Protectors of Predators or Prey: Bystanders and Upstanders Amid Sexual Crimes – Article by Zachary D. Kaufman

Article | Criminal Law
Protectors of Predators or Prey: Bystanders and Upstanders amid Sexual Crimes
by Zachary D. Kaufman*

From Vol. 92, No. 6 (September 2019)
92 S. Cal. L. Rev. 1317 (2019)

Keywords: Bad Samaritan Laws, Bystanders, Sexual Violence Prevention

 

Abstract

In the wake of widespread revelations about sexual abuse by Harvey Weinstein, Larry Nassar, and others, the United States is reckoning with the past and present and searching for the means to prevent and punish such offenses in the future. The scourge of sexual crimes goes far beyond instances perpetrated by powerful men; this misconduct is rampant throughout the country. In some of these cases, third parties knew about the abuse and did not try to intervene. Scrutiny of—and the response to—such bystanderism is increasing, including in the legal world.

In order to align law and society more closely with morality, this Article proposes a more holistic, aggressive approach to prompt involvement by third parties who are aware of specific instances of sexual crimes in the United States. This Article begins by documenting the contemporary scope of sexual crimes in the United States and the crucial role bystanders play in facilitating them.

The Article next provides an overview and assessment of “Bad Samaritan laws”: statutes that impose a legal duty to assist others in peril through intervening directly (also known as the “duty to rescue”) or notifying authorities (also known as the “duty to report”). Such laws exist in dozens of foreign countries and, to varying degrees, in twenty-nine U.S. states, Puerto Rico, U.S. federal law, and international law. The author has assembled the most comprehensive global database of Bad Samaritan laws, which provides an important corrective to other scholars’ mistaken claims about the rarity of such statutes, particularly in the United States. Despite how widespread these laws are in the United States, violations are seldom, if ever, charged or successfully prosecuted.

Drawing on historical research, trial transcripts, and interviews with prosecutors, judges, investigators, and “upstanders” (people who intervene to help others in need), the Article then describes four prominent cases in the United States involving witnesses to sexual crimes. Each case provides insight into the range of conduct of both bystanders and upstanders.

Because not all such actors are equal, grouping them together under the general categories of “bystanders” and “upstanders” obscures distinct roles, duties, and culpability for violating those duties. Drawing on the case studies, this Article thus presents original typologies of bystanders (including eleven categories or sub-categories), upstanders (including seven categories), and both kinds of actors (including four categories), which introduce greater nuance into these classifications and this Article’s proposed range of legal (and moral) responsibilities. These typologies are designed to maximize generalizability to crimes and crises beyond sexual abuse.

Finally, the Article prescribes a new approach to the duty to report on sexual abuse and possibly other crimes and crises through implementing a combination of negative incentives (“sticks”) and positive incentives (“carrots”) for third parties. These recommendations benefit from interviews with sexual violence prevention professionals, police, legislators, and social media policy counsel. Legal prescriptions draw on this Article’s typologies and concern strengthening, spreading, and standardizing duty-to-report laws at the state and territory levels; introducing the first general legal duty to report sexual crimes and possibly other offenses (such as human trafficking) at the federal level; exempting from liability one of the two main bystander categories the Article proposes (“excused bystanders”) and each of its six sub-categories (survivors, “confidants,” “unaware bystanders,” children, “endangered bystanders,” and “self-incriminators”); actually charging the other main bystander category the Article proposes (“unexcused bystanders”) and each of its three sub-categories (“abstainers,” “engagers,” and “enablers”) with violations of duty-to-report laws or leveraging these statutes to obtain testimony from such actors; and more consistently charging “enablers” with alternative or additional crimes, such as accomplice liability. Social prescriptions draw on models and lessons from domestic and foreign contexts and also this Article’s typologies to recommend, among other initiatives, raising public awareness of duty-to-report laws and creating what the Article calls “upstander commissions” to identify and “upstander prizes” to honor a category of upstanders the Article proposes (“corroborated upstanders”), including for their efforts to mitigate sexual crimes. A combination of these carrots and sticks could prompt would-be bystanders to act instead as upstanders and help stem the sexual crime epidemic.

