Mao designated this youth movement “the Red Guards,” and they proceeded to dismantle what was left of Chinese civil society after the civil war and the failed five-year plan of the Great Leap Forward.[206]

Among the institutions purged by the Cultural Revolution, few were as decimated as the legal infrastructure of China. Mao closed all law schools, as well as courts and tribunals.[207] Mao’s Cultural Revolution jailed and executed countless judges and lawyers, and he declared that the Chinese people should “[d]epend on the rule of man, not the rule of law.”[208] Furthermore,

the law and legal institutions were dismembered in a frenzy of hysterical fanaticism. Beginning in 1966, all law schools were closed. Attorneys, judges, courtroom personnel and law teachers were forced to work in the countryside . . . . The Red Guards . . . freely searched houses without legal process, arrested anyone, investigated anything, and sentenced, imprisoned, and frequently executed.[209]

As China crawled out from under the devastation of Mao’s Cultural Revolution, its new leadership sought a new direction. When Deng Xiaoping emerged triumphant after a power struggle with the “Gang of Four,” he sought to reestablish a functioning legal system.[210] Although his predecessor and Mao’s successor, Hua Guofeng, ordered the drafting of a new constitution and the reopening of China’s law schools in 1977, the reconstruction of the legal system took shape as one of the central components Deng’s vision for a prosperous China.[211] Since the Cultural Revolution purged the country of trained lawyers and judges, a new judiciary was appointed from the ranks of military officers.[212] These untrained judges and lawyers struggled to resolve cases when the nation was devoid of a system of laws.[213]

Deng Xiaoping saw the rule of law as the common thread coursing through the developed economies of the world, and he wanted China to emulate their prosperity. Deng set upon a course to provide China with a coherent body of law, including commercial law, to pursue a brighter economic future.[214] First, he ordered the drafting of yet another constitution in 1982.[215] Second, he oversaw the development of a legal code designed to govern the commercial transactions that he hoped would follow.[216] Of these, three are of importance for our understanding of convergence in contract law.

Prior to the enactment of the New Contract Law in 1999, contracts in China were governed by a set of three laws. Known as “the [T]hree [P]illars of Chinese Contract Law,” these were (1) the Economic Contract Law of 1981 (the “ECL”); (2) the Foreign Economic Contract Law of 1985 (the “FECL”); and (3) the Technology Contract Law of 1987 (the “TCL”).[217] The ECL was designed to solve the immediate need for a law to govern contracts between Chinese parties domestically.[218] The need was so urgent that it was promulgated while the newest constitution was still under consideration. As the Chinese economy grew during the 1980s, it became clear that the ECL might not be appropriate for contracts involving foreign direct investment. As a result, the National People’s Congress enacted the FECL to govern contracts between Chinese nationals and foreigners.[219] Later, as the national and strategic importance of technology and technology transfer became apparent, the National People’s Congress adopted the TCL to govern contracts in which the subject matter involved technology.[220]

The piecemeal nature of Chinese contract law, as contained in the Three Pillars, became problematic. Since each of the laws was promulgated at a different time by a different National People’s Congress, they reflected different and evolving understandings of the role of contract law within economic policy.[221] Furthermore, the fact that they were directed at different kinds of parties or contracts meant that they often contained gaps or conflicted with each other.[222] As China’s economy exploded with growth and complexity throughout the 1990s, the need for a comprehensive contract law gained urgency.[223]

The response to this pressure was the New Contract Law. When it took effect, it rendered the Three Pillars obsolete. To be sure, the New Contract Law is sweeping in scope, rolling in all of the subject matter from the prior three codes and expanding upon them to cover new ones.[224] The New Contract Law is comprised of two main parts, namely, (1) general provisions and (2) specific provisions.[225] As the name implies, the general provisions lay down rules of law applicable to all contracts in general. These include rules governing formation, interpretation, validity, assignment, breach, conditions, and choice of law.[226] The specific provisions are comprised of fifteen chapters, each of which addresses the following subject matter areas: “sales, donation[s], lease[s], financial lease[s], [labor], supply of electricity, gas and water, loan[s], technology, storage, warehousing, carriage, construction . . . , commission, brokerage and intermediation.”[227] In addition to its general and specific provisions, the New Contract Law is supplemented by the General Principles of Civil Law of 1986 (the “GPCL”).[228] The GPCL contains general rules governing all civil-juristic acts that are applicable to contracts.[229] Furthermore, there is a host of other laws that touch upon or affect contracts that come to bear on agreements in China, including consumer protection, advertising, insurance, and competition laws, to name just a few.[230]

What is most interesting about the New Contract Law is not just that it replaced and superseded the Three Pillars, but also that it has origins in the Law Merchant. China’s New Contract Law is arguably a direct descendant of the medieval lex mercatoria, or the Law Merchant. It can be so characterized because of the influence of the CISG in its formation, and, therefore indirectly, the UCC. Both the CISG and the UCC were contemplated by the drafters of the New Contract Law.[231] As a result, we should not be surprised that China’s New Contract Law reflects many of the characteristics of both the CISG and the UCC, including their deference to the knowledge and understandings of the parties to the contract.

China’s New Contract Law has been characterized as the beneficiary of “double transplantation.”[232] The first of these transplants came about when China acceded to the CISG.[233] Doing so subjected Chinese companies engaged in international commercial transactions to a regime rooted in the deferential humility of the American UCC. The second transplant is subtler. It can be said to have occurred in the actual drafting of the New Contract Law since the process and the substance of the comprehensive code tracked that of the CISG itself.[234]

The New Contract Law of China, however, is not a wholesale adoption of the CISG or the UCC. Indeed, it departs from these bodies of law in important ways. In fact, the most important departure may reflect the competitive nature of the market for the provision of contract law and the convergence resulting from this competition. The most distinguishing characteristic of the New Contract Law revolves around the remedy for breach. Unlike the CISG and the UCC before it, both of which provide the award of monetary damages as the presumptive form of relief, the New Contract Law actually awards specific performance as a matter of course.[235]

 To be sure, specific performance was also the presumptive form of relief under the Three Pillars. In fact, the New Contract Law actually relaxes the standard and affords the plaintiff in a contract action a choice of remedy, unless: “(i) performance is impossible in law or in fact; (ii) the subject matter of the obligation does not lend itself to enforcement by specific performance or the cost of performance is excessive; (iii) the obligee does not require performance within a reasonable time.”[236]

The Chinese departure away from the money damages routinely awarded under Western contract regimes in favor of specific performance reflects a trend already under way in the United States. Under the common law, specific performance was once reserved for contracts where the subject matter could be demonstrated to be “unique”—like a work of art or a family heirloom.[237] Over time, this limitation has softened such that specific performance could be had when the victim of the breach could show difficulty in obtaining a substitute for the promised performance.[238]

The UCC expressly softens the standard for specific performance from the more rigid common law rule. UCC section 2-716 provides that:

(1) Specific performance may be decreed where the goods are unique or in other proper circumstances . . . .

[And] (3) [t]he buyer has a right of replevin for goods identified to the contract if after reasonable effort he is unable to effect cover for such goods or the circumstances reasonably indicate that such effort will be unavailing or if the goods have been shipped under reservation and satisfaction of the security interest in them has been made or tendered.[239]

The UCC, then, adds “other proper circumstances,” “goods identified to the contract,” a limitation to when cover fails, and “goods . . . shipped under reservation” to the common law requirement of uniqueness.[240] This broadened availability of specific performance mirrors the deference to subjective value discussed earlier in UCC section 2-208’s provisions governing the hierarchy of interpretation.[241] Specific performance can be seen as tailoring relief for breach of contract to the specific parties involved. The tailored approach of specific performance, in short, approximates bespoke law.

IV.  Convergence Across All of Commercial Law

Contract law is not the only area of commercial law where we are witnessing convergence due to increasing competition in the market for law provision. Indeed, nearly every aspect of commercial law is witnessing convergence. Payment systems, secured transactions, warehouse receipts and bills of lading, and even bankruptcy law are being disrupted by more efficient technology and alternative sources of commercial law. These competitive forces are leading to a convergence upon “customized” commercial law, in which parties themselves can enjoy the benefits of their own bespoke legal regime.

A.  Payment Systems and Cryptocurrencies

The most dramatic change in commercial law over the last twenty years has been in the area of payment systems. The UCC provisions governing negotiable instruments, notes, bank drafts, letters of credit, and even electronic funds transfers, have been rendered all but obsolete. This development is due to the rise of electronic funds transfers for large payments, credit and debit cards for small payments, and ACH transfers for everything in between.

UCC Articles 3, 4, and 4A provide for transactions involving bank drafts, credit and debit cards, and electronic funds transfers.[242] But as bank drafts go the way of the buggy whip, electronic payment methods have become ubiquitous. In fact, it is not clear that the provisions of Article 4A actually cover mobile telephone transfer payments, whether or not they occur over networks such as Tencent’s WeChat (in China), Zelle or PayPal (in the United States), or MPESA (in Kenya, Pakistan, and Afghanistan).[243]

Furthermore, while these new forms of electronic money transfer and payment systems are closely-related offshoots of traditional ones, the new payment systems represented by blockchain technology and the cryptocurrencies that blockchain makes possible are not. Whether the UCC—or another commercial code—governs their workings seems increasingly irrelevant since these newer systems provide their own “law,” complete with “rules” of property and mechanisms of enforcement. With blockchain technology, parties to a payment transaction can not only design their own (bespoke) “law,” but they can also design their own (bespoke) “money.”

B.  Secured Transactions and Smart-Keys

Security interests are ubiquitous in commercial finance, and accordingly, they are amply provided for in commercial law. A typical security interest arises when a lender is granted a residual property interest in chattel property, which is triggered if and when the borrower defaults on the loan.[244] These arrangements were once referred to as “chattel mortgage[s]” and were frowned upon by courts of law.[245] They gained recognition in the United States only after the passage of chattel mortgage acts in the states along the East Coast.[246] Although the chattel mortgage is relatively young by commercial law standards (the first American chattel mortgage act was passed in 1820), the security interest in collateral is a standard concept in debt finance, and is employed by lenders to all classes of borrowers, from the largest corporations down to the smallest consumer.[247] In the United States, security interests are governed by UCC Article 9.[248]

The value of a security interest is that it provides a secured creditor two remedies in addition to those available to unsecured creditors, namely, (1) priority and (2) “self-help.”[249] Priority means that the secured creditor, upon the debtor’s default, has first claim on the proceeds from the sale of the collateral.[250] If the value of the collateral exceeds the secured creditor’s claim, the residual redounds to the debtor or the debtor’s other creditors.[251] In order to enjoy priority, however, a secured creditor or an officer of the courts must seize and sell the collateral.[252] In short, priority provides a secured creditor with some measure of peace of mind, but the value of the collateral remains inchoate until some (usually expensive) legal process is taken.

Self-help, on the other hand, is a slightly more salient remedy for some secured creditors, depending upon the collateral and debtor involved. By “self-help,” the law of debtors and creditors means that a secured creditor may take or disable the collateral as a means of securing payment of the underlying debt. Self-help can be effected through repossession or the padlocking of equipment, or by other means of disrupting the use of the collateral. The most important limitation on the remedy of self-help is that it cannot be exercised when it results in a “breach-of-the-peace.”[253]

Today, the practice of lending against collateral is becoming increasingly mechanized. Technology is quickly supplanting Article 9 of the UCC with respect to levying on property.[254] If a lender wants a cheap, fast, and effective way to exercise self-help, one way to do so is to employ a “smart key.” A smart key is software or other electronic device that affords the secured creditor the ability to disable the collateral remotely, without ever approaching the physical proximity of the collateral or the debtor.[255] If the collateral is a piece of manufacturing machinery, for example, a smart key might allow the secured creditor to turn off—and keep off—that machine until the debt obligation is paid or the credit account is brought current.[256] Smart keys have been used to secure loans on automobiles, computer software, boats, factory equipment, and buildings.[257] With smart keys, secured creditors can tailor their own bespoke self-help remedy to suit their particular situation.

C.  Warehouse Receipts, Bills of Lading, and Blockchain

Warehouse receipts and bills of lading are particular types of negotiable instruments and were among the earliest forms of paper money.[258] In commercial law, they are referred to as “document[s] of title.”[259] In the United States, documents of title are governed by UCC Article 7.[260] A warehouse receipt is precisely as the name implies: the owner of goods places those goods with a warehouse for safe keeping. In return, the warehouse gives the owner of the goods a warehouse receipt, entitling the owner, or the owner’s assignee, to collect the goods at a later date.[261]

A bill of lading is similar to a warehouse receipt but involves goods in transit. The term “lading” is the Old English word for what we today call “loading.”[262] As goods were loaded onto a ship for transport, a bill of lading was issued to the shipper of the goods indicating title to those goods. The goods could then be shipped and collected by the shipper or the shipper’s assignee, namely, the buyer.[263]

Because both warehouse receipts and bills of lading could be assigned or “negotiated” to a third party, they, along with merchant promissory notes, became the first forms of paper money used in the Middle Ages.[264] These instruments entitled the bearer to the goods detailed in the document.[265]

One of the earliest uses of blockchain technology was to track shipments, authenticity, and quality across space and time. Today, everything from diamonds to fish are shipped and tracked with blockchain certainty.[266] Blockchain technology can, in a very reliable and trustworthy fashion, track and transfer goods, both in warehouses and in transit. Accordingly, the need for warehouse receipts and bills of lading have diminished. Today, the owner or shipper of goods can reliably keep or send those goods without resorting to UCC Article 7 to resolve disputes regarding title, risk of loss, or payment. All of those functions can now be governed by the blockchain, and owners, sellers, shippers, buyers, and everyone else along the “chain of custody” can craft a tracking system perfectly aligned with their own particular needs. Such a system might even be called a “bespoke hub-and-spoke” system.