*. Associate Professor of Law and Political Science, University of Houston Law Center, with additional appointments in the University of Houston’s Department of Political Science and Hobby School of Public Affairs. J.D., Yale Law School; D.Phil. (Ph.D.) and M.Phil., both in International Relations, Oxford University (Marshall Scholar); B.A. in Political Science, Yale University. Research for this Article, including fieldwork, was generously facilitated by a grant from Harvard University as well as institutional support from Stanford Law School (where the author was a Lecturer from 2017 to 2019) and the Harvard University Kennedy School of Government (where the author was a Senior Fellow from 2016 to 2019).

The author primarily thanks the following individuals for helpful comments and conversations: Will Baude; Frank Rudy Cooper; John Donohue; Doron Dorfman; George Fisher; Richard Ford; Jeannie Suk Gersen; Hank Greely; Chris Griffin; Oona Hathaway; Elizabeth D. Katz; Amalia Kessler; Tracey Meares; Michelle Mello; Dinsha Mistree; Mahmood Monshipouri; Joan Petersilia; Camille Gear Rich; Mathias Risse; Peter Schuck; Kathryn Sikkink; David Sklansky; Kate Stith; Mark Storslee; Allen Weiner; Robert Weisberg; Lesley Wexler; Alex Whiting; Rebecca Wolitz; Gideon Yaffe; audiences at Yale Law School, Stanford Law School, Harvard University Kennedy School of Government, Stanford University Center for International Security & Cooperation, University of Virginia School of Law, University of Southern California Gould School of Law, Louisiana State University Paul M. Hebert Law Center, Penn State Law, University of Hawai’i Richardson School of Law, West Virginia University College of Law, University of Sydney Law School, University of Western Australia Law School, South Texas College of Law, University of Houston Department of Political Science and Hobby School of Public Affairs, and Colorado College; audiences at the 2018 conferences of the Harvard Law School Institute for Global Law & Policy, Law & Society Association, American Political Science Association, International Studies Association, and Policy History Association; and audiences at the 2019 conferences of the Law & Society Association, International Studies Association, CrimFest (at Brooklyn Law School), and the Southeastern Association of Law Schools. The author is especially indebted to his students in the reading group at Stanford Law School on “The Law of Bystanders and Upstanders” he led in spring 2019: Jamie Fine, Katherine Giordano, Bonnie Henry, Jeremy Hutton, Allison Ivey, Andrew Jones, Azucena Marquez, Camden McRae, Sergio Sanchez Lopez, and Spencer Michael Schmider. The author also thanks the following individuals for their valuable feedback: Fahim Ahmed, Matthew Axtell, Maria Banda, Adrienne Bernhard, Isra Bhatty, Charles Bosvieux-Onyekwelu, Sara Brown, Ben Daus-Haberle, Brendon Graeber, Melisa Handl, Janhavi Hardas, Elliot Higgins, Hilary Hurd, Howard Kaufman, Linda Kinstler, Chris Klimmek, Tisana Kunjara, Gabrielle Amber McKenzie, Noemí Pérez Vásquez, Tanusri Prasanna, and Noam Schimmel.

The author is grateful to the following individuals for granting interviews for this Article: an anonymous attorney involved in the Steubenville case; an anonymous employee of the Massachusetts Attorney General’s office; an anonymous employee of the Massachusetts Sentencing Commission; Jake Wark of the Suffolk County District Attorney’s office in Massachusetts; Manal Abazeed, Jehad Mahameed, Mounir Mustafa, and Raed Saleh of the White Helmets/Syria Civil Defense; Naphtal Ahishakiye of IBUKA in Rwanda; Holocaust survivors Isaac and Rosa Blum; Gili Diamant and Irena Steinfeldt of Yad Vashem in Israel; Alexandria Goddard; Martin Niwenshuti of Aegis Trust in Rwanda; Lindsay Nykoluk of the Calgary Police Service in Canada; Ruchika Budhraja, Gavin Corn, Neil Potts, and Marcy Scott Lynn of Facebook; Jessica Mason of Google; and Regina Yau of the Pixel Project.

For thorough, thoughtful research assistance, the author thanks Chelsea Carlton, Michelle Katherine Erickson, Jana Everett, Thomas Ewing, Matthew Hines, Ivana Mariles Toledo, and Allison Wettstein O’Neill. The author also thanks the following individuals for research assistance on particular topics: Kathleen Fallon, Alexandria Goddard, Josh Goldman, Farouq Habib, Naomi Kikoler, Mariam Klait, Shari Lowin, Riana Pfefferkorn, Kenan Rahmani, Yong Suh, Paul Williams, Regina Yau, and library staff at Harvard Law School (including Aslihan Bulut and Stephen Wiles), Stanford Law School (including Sonia Moss and Alex Zhang), and the University of Houston Law Center (including Katy Badeaux, Christopher Dykes, and Amanda Watson). Of these individuals, the author owes the most gratitude to Katy Badeaux.

Finally, the author thanks the editors of the Southern California Law Review (“SCLR”)—particularly Editor-in-Chief Kevin Ganley, Managing Editor Christine Cheung, Executive Senior Editor Rosie Frihart, Executive Editor Celia Lown, and Senior Editor Evan Forbes—for their excellent editorial assistance. The author was honored that SCLR selected this Article as the subject of its annual symposium held at the University of Southern California’s Gould School of Law on March 21, 2019.

The author’s public engagement on this topic has drawn on the research and recommendations contained in this Article. Those activities include advising policymakers on drafting or amending Bad Samaritan laws and other legislation (including the federal Harassment and Abuse Response and Prevention at State (HARPS) Act sponsored by Congressperson Jackie Speier) and publishing op-eds in the Boston Globe (When Speaking Up is a Civic Duty, on August 5, 2018) and the San Francisco Chronicle (No Cover for Abusers; California Must Close Gap in its Duty-to-Report Law, on June 23, 2019).

This Article is current as of September 27, 2019. Any errors are the author’s alone.

 

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Divergence in Land Use Regulations and Property Rights – Article by Christopher Serkin

From Volume 92, Number 4 (May2019)
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Divergence in Land Use Regulations and Property Rights

Christopher Serkin[*]

INTRODUCTION

For the past century, property rights—and in particular development rights—have been circumscribed and largely defined by comprehensive local land use regulations. As any student of land use knows, zoning across the country shares a common DNA. Despite their local character, zoning limits on development rights in almost every American jurisdiction share a deep family resemblance borne from their common origin in the Standard Zoning Enabling Act (SZEA). Zoning for much of the twentieth century therefore converged around a core goal of separating incompatible uses of land as a kind of ex ante nuisance prevention.[1] Of course, zoning went much farther than the common law of nuisance, but its animating justification was to minimize the externalized impacts of certain kinds of intensive development.

For decades, zoning created a relatively stable and predictable system defining development rights and also neighbors’ expectations about what could be built nearby. While municipalities innovated on the margins, the shared approach meant that developers could easily assess the developable envelope and permissible uses for any property, and many became sophisticated at navigating local zoning ordinances to maximize development potential. This also resulted in equally stable political dynamics. By and large, developers and conservative property rights advocates were allies in opposing restrictive zoning, while community groups and pro-regulation liberals advocated for zoning to protect community character, in-place residents, and the environment.[2]

More recently, however, zoning has been changing. Even first principles are up for grabs, and land use regulations increasingly diverge from each other. Some municipalities today deploy zoning as a framework for bargaining with developers.[3] Others focus on sustainable development, housing affordability, community preservation, and many other goals.[4] The proliferation of new zoning goals means that property and development rights may now be strikingly different between jurisdictions. This is a period of increasing divergence in the substantive content of development rights across municipalities.