D.  Corporate Reorganization and “Pre-Packs”

One of the most ubiquitous transformations of commercial practice to customization does not involve advanced technology at all. Instead, it has occurred in the area of bankruptcy law. Large Chapter 11 corporate reorganizations have effectively become the most customized law of the twenty-first century because of the rise of “pre-packs.” A “pre-pack,” or “pre-packaged bankruptcy,” is a pre-negotiated reorganization that uses the bankruptcy courts as a rubber stamp for the true “creditors’ bargain.”[267] A debtor or its key creditors initiate the negotiations when it becomes clear that the debtor’s operations and revenue stream can no longer support its debt load, but an adjustment of its capital structure might make it profitable.[268] The key creditors also know that the provisions of Chapter 11 are designed to promote negotiations, even with the debtor’s smallest (in terms of claims) creditors who are given “hold-out” power under the code.[269]

The purpose of the pre-pack negotiations is to carefully tailor a plan of reorganization that maximizes the going concern value of the company but offers would-be hold outs enough to prevent them from blocking court confirmation of the plan.[270] If the small creditors try to extract “nuisance value” from the other creditors by holding out, the pre-packaged plan is designed to affect “cramdown” on the objecting creditor by providing more under the plan than the objector would have received in a liquidation of the company’s assets. In short, we can think of pre-packs as the original bespoke law.


The rise of smart contracts has reintroduced fierce competition in the market for the provision of contract law. This competition once existed between the church and the state, but the state has long since wrested control over the provision of contract law from competing institutions. The state has solidified its monopoly over the provision of contract law, but, over time and at the margins, consumers of contract law have found substitutes. This slippage in the elasticity of demand for contract law has led the state to gradually make concessions to the consumers of contract law, increasingly tailoring it to the needs of the parties to the transactions involved.

These concessions were not enough. Today, parties are, quite literally, taking the law of contract into their own hands by crafting their own, tailor-made, self-enforcing “smart contracts” to suit their own particular circumstances. As this happens, jurisdictions around the world are engaged in a competitive response, providing more malleable contract law to suit the needs of the parties they hope to serve and govern.


[*] *. Joseph A. Matson Dean of the Law School and Professor of Law, University of Notre Dame; William F. Baxter – Visa International Professor of Law, Emeritus, Stanford University. I thank Brian Bix, Michelle Boardman, Curtis Bridgeman, Vanessa Casado Perez, Miriam Cherry, Yun-chien Chang, Jonathan Choi, Billy Christmas, Robert Cooter, Giuseppe Dari-Mattiacci, Charles Delmotte, Richard Epstein, Andrew Gold, Robert Hilman, Stefanie Jung, Kimberly Krawiec, Saul Levmore, Alan Meese, Robert Miller, Adam Mossoff, Mark Movesian, Nate Oman, Ariel Porat, Mario Rizzo, Aaron Simowitz, Henry Smith, and participants at New York University Classical Liberal Institute’s symposium on Convergence and Divergence in Private Law.

 [1]. See generally Henri Pirenne, Medieval Cities: Their Origins and the Revival of Trade (Frank D. Halsey trans., Princeton Univ. Press 1974) (1927) (arguing that the expansion of medieval cities was attributable to a growth in continental trade).

 [2]. See Bruce L. Benson, The Spontaneous Evolution of Commercial Law, 55 S. Econ. J. 644, 647 (1989) (“The development of commercial law was almost entirely left up to the merchants themselves.”); see also J.H. Baker, The Law Merchant and the Common Law before 1700, 38 Cambridge L.J. 295, 303 (1979) (“By avoiding the forms which could be sued upon . . . in the common-law courts, [the merchants] gave themselves more flexibility.”). Legal historian Emily Kadens disputes the widely-disseminated notion that the Law Merchant was an organic body of law dissociated from principalities and other government enforcement institutions. Emily Kadens, The Myth of the Customary Law Merchant, 90 Tex. L. Rev. 1153, 1153–61 (2012).

 [3]. See F.C.T. Tudsbury, Law Merchant and the Common Law, 34 L.Q. Rev. 392, 394 (1918) (“[T]he usages of merchants and traders . . . ratified by the decisions of courts of law . . . has become engrafted upon, or incorporated into, the Common Law, and may thus be said to form part of it.” (quoting Cockburn, C.J., in Goodwin v. Robarts (1875) 10 L.R. Exch. 337 (Eng.))).

 [4]. See Charles M. Cook, The American Codification Movement 109 (1981).

 [5]. Id.; see also Wienczyslaw J. Wagner, Codification of Law in Europe and the Codification Movement in the Middle of the Nineteenth Century in the United States, 2 St. Louis U. L.J. 335, 341 (1953) (dating the origins of the German codification movement to the Prussian Civil Code of 1794).

 [6]. See Johannes W. Flume, Law and Commerce: The Evolution of Codified Business Law in Europe, 2 Comp. Legal Hist. 45, 57 (2014) (detailing the promulgation of the German Commercial Code of 1861); Gunther A. Weiss, The Enchantment of Codification in the Common-Law World, 25 Yale J. Int’l L. 435, 52027 (2000) (tracing the development of the UCC to the history of codification efforts in both Europe and the United States).

 [7]. See Dame Mary Arden, Time for an English Commercial Code?, 56 Cambridge L.J. 516, 517 (1997) (providing a brief history of the origins of the American Law Institute and the UCC).

 [8]. See William A. Schnader, Why the Commercial Code Should Be “Uniform, 20 Wash. & Lee L. Rev. 237, 238 (1963) (explaining the constitutional and practical limitations surrounding the adoption of uniform laws in the United States).

 [9]. See E. Allan Farnsworth, The Vienna Convention: History and Scope, 18 Int’l Law. 17, 17–19 (1985) (detailing the origins of the CISG).

 [10]. See id. at 17–18.

 [11]. See Schnader, supra note 8, at 238.

 [12]. See Wang Jingen & Larry A. DiMatteo, Chinese Reception and Transplantation of Western Contract Law, 34 Berkeley J. Int’l L. 44, 46 (2016) (explaining the Western origins—which include the UCC—of Chinese contract law).

 [13]. Id.