This trend towards divergence in land use regulations has not, however, resulted in the wholesale jettisoning of traditional approaches to zoning and land use regulation. In fact, while the goals may increasingly diverge, zoning’s fundamental tools remain fairly consistent. Instead of wholesale divergence in zoning and development rights, what we are actually witnessing more closely resembles multimodal convergence, where zoning regimes coalesce around multiple points instead of a single goal.[5]

The question here is whether this divergence is beneficial on balance. Any divergence has its costs, primarily in the form of increased information costs for property owners and the deadweight costs of increased special interest group rent seeking. But it comes with benefits, too, as diversity in land use goals allows consumers to select their preferred set of property rights. Too little divergence and people are locked into regimes they may not want. Too much and information costs may grow too high.

Increasing divergence—or multimodal convergence—also explains some of the new political fights around zoning and property rights. Traditional conservative and liberal positions have become unsettled as progressives have increasingly blamed zoning for the affordability crisis in many cities.[6] Some liberal groups, however, continue to embrace restrictive zoning because they prioritize environmental or community-preservation concerns or favor mandatory inclusionary zoning as a better response to affordability.[7] Simultaneously, conservative suburbs that had previously rejected land use regulations in favor of a pro-growth agenda have had second thoughts and are deploying strict new limits on development partly to constrain the burden on congestible infrastructure like roads.[8] In short, restrictive zoning and strong property rights are no longer at opposite ends of a single spectrum. Making sense of zoning’s new landscape requires grouping land use regulations as focusing primarily on one of several different possible goals. These include, among others, affordability, environmental protection, aesthetics, historic preservation, community protection, fiscal concerns, and more invidious exclusion. Sometimes these are competing goals, and sometimes they are simply orthogonal to each other. This Article identifies the range of goals that local governments today pursue through zoning and then examines the costs and benefits of this new zoning reality.

I.  Zoning’s Common Origin

In our fragmented and diverse political system, the consistency of land use regulations between municipalities may seem surprising. In fact, however, zoning everywhere in the United States shares a common—and familiar—origin in the Standard Zoning Enabling Act (SZEA).[9] Promulgated in 1926 by the Department of Commerce, the SZEA was designed as model legislation for states to adopt that would empower local governments to enact comprehensive zoning and land use regulations.[10] The approach was a success. Following a tacit blessing by the Supreme Court in Village of Euclid v. Ambler Realty Co.,[11] almost every state in the country adopted some version of the SZEA within the ensuing decades, and zoning became ubiquitous.[12]

From that origin story comes a common set of concerns that zoning was meant to address. Zoning has long been seen as a kind of ex ante nuisance prevention.[13] It separated incompatible uses of land before they arose, keeping factories out of residential neighborhoods during the urbanization and industrialization of the early twentieth century.[14] And it protected singlefamily homes from more intensive uses, in effect stratifying much of the country into single-use zones. This had a pernicious underbelly, reinforcing divisions based on class and on race, keeping apartment buildings and other forms of multifamily housing out of more affluent single-family zones.[15] Indeed, this is zoning’s original sin.[16] But this is also the fundamental justification that the Supreme Court endorsed in Euclid.[17]

Political fights emerged quickly. The mainstream arguments were not over the project of zoning, but instead over its implementation. Few people objected to the idea of using regulations to separate genuinely incompatible land uses. Indeed, the regulatory goal of minimizing externalities was consonant with both liberal and conservative convictions. But zoning’s contours have been contested now for a long time. By and large, conservatives objected to regulatory restrictions on property rights and so have advocated for limited zoning that separates only the most conflicting uses. Others on the right have advocated for even more extreme regulatory minimalism, relying on private land use controls instead of zoning and invoking covenants and homeowners’ associations as remedies for regulatory overreach.[18] Liberals, on the other hand, embraced zoning. They were willing to take a more capacious view of the harms of neighboring uses and so promoted increasingly fine-grained land use regulations.[19] The conventional understanding of attitudes towards zoning could therefore be presented along a simple spectrum from anti-regulation to pro-regulation.[20] Slowly over time, local governments moved beyond these narrow goals. Today, the underlying goals of many land use regulations have nothing to do with ex ante nuisance controls.

II.  Divergence in the Purposes of Land Use Regulation

Local governments have become increasingly creative about pursuing a variety of municipal goals through land use regulations, and zoning has become concomitantly more nuanced and sophisticated. The result is a more complex regulatory apparatus that owners must navigate to develop property in many jurisdictions. It has also resulted in widening fissures in the political fights over zoning. Although not always noticed, even by local officials and developers let alone by courts and scholars, the presumptive conservative opposition to land use regulations and liberal support has, in many cases, flipped.[21] Odd political alliances dot the landscape of local land use disputes, with—for example—affordable housing advocates working alongside for-profit developers to resist restrictive zoning ordinances.

From a distance, the divergence in local uses of zoning creates what appears to be real instability. When the dispute over zoning was framed simply in terms of more versus less regulation, the stakes were predictable and relatively clear. But now with governments pursuing many different goals in their land use regulations—with apparent divergence in the purposes of zoning—this area of law appears quite chaotic.

Municipal land use regulations no longer converge around the central organizing goal of minimizing conflicting uses of property (if they ever truly did). This is not, however, a story of entirely disorganized divergence. The proliferation of goals still relies for the most part on conventional zoning tools, even if these tools are deployed somewhat differently. What one therefore observes, looking carefully, is multimodal convergence in land use controls. And identifying those various points of convergence can go a long way to discerning patterns in—and understanding the political stakes of—zoning fights wherever they occur. The first step, however, is to survey the many goals that land use regulations today can serve and how local governments tend to pursue them.

Many of the specific objectives are by now familiar. Scholars already distinguish between growth machine and homevoter jurisdictions.[22] Advocates for sustainable development clash with NIMBYs (Not in My Backyard) and BANANAs (Build Absolutely Nothing Anywhere Near Anything”) and are joined by California’s new YIMBYs (Yes in My Backyard”).[23] It is easy to observe these fights on the ground and to see how much jurisdictions can diverge in their land use priorities. But instead of seeing these as one-off battles or through the realpolitik lens of interest-group conflicts, it is worth stepping back and canvassing the range of goals that local governments today pursue through their land use regulations.

Looking broadly, modern land use regulations often represent an effort to pursue one or more of the following goals. These are not mutually exclusive. Some are congruent with each other, but others are in inextricable tension. Many implicate a voluminous academic literature. They are presented here in only their most cursory outlines. The value of this Article is not in the exhaustive explication of any particular land use goal but instead in a broad survey of many of them together to identify the resulting content of the land use regulations that each of these goals tends to produce. What begins to emerge is a sense of real divergence in the objectives that local officials pursue through land use regulations, the implementation of which nevertheless converges around a few key zoning tools.

A.  Minimizing Harms from Neighbors

Minimizing conflicting uses of property is the original justification for zoning, and conventional land use tools are well-suited to this goal by separating residential, commercial, and industrial uses. Debates persist over what counts as incompatibility and what sorts of externalized harms need to be regulated.[24] Nevertheless, this overarching goal—and the resulting approach to zoning—are straightforward. Indeed, this objective continues to dominate land use regulation in many suburbs, where residents continue to protect low-intensity residential development by minimizing incursions of more intensive uses.[25]

B.  New Urbanism and Mixed Use

In many other areas, however, the traditional view of incompatible uses has broken down. People increasingly seek mixed uses and walkable neighborhoods, preferring that vibrancy to single-use residential areas.[26] New urbanism champions these land use goals.[27] New urbanists may still accept at least implicitly the goal of separating incompatible uses, but they adopt a very different view of what counts as incompatible.