 [14]. The ius commune, or the “common law of Europe,” was the general understanding of law that was spread across continental Europe after the reception of Roman law in the eleventh century. This occurred after the Code of Justinian was discovered in the libraries of Toledo and Cordoba during the reconquista of Spain. Lawyers and judges trained in Roman law in the newly-formed universities of Europe spread the same or “common” principles of law wherever they traveled to practice. See Mary Ann Glendon et al., Comparative Legal Traditions in a Nutshell 2834 (4th ed. 2015).

 [15]. See Margaret J. Radin, Boilerplate: The Fine Print, Vanishing Rights, and the Rule of Law 1215, 40 n.7 (2013) (implying that modern word processing technology has empowered contract drafters to produce increasingly complex standard form contracts).

 [16]. See G. Marcus Cole, Rational Consumer Ignorance: When and Why Consumers Should Agree to Form Contracts Without Even Reading Them, 11 J.L. Econ. & Pol’y 413, 421 (2015) (arguing that the marginal consumer for each contract term will “police” the terms offered in standard form contracts by comparing forms).

 [17]. See generally Mayukh Mukhopadhyay, Ethereum Smart Contract Development (2018) (detailing extensively the various functions of smart contracts).

 [18]. The “Law of One Price” (or “LOOP,” for short) is the economic principle that states that, in the absence of trade frictions like transportation costs or tariffs, a commodity traded in a competitive market bears the same price wherever it is bought or sold, anywhere in the world. See N. Gregory Mankiw, Principles of Economics 686 (6th ed. 2012). The Law of One Price serves as the basis for the Theory of Purchasing Power Parity, namely, that a basket of commodity-goods should cost the same around the world but for the productivity of the country in which the purchase is made. See Dennis V. Kadochnikov, Gustav Cassel’s Purchasing Power Parity Doctrine in the Context of His Views on International Economic Policy Coordination, 20 Eur. J. Hist. Econ. Thought 1101, 1111 (2013).

 [19]. See generally Gareth W. Peters & Efstathios Panayi, Understanding Modern Banking Ledgers Through Blockchain Technologies: Future of Transaction Processing and Smart Contracts on the Internet of Money, in Banking Beyond Banks and Money: A Guide to Banking in the Twenty-First Century 239 (Paolo Tasca et al. eds., 2016).

 [20]. See Learned Hand, Book Review, 35 Harv. L. Rev. 479, 479 (1922) (reviewing Benjamin N. Cardozo, The Nature of the Judicial Process (1921)) (describing the common law as “a monument slowly raised, like a coral reef, from the minute accretions of past individuals, of whom each built upon the relics which his predecessors left, and in his turn left a foundation upon which his successors might work”); see also G. Marcus Cole, Shopping for Law in a Coasean Market, 1 N.Y.U. J.L. & Liberty 111, 123 (2005) (characterizing the common law as a cumulative spontaneous order which grows over time by accretion).

 [21]. See 1 F.A. Hayek, Law, Legislation & Liberty 36–38 (1973) (describing the two sources of order as “planned” orders and “spontaneous” orders).

 [22]. See Jingen & DiMatteo, supra note 12, at 46.

 [23]. See Gilles Cuniberti, The International Market for Contracts: The Most Attractive Contract Laws, 34 Nw. J. Int’l L. & Bus. 455, 457 (2014) (presenting an empirical analysis of choice-of-law clauses that shows New York law dominates all others); Theodore Eisenberg & Geoffrey P. Miller, The Flight to New York: An Empirical Study of Choice of Law and Choice of Forum Clauses in Publicly-Held Companies’ Contracts, 30 Cardozo L. Rev. 1475, 1478 (2009); Geoffrey P. Miller & Theodore Eisenberg, The Market for Contracts, 30 Cardozo L. Rev. 2073, 2073 (2009).

 [24]. See generally Leon E. Trakman, Law Merchant: The Evolution of Commercial Law (1983) (tracing the origins of modern commercial law to the Law Merchant of the Middle Ages).

 [25]. The only existing British bank older than Barclays is C. Hoare & Co., founded in London in 1672. 7 Oldest Banks in the World,, (last visited July 10, 2019).

 [26]. JahanZaib Mehmood & Francis Garrido, Data Dispatch EMEA: Europe’s Fifty Largest Banks by Assets, S&P Global (April 16, 2018, 12:27 PM),

 [27]. Stefania Vitali et al., The Network of Global Corporate Control, PLoS ONE (Oct. 26, 2011),

 [28]. Id.

 [29]. Press Release, All Aboard With Barclays’ New £500m Fund for Northern SMEs, Barclays (May 31, 2018, 4:00 PM), (“Barclays has been helping businesses across the North to succeed since the dawn of the Industrial Revolution . . . , when we financed the world’s first steam locomotive passenger railway between Stockton and Darlington.” (quoting Barclays CEO, Jes Staley)).

 [30]. Rupert Jones, Put It on the Plastic: Barclaycard, the UK’s First Credit Card, Turns Fifty, The Guardian (June 29, 2016, 12:58 PM),

 [31]. Brian Milligan, The Man Who Invented the Cash Machine, BBC News (June 25, 2007, 5:35 AM),

 [32]. Barclays technology archive blog is worth a read, available at Technology, Barclays: Group Archives, (last visited July 20, 2019).

 [33]. Ian Allison, Barclays’ Smart Contract Templates Stars in First Ever Public Demo of R3’s Corda Platform, Int’l. Bus. Times, (last updated July 11, 2016, 11:44 AM).

 [34]. See James Chen, Derivative, Investopedia,
ative.asp (last updated May 19, 2019); Definition of A Derivative, Econ. Times, https://economic (last visited May 10, 2019).

 [35]. Arjun Kharpal, Barclays Used Blockchain Tech to Trade Derivatives, CNBC (Apr. 19, 2016, 6:37 AM),

 [36]. ISDA & Linklaters, Whitepaper: Smart Contracts and Distributed Ledger ­– A Legal Perspective (2017),

 [37]. Id. at 3, 19–20.

 [38]. See From Concept to Reality, ISDA Q., Aug. 2018, at 33, 33–34.

 [39]. See Ketaki Dixit, Barclays Uses ISDA Standard for Blockchain Derivatives, Ambcrypto (Apr. 27, 2018),

 [40]. Id.

 [41]. See Derivative Contracts Sample Clauses, Law Insider,
derivative-contracts (last visited July 20, 2019) (providing various standard form terms for derivative contracts).

 [42]. See Dixit, supra note 39.

 [43]. See What 29,985,328 Transactions Say About the State of Smart Contracts on Ethereum, Medium (Oct. 28, 2018) [hereinafter 29,985,328 Transactions],

 [44]. Ethereum Transacting $166 Million Per Hour, 53% to Smart Contract Dapps, Trustnodes (May 6, 2018, 1:06 PM),

 [45]. See Max Raskin, The Law and Legality of Smart Contracts, 1 Geo. L. Tech. Rev. 305, 309 (2017) (“A smart contract is an agreement whose execution is automated.”).