New urbanist land use regulation therefore looks quite different from conventional Euclidean zoning. The regulatory regime still regulates land uses and development density, but it seeks vibrant and diverse uses instead of homogenous ones. In addition to some rigid use districts, then, it permits forms of mixed-use development.[28] Some zoning ordinances do this explicitly, predesignating certain zones for mixed use buildings.[29] Others do this through overlay districts or through special exceptions and variances.[30] The result is mixing more intensive and commercial uses with residential ones, often on arterial streets or in places located near mass transit.

C.  Encouraging Growth

Following Professors Harvey Molotch and William Fischel, land use literature has long divided municipalities into “growth machine” and “homevoter” jurisdictions.[31] The former seek to attract development and mobile capital and to encourage investments in new local developments. But this can be further subdivided into a number of different specific motivations. Most obviously, as the “growth machine” name implies, this pro-development attitude can reflect a straightforward desire to benefit the local development community. Builders, architects, realtors, lawyers, bankers, and others all have a strong financial interest in increased development activity.[32] Others favor growth for its own sake. A growing city feels dynamic and vibrant, even as it puts pressure on existing communities.[33] Still others are more instrumental, favoring growth for the increased economic activity that it sometimes produces and also for the services and amenities that size brings, whether a restaurant, professional sports team, or symphony, to name just some of the most obvious examples.[34]

Whatever the specific reason, this pro-growth agenda translates into a broad hostility to strict land use regulations. Municipalities that impose onerous regulatory hurdles are at a competitive disadvantage when it comes to attracting development and will expect to see development activity decrease, all else being equal. The resulting approach to zoning is therefore to minimize regulatory hurdles in order to encourage growth.

D.  Discouraging Growth

The opposite goal is also commonplace: discouraging growth. Just as some people seek growth for the amenities it brings, others may object because of increasing congestion or changes in municipal character that can accompany substantial new development.[35] It can also come simply from status quo bias.[36]

Again, whatever the specific motivation, the anti-growth agenda embraces zoning and land use regulations of all kinds. The clearest regulatory strategy to preserve the status quo is to erect as many regulatory hurdles as possible to prevent new development. Strict zoning requirements, including designating large areas of a municipality as effectively off-limits for development, are the most obvious techniques.[37] But adding new layers of regulation can be equally if not more effective. One study has demonstrated that every new regulation reduces building permits for multifamily units by 6%.[38] Historic preservation rules, strict subdivision ordinances, development impact fees, and so forth can also create an atmosphere hostile to development that drives growth elsewhere.

E.  Zoning for Tax Revenue

Zoning is increasingly bound up with issues of municipal finance. Sometimes this is direct, like using regulatory concessions as opportunities to raise money or develop infrastructure.[39] But more often, this is indirect, like using zoning to encourage land uses that have net positive budget impacts. Public schools, in particular, are often the largest expense for local governments and therefore drive land use decisions.[40]

While normatively controversial, local governments often seek to exclude affordable housing because low-income households generate relatively little revenue and yet place significant burdens on municipal budgets through impacts on schools and other municipal services. On the flip side, local governments seek land uses that generate substantial tax revenue while creating few costs.[41] Depending on the nature of the tax base, this often means seeking to attract high-valued homes for people with few if any school-aged children.

Traditionally, these dynamics have produced large-lot zones, limits or bans on multifamily housing, and other familiar, if troubling, forms of exclusionary zoning. By requiring housing that consumes more land per unit, a local government can reduce the amount of housing that can be built in any area and also can increase the land costs associated with housing, driving up prices. Admittedly, this dynamic has been shifting somewhat in recent years. Changing consumer preferences means that dense, mixed-use, multifamily development can sometimes be the most expensive, with new high-rise areas in cities like Nashville generating by far the most net tax revenue per square foot.[42] Nevertheless, in much of the country and especially in suburbs, the conventional wisdom still holds. Those places still deploy large lot zoning and bans on multifamily housing in order to exclude lower-income households and to attract and retain housing for the affluent.[43]

F.  Zoning for Fees

A more direct form of fiscal zoning comes from the bargaining opportunity that land use regulations can represent. Several decades ago, Professor Carol Rose demonstrated that zoning can be seen through the competing lenses of planning and dealing.[44] Under the dealing model, land use regulations should be seen as a kind of opening offer. Developers then must petition governments for more permissive regulations—like increases in density—and provide certain financial or in-kind benefits in exchange for regulatory largesse. Some people view this as a kind of graft, others simply as a way of ensuring that developers internalize more of the costs of increased density.[45] Regardless, many local governments have become increasingly sophisticated about enacting land use regulations that create a framework for bargaining.