 [46]. Tsui S. Ng, Blockchain and Beyond: Smart Contracts, Am. B. Ass’n. (Sept. 28, 2017),

 [47]. Raskin, supra note 45, at 310.

 [48]. See Jason Wong, The 6 Most Common Blockchain Programming Languages, Very Possible (Aug. 14, 2018),

 [49]. See Raskin, supra note 45, at 333.

 [50]. Ng, supra note 46.

 [51]. Robert van Mölken, Blockchain Across Oracle 144 (2019) (explaining that “one of the advantages of a public blockchain is immutability . . . ,” which “has the same effect on smart contracts”); Thomas J. Rush, Smart Contracts Are Immutable—That’s Amazing…and It Sucks, Medium (May 13, 2016),; Marcin Zduniak, Blockchain Immutability: Behind Smart Contracts, Espeo Blockchain: Blog (May 29, 2018),

 [52]. See Loi Luu et al., Making Smart Contracts Smarter, Proc. 2016 ACM SIGSAC Conf. Computer & Comm. Sec. 254, 255 (2016), (“In contrast to distributed applications that can be patched when bugs are detected, smart contracts are irreversible and immutable.”).

 [53]. See Lin William Cong & Zhiguo He, Blockchain Disruptions and Smart Contracts 9 (Nat’l Bureau of Econ. Research, Working Paper No. 24399, Apr. 2018),

 [54]. Deloitte, Impacts of the Blockchain on Fund Distribution 68 (2018),; Mayank Pratap, Everything You Need to Know About Smart Contracts: A Beginner’s Guide, Hackernoon (Aug. 27, 2018),

 [55]. See What is an Enterprise Blockchain Smart Contract?, BlockApps (July 30, 2018),

 [56]. See Jackson Ng, Escrow Service as a Smart Contract: The Business Logic, Medium: Coinmonks (May 19, 2018), (explaining how smart contracts operate to replace escrow agents in transactions that previously required them).

 [57]. See, e.g., Niels Ferguson et al., Cryptography Engineering: Design Principles and Practical Applications 4 (2010) (explaining the “lock” and “key” operation of public key and private key cryptography).

 [58]. See 29,985,328 Transactions, supra note 43.

 [59]. See Andrew Romans, Masters of Blockchain and Initial Coin Offerings 4 (2018) (describing ICOs as investment vehicles comparable to IPOs).

 [60]. Id.

 [61]. Id.

 [62]. Id.

 [63]. See Christoph Menke, Law and Violence, 22 Law & Literature 1, 1 (2010) (“Law is itself a kind of violence . . . .”); see also Stephen L. Carter, Law Puts Us All in Same Danger As Eric Garner, Bloomberg (Dec. 4, 2014, 7:56 AM), (“[T]he police go armed to enforce the will of the state, and if you resist, they might kill you.”).

 [64]. Nathan B. Oman, The Dignity of Commerce: Markets and the Moral Foundations of Contract Law 6 (2016) (describing John Slade’s case against Humphrey Morley before the Devon Assizes as the origin of modern contract law).

 [65]. See, e.g., Julia Rudolph, Common Law and Enlightenment in England, 16891750, at 130 (2013) (“Over time a body of equity law developed in English Chancery, providing new kinds of remedies where the rigidity of common law—with its closed system of Latin writs and formalized pleading in law French—meant that either that new problems could not be dealt with at common law, or that the common law would produce an unjust result.”); see also E. Allan Farnsworth, Contracts 12–18 (4th ed. 2004) (describing the evolution of the action of assumpsit from the common law tort writ of trespass). 

 [66]. See Farnsworth, supra note 65, at 12.

 [67]. See A.W. Brian Simpson, A History of the Common Law of Contract: The Rise of the Action of Assumpsit 199–202 (Clarendon Press 1987) (describing the meaning of the phrase “cause of action”).

 [68]. See George W. Keeton, The Norman Conquest and the Common Law 91–92 (Barnes & Noble 1966) (quoting F. W. Maitland’s claim that, “[i]f English history is to be understood, the law of Domesday Book must be understood”).

 [69]. Id. at 91.

 [70]. See Maurice Keen, The Penguin History of Medieval Europe 107 (Penguin Books 1991) (“Norman direction, working within Anglo-Saxon traditions of local administration, had produced in Domesday Book the most complete survey ever made of the resources in men and wealth of a medieval kingdom.”).

 [71]. Theodore Frank Thomas Plucknett, A Concise History of the Common Law 355 (Liberty Fund 5th ed. 2010) (emphasis in the original); see also J.H. Baker, An Introduction to English Legal History 41 (4th ed. 2005) (describing the complex contortions engaged in by the king’s courts in order to fit plaintiffs cases into the writ of trespass before other forms of action were developed). Technically, the writ of right was also contemporaneous with the writ of trespass and was an action to recover dispossessed land as opposed to land that was trespassed upon. See Martin Shapiro, Courts: A Comparative and Political Analysis 81 (1981).

 [72]. See S.F.C. Milsom, Historical Foundations of the Common Law 22 (1969).

 [73]. Id. at 256–61.

 [74]. Id. at 211–13; see also S.J. Stoljar, A History of Contract at Common Law 3 (1975) (tracing the origins of modern contract law to the original writs of debt, detinue, and covenant).

 [75]. See, e.g., Nurse v. Barns (1664) 83 Eng. Rep. 43 (KB) 43 (holding a mill owner liable for incidental damages suffered by a lessee of iron mills worth twenty pounds should be granted damages of five hundred pounds for stock purchased in reliance on the contract).

 [76]. See Stoljar, supra note 74, at 4–5.

 [77]. See Simpson, supra note 67, at 203; see also Christine Desan, Making Money: Coin, Currency, and the Coming of Capitalism 86 (2014) (“The ‘earliest writ of a contractual nature to be regularly issued,’ common law debt emerged in the 12th century.” (quoting Simpson, supra note 67, at 53­–55)).

 [78]. See Desan, supra note 77, at 86.

 [79]. See Plucknett, supra note 71, at 400.

 [80]. Id.

 [81]. Signet rings “were used historically as a seal with a unique family crest to sign documents.” Charlie Gowins-Eglinton, How Signet Rings Went from Traditional Family Heirloom to Modern Must-Have, Telegraph (Aug. 16, 2017, 6:45 AM),; see also Chritopher Austin, A Brief History of Signet Rings, History Press, (last visited July 20, 2019).

 [82]. See Simpson, supra note 67, at 203.

 [83]. See Plucknett, supra note 71, at 400.

 [84]. See Simpson, supra note 67, at 203.

 [85]. See Simpson, supra note 67, at 90.

 [86]. Id.

 [87]. Id.

 [88]. Id.

 [89]. Id. at 91.

 [90]. Id.

 [91]. Id.

 [92]. Id.

 [93]. Id.

 [94]. See Robert B. Ekelund, Jr. & Robert F. Hébert, A History of Economic Theory and Method 56–58 (5th ed. 2007) (asserting that the effects of jurisdictional competition among courts of the Tudor and Elizabethan eras undermined the royal monopolies central to mercantilism).

 [95]. Robert E. Rodes, Jr., Secular Cases in the Church Courts: A Historical Survey, 32 Cath. Law. 301, 304 (1989) (explaining that “to get into church court all one had to do was to make the debtor pledge his faith as a Christian,” the breach of which was deemed “fidei laesio, breach of faith”).

 [96]. Originating in France in the middle of the fourteenth century, Gallicanism was a movement seeking to wrest civil and religious authority away from the Pope in Rome towards local authorities. See generally Jotham Parsons, The Church in the Republic: Gallicanism and Political Ideology in Renaissance France (2004). For a rich analysis of Gallicanism, see generally Emile Perreau-Saussine, Catholicism and Democracy: An Essay in the History of Political Thought (Richard Rex trans. 2012).

 [97]. See Guy Bedouelle, The History of the Church 112–15 (2003) (describing the rise and fall of Gallicanism from the fifteenth through the eighteenth centuries).

 [98]. Robert Oxton Bolt, A Man For All Seasons, act 2, sc. 3 (Sir Thomas More, explaining why he will not swear to the Act of Succession, concluding that “[w]hen a man takes an oath . . . he’s holding his own self in his own hands . . . [l]ike water”).

 [99]. See Harold J. Berman, Law and Revolution: The Formation of the Western Legal Tradition 516 (1983) (“Canon Law claimed jurisdiction over . . . laity charged with sin and breach of faith . . . .”).

 [100]. See Historical Dictionary of Late Medieval England, 1272–1485, at 112–14 (Ronald H. Fritze & William B. Robison eds., 2002).

 [101]. See Mary C. Moorman, Indulgences: Luther, Catholicism, and the Imputation of Merit (2017) (ebook) (noting that St. Thomas Aquinas reasoned that the authority granted by Christ to Peter to bind and loose supported the Church’s extension of indulgences, since “whatever remission is granted in the court of the Church holds good in the court of God” (citation omitted)).

 [102]. See 4 Sir William Blackstone, Commentaries on the Laws of England 106 (11th ed. 1791) (condemning a Catholic Church for, in the pursuit of money and power, creating “[n]ew-fangled offences” and selling “indulgences . . . to the wealthy” while also “injoin[ing] penance pro salute animae, and commut[ing] that penance for money”).

 [103]. See R.N. Swanson, Indulgences in Late Medieval England 56 (2007) (“The power of the pardon rather than any other associations made these indulgences popular.”).

 [104]. See R.N. Swanson, Religion and Devotion in Europe, c. 1215c. 1515, at 220 (1997). Swanson provides the following examples of fees paid for indulgences:

For the Jubilee of 1500 the collector [of money for the sale of indulgences], Jasper Ponce, set a sliding scale of charges varying with landed income or the value of moveable goods. For the landed, the costs ranged from £3. 6s. 8d. for incomes over £2000 [(this is an enormous income, that of a high baron)] down to 1s. 4d. for the £2040 category; for the others from £2 for those with goods over £1,000 down to 1s. for those in the £20200 group. People falling below £20 paid what they felt able to contribute out of devotion.

 [105]. See Daniel Klerman, Jurisdictional Competition and the Evolution of the Common Law, 74 U. Chi. L. Rev. 1179, 1179 (2007) (arguing that, since court fees were the source of revenue for the courts of England, and since plaintiffs chose the courts in which to file suit, “judges and their courts competed by making the law more favorable to plaintiffs”). 

 [106]. See Edward Peter Stringham & Todd J. Zywicki, Rivalry and Superior Dispatch: An Analysis of Competing Courts in Medieval and Early Modern England, 147 Pub. Choice 497, 498 (2011).

 [107]. For this famous case, see generally Slade’s Case (1602) 76 Eng. Rep. 1074 (KB) [hereinafter Slade’s Case].

 [108]. See Klerman, supra note 105, at 1181.

 [109]. Id. at 1180 (quoting William M. Landes & Richard A. Posner, Adjudication as a Private Good, 8 J. Legal Stud. 235, 254–55 (1979)).

 [110]. See Slade’s Case, supra note 107.

 [111]. The monopoly over the legitimate use of physical force or the “monopoly on violence” is a core concept of modern political theory and public law. It has its origins in Jean Brodin’s Les Six Livres de la République, published in 1576, and Thomas Hobbes’s Leviathan, published in 1651. For their respective works, see generally Jean Bodin, Les Six Livres de la République (Gérard Mairet ed., 1993) (1576); Thomas Hobbes, The Leviathan (Prometheus Bks. 1988) (1651). It later formed the foundation of Max Weber’s definition of the state as any organization that succeeds in holding the exclusive right to use, threaten, or authorize physical force against residents of its territory. See generally Max Weber, Politics as a Vocation (1919), reprinted in Max Weber: Essays in Sociology 77 (H.H. Gerth & C. Wright Mills eds., trans., 1946),


 [112]. In this context, contract law supplied by government can be said to be “subsidized” by taxpayers, since governmental institutions provide enforcement mechanisms (violence) not at the disposal of private means of enforcement. See Carter, supra note 63.

 [113]. See generally Xiaoming Yang et al., Micro-Innovation Strategy: The Case of WeChat, 20 Asian Case Res. J. 401 (2016) (detailing Tencent’s strategy of marketing low-cost consumer innovation to China’s burgeoning population).

 [114]. Id. at 403.

 [115]. See Salvatore Cantale & Ivy Buche, How Tencent Became the World’s Most Valuable Social Network Firm – with Barely Any Advertising, The Conversation (Jan. 18, 2018, 2:10 PM),

 [116]. Tencent’s growth has been attributed in large part to its ability to tap into four factors unique to China’s technology sector, namely, (1) scale, (2) openness (to private domestic entrepreneurship), (3) official support of local and central governments, and (4) technology. This combination of factors has been dubbed the SOOT model for growth by Edward Tse. See Edward Tse, China’s Disruptors 71, 83 (2015).

 [117]. Interview with Charles Chen, Co-Founder, Tencent, at Stanford Law School (Apr. 20, 2014) (notes on file with author).

 [118]. See Rayna Hollander, WeChat Has Hit 1 Billion Monthly Users, Bus. Insider (Mar. 6, 2018, 2:59 PM), (explaining that “[r]oughly 83% of all smartphone users in China use WeChat,” while penetration has reached 93% in Tier 1 cities).

 [119]. See, e.g., QQ Number Service Terms of Use, QQ Security Ctr,
appeal/en_appeal_safety (last visited Aug. 29, 2019) (detailing the appeals process for suspension of account service).

 [120]. See Lisa Bernstein, Opting Out of the Legal System: Extralegal Contractual Relations in the Diamond Industry, 21 J. Legal Stud. 115, 115 (1992) (describing the private legal order and norms adopted by New York diamond merchants).

 [121]. Id.

 [122]. Id. at 135.

 [123]. Id.

 [124]. Id. at 126.

 [125]. See Avner Greif, Reputation and Coalitions in Medieval Trade: Evidence on the Maghribi Traders, 49 J. Econ. Hist. 857, 857 (1989) (describing the complex system of trust and reputational sanctions underlying trans-Mediterranean trade during the Middle Ages).

 [126]. Id.

 [127]. Id. at 86163.

 [128]. Id.

 [129]. Id.

 [130]. Id. at 870.

 [131]. Id.

 [132]. Id.

 [133]. See id.

 [134]. Id.

 [135]. Id. at 874.

 [136]. See Geoffrey P. Miller, Choice of Law as a Precommitment Device, in The Fall and Rise of Freedom of Contract 357, 365 (F.H. Buckley ed., 1999) (asserting that jurisdictions compete knowing that parties are free to adopt their law within contractual choice of law and choice of forum provisions).

 [137]. See Samuel Fleischacker, Adam Smith’s Reception Among the American Founders, 17761790, 59 Wm. & Mary Q. 897, 897 (2002) (“[T]he American founders were among the earliest readers of [Adam] Smith’s Wealth of Nations, and their readings constitute a significant episode in the history of the book’s reception.”); David Prindle, The Invisible Hand of James Madison, 15 Const. Pol. Econ. 223, 231 (2004) (tying Madison’s exposure to Smith to his writings in The Federalist Papers and arguing that they reflect the influence of Smith’s idea that “competition among self-interested individuals, groups, and institutions, if intelligently structured, can produce the public good”).

 [138]. See, e.g., Michael S. Greve, The Upside Down Constitution 134 (2012) (arguing that the legal and educational backgrounds of several of the Framers made exposure to the concept of jurisdictional competition inescapable).

 [139]. See, e.g., Michael W. McConnell, Federalism: Evaluating the Founders’ Design, 54 U. Chi. L. Rev. 1484, 150506 (1987) (book review) (discussing the Founders’ trust in jurisdictional competition through federalism to protect individual rights, such as freedom of religion).

 [140]. Mark Moller, The Checks and Balances of Forum Shopping, 1 Stan. J. Complex Litig. 171, 186 (2012).

 [141]. Todd E. Pettys, Competing for the People’s Affection: Federalism’s Forgotten Marketplace, 56 Vand. L. Rev. 329, 352 (2003).

 [142]. The Federalist No. 17, at 77 (Alexander Hamilton) (Terence Ball ed., 2003).

 [143]. The History of the UCC, Legalinc (May 9, 2018),

 [144]. Id.

 [145]. Id.

 [146]. For a rich, authoritative history of the codification movement and the creation of uniform codes in the United States, see generally Robert A. Stein, Forming a More Perfect Union: A History of the Uniform Laws Commission (2013).

 [147]. The NCCUSL, also known as the Uniform Laws Commission, was formed in 1892. About Us, Uniform L. Commission, (last visited July 21, 2019).

 [148]. For more on the Louisiana system, see Daniel Engber, Louisiana’s Napoleon Complex, Slate (Sept. 12, 2005, 6:59 PM), (“[L]aws governing commercial transactions in Louisiana come from the French system, putting them at odds with the parts of the Uniform Commercial Code used by other states.”).

 [149]. See, e.g., Brooks Cotton Co. v. Williams, 381 S.W.3d 414, 427–28 (Tenn. Ct. App. 2012) (holding that whether a “farmer” is a “merchant” under the UCC depends upon the circumstances).

 [150]. See Peter A. Diamond, A Model of Price Adjustment, 3 J. Econ. Theory 156, 16465 (1970) (demonstrating that as consumers and sellers in a competitive market encounter prices that are higher or lower than the equilibrium price for any good, they gain information that causes prices to converge to the competitive equilibrium price).

 [151]. For experimental proof of this phenomenon, see generally Vernon L. Smith, An Experimental Study of Competitive Market Behavior, 70 J. Pol. Econ. 111 (1962).

 [152]. See Jan Tuinstra, Price Dynamics in Equilibrium Models 5758 (2001) (demonstrating how asymmetric price adjustments work to achieve convergence toward market price equilibrium).

 [153]. See Frank M. Machovec, Perfect Competition and the Tranformation of Economics 21 (2003) (explaining that the tendency of markets toward equilibrium is “grounded in man’s success in discovering and overcoming his errors”).

 [154]. See Diamond, supra note 150, at 163.

 [155]. Id.

 [156]. Id. at 164.

 [157]. Id. at 165.

 [158]. Id.

 [159]. Id.

 [160]. See Israel M. Kirzner, Competition and Entrepreneurship 21922 (1973) (demonstrating how price convergence occurs in “a simple market for a single, undifferentiated product of standard quality” called “milk”).

 [161]. Id. at 220.

 [162]. Id.

 [163]. For an exploration into how banks price and control risks with non-price terms in private lending, see generally Philip E. Strahan, Fed. Reserve Bank of N.Y., Staff Report No. 90, Borrower Risk and the Price and Non-Price Terms of Banks Loans (1999),

 [164]. See Paul Krugman et al., Essentials of Economics 198 (2d ed. 2007) (“In a perfectly competitive market, all market participants, both consumers and producers, are price-takers.”). 

 [165]. See Fred M. Gotthiel, Principles of Microeconomics 240–41 (7th ed. 2013) (explaining how substitutability and fungibility of goods increases as markets move from monopolistic competition to perfect competition).

 [166]. See George G. Djolov, The Economics of Competition: The Race to Monopoly 62–67 (Haworth Press 2006) (explaining how product differentiation creates barriers to, and a departure from, competitive markets).

 [167]. See Diamond, supra note 150, at 165.

 [168]. Id.

 [169]. Id.

 [170]. Id.

 [171]. Id.

 [172]. See Israel M. Kirzner, Entrepreneurial Discovery and the Competitive Market Process: An Austrian Approach, 35 J. Econ. Literature 60, 70 (1997).

 [173]. See id. (explaining that the alert “entrepreneur discovers these earlier errors, buys where prices are ‘too low’ and sells where prices are ‘too high,’” such that “low prices are nudged higher, high prices are nudged lower; . . . [s]hortages are filled, surpluses are whittled away; [and] quantity gaps tend to be eliminated in the equilibrative direction”). 

 [174]. For the authoritative account of the codification movement, see generally Stein, supra note 146.

 [175]. See Trakman, supra note 24, at 7 (“Custom, not law, has been the fulcrum of commerce since the origin of exchange.”).

 [176]. See generally Arthur L. Corbin, A Tribute to Karl Llewellyn, 71 Yale L.J. 805 (1962) (expounding upon the life of Professor Llewellyn, including his service as Official Reporter of the UCC).

 [177]. See William A. Schnader, A Short History of the Preparation and Enactment of the Uniform Commercial Code, 22 U. Miami L. Rev. 1, 4 (1967) (describing the circumstances surrounding the appointment of Professor Llewellyn as Official Reporter).

 [178]. Id.

 [179]. See S. Todd Lowry, Lord Mansfield and the Law Merchant: Law and Economics in the Eighteenth Century, 7 J. Econ. Issues 605, 60507 (1973).

 [180]. Id. at 605.

 [181]. Id. at 606 (citation omitted).

 [182]. Frederick J. Moreau, The Unwritten Law and Its Writers, 2 Pepp. L. Rev. 213, 242 (1975).

 [183]. The UCC is comprised of nine Articles, each with a focus on a particular area of commercial law.

 [184]. U.C.C. § 2-208 (Am. Law Inst. & Unif. Law Comm’n, withdrawn 2001).

 [185]. See id. § 2-208 cmt. 1.

 [186]. Id.

 [187]. See Farnsworth, supra note 9, at 17 (explaining the origins of the CISG).

 [188]. For the complete list of signatories to the Vienna Convention, see CISG: List of Contracting States, Institute of Int’l Commercial Law, (last visited July 22, 2019).

 [189]. See Lyon L. Brinsmade, American Bar Association Report to the House of Delegates, 18 Int’l Law. 39, 40 (1984) (“[M]any provisions of the Convention are very similar in content and form to those of the [UCC].”); Michael Kabik, Through the Looking-Glass: International Trade in the “Wonderland” of the United Nations Convention on Contracts for the International Sale of Goods, 9 Int’l Tax & Bus. Law. 408, 42829 (1992) (observing not only that “[m]any of the [CISG]’s provisions . . . similar in approach and content to those of the [UCC],” but also that “the [CISG] is, for the most part, truly a mirror image of the[UCC]”).

 [190]. Robert S. Rendell, The New U.N. Convention on International Sales Contracts: An Overview, 15 Brook. J. Int’l L. 23, 42 (1989).

 [191]. U.C.C. § 2-201 (Am. Law Inst. & Unif. Law Comm’n 2018).

 [192]. Id.

 [193]. Id. § 2-202.

 [194]. Id.

 [195]. MCC-Marble Ceramic Ctr. v. Ceramica Nuova D’Agostino, S.P.A., 114 F.3d 1384, 138889 (11th Cir. 1998); CISG Advisory Council Opinion No. 3: Parol Evidence Rule, Plain Meaning Rule, Contractual Merger Clause and the CISG, 17 Pace Int’l L. Rev. 61, 61 (2005) (“The Parol Evidence Rule has not been incorporated into the CISG.”).

 [196]. See Aditi Ramesh et al., CISG v. UCC: Key Distinctions and Applications, 7 Bus. Mgmt. Rev. 459, 462 (2016).

 [197]. See, e.g., Clayton P. Gillete & Robert E. Scott, The Political Economy of International Sales Law, 25 Int’l Rev. L. & Econ. 446, 474 (2005) (“Uncertainty results not only from the many vague standards, but also from the use of ambiguous language that may have different meanings in different cultures.”).

 [198]. Feng Chen, The New Era of Chinese Contract Law: History, Development, and a Comparative Analysis, 27 Brook. J. Int’l L. 153, 168 (2001).

 [199]. See Chuan Feng et al., China’s Changing Legal System 12931 (2016) (explaining the history and operation of the “three pillars” system of Chinese contract law).

 [200]. See Volker Behr, Development of a New Legal System in the People’s Republic of China, 67 La. L. Rev. 1161, 1164 (2007) (stating that, under Mao’s Cultural Revolution, “[c]ontracts were considered to be symbols of a capitalistic system; hence, the contract system was abolished”).

 [201]. Susan Ariel Aaronson, Is China Killing the WTO?, Int’l Econ., Winter 2010, at 40, 1 (“The rule of law was a key element of China’s accession agreement because trade policymakers understood that how China was governed could distort trade in many of the sectors in which China competes.”). In fact,

[t]he 2001 Protocol on the Accession of the People’s Republic of China explicitly calls on China to “apply and administer in a uniform, impartial, and reasonable manner all its laws, regulations and other measures of the central government as well as local regulations, rules and other measures . . . pertaining to or affecting trade . . . . China shall establish a mechanism under which individuals and enterprises can bring to the attention of the national authorities cases of non-uniform application.” It also calls on China to ensure that “those laws, regulations, and other measures pertaining to and affecting trade . . . shall be enforced.”

Id. (ellipses in original) (quoting Ministerial Conference, Protocol on the Accession of the People’s Republic of China, WTO Doc. WT/L/432 (Nov. 23, 2001)).

 [202]. See Chen, supra note 198, at 155–68.

 [203]. See Peter Winship, An Introduction to the United Nations Sales Convention, 43 Consumer Fin. L.Q. Rep. 23 (1989), (“In accordance with Article 99(1), the convention was to enter into force approximately one year after ten states had become Contracting States.”).

 [204]. See Frank Dikötter, Mao’s Great Famine: The History of China’s Most Devastating Disaster Catastrophe, 1958–1962, at 327 (2010) (describing the toll taken by Mao’s economic failures).

 [205]. See generally Frank Dikötter, The Cultural Revolution: A People’s History, 1962–1976 (2016) (describing the internal power struggle after the failure of Mao’s The Great Leap Forward). 

 [206]. See Tang Tsou, The Cultural Revolution and Post-Mao Reforms 73 (1986).

 [207]. See Jerome A. Cohen, A Looming Crisis for China’s Legal System, Foreign Pol’y (Feb. 22, 2016, 10:15 AM) (“[I]n 1972, there was virtually no legal education—because of the Cultural Revolution, universities were shuttered for a decade.”).

 [208]. Shao-Chuan Leng & Hungdah Chiu, Criminal Justice In Post-Mao China 18 (1985) (citation omitted).

 [209]. Ralph H. Folsom & John H. Minan, Law in the People’s Republic of China 12 (1989).

 [210]. William R. Baerg, Judicial Institutionalization of the Revolution: The Legal Systems of the People’s Republic of China and the Republic of Cuba, 15 Loy. L.A. Int’l & Comp. L. Rev. 233, 242 (1992).

 [211]. Id. at 243.

 [212]. Id. at 244.