The most familiar example is the imposition of impact fees or exactions. These are explicit mechanisms by which local governments charge developers for the burdens of new development, either through prespecified legislated fees or ad hoc bargains.[46] But other zoning approaches also create bargaining moments for local governments. For example, some local governments place large amounts of land into holding zones, typically industrial or agricultural zones where no other uses are permitted.[47] These do not reflect the municipality’s judgment about the highest and best use for the property but instead create such strict limits that anyone wanting to develop the property will have to seek a rezoning. Since property owners are rarely entitled to rezonings as of right, this gives municipalities discretion and so creates a meaningful opportunity to bargain for developer contributions to infrastructure, and so forth.

More generally, then, zoning ordinances can generate revenue either by imposing prespecified impact fees or by giving local officials discretion in land use decisionmaking. Vague zoning standards—like a requirement that development be “consistent” with existing community—allow local officials to deny land use applications.[48] This discretion therefore also allows officials to grant the applications but only upon certain concessions or contributions by the developer.

G.  Zoning to Increase Property Values

According to Professor Fischel’s leading account of suburbs and small local governments, homeowners dominate the political landscape and are primarily motivated by property values.[49] Most homeowners’ primary asset is their house, and so they are keenly interested in property values, seek policies and regulations that will increase local property values, and reward local politicians who provide them.[50]

There is no magic zoning bullet that will automatically create higher values. Instead, the relationship between zoning and property values is dynamic and depends tremendously on local context. Nevertheless, it is generally the case that restricting the supply of developable land will tend to increase property values. In fact, it amounts to a kind of transfer from new entrants who have to pay higher housing costs to in-place residents who see their property values climb.[51]

This does not always work. Sometimes, depending on elasticity in local markets, strict regulations can produce economic stagnation. If demand for housing is weak or very responsive to price, then overly restrictive zoning can be self-defeating.[52] But where demand is strong, as in many affluent and developed communities, restrictions on supply can increase property values for in-place property owners.

H.  Affordability

Not everyone benefits from rising property values. A countervailing pressure in many municipalities is the desire to encourage more affordable housing options.[53] Rents and home prices that are too high can drive out important members of the community—like teachers, government employees, artists, low-wage workers, and so forth—which can have adverse economic effects and can also deplete social capital.[54]

Local governments have a number of tools at their disposal to address housing affordability, but each comes with limitations. Obvious, but much maligned, tools include rent regulation and the provision of public housing.[55] But land use regulations can also be deployed to encourage affordable housing. Inclusionary zoning, for example, offers developers density bonuses in exchange for developing some number of affordable units or sometimes requires a number of affordable units outright as a condition for building.[56] More generally, too, simply increasing the supply of any form of new housing can also put downward pressure on price.[57] Cities today are experimenting with ways of relaxing density limits in order to increase the supply of new housing and thereby address affordability. In 2018, New York, for example, changed its off-street parking requirements for certain kinds of buildings, dramatically increasing the number of residential units that could be developed on any given lot.[58] The most extreme example is the YIMBY movement in California, which pushed for a change in 2018 that would have all but eliminated density limits on residential development anywhere near mass transit.[59] This would have unlocked an enormous amount of development potential throughout California’s cities. The measure failed, but there can be no doubt that affordability is motivating increasing political pressure.[60]

Not everyone agrees that unlocking development potential will help with affordability. Indeed, it might seem that developing high-end market rate housing would increase not decrease local housing costs. But the law of supply and demand is powerful, and even market-rate housing eases the demand for more modest existing housing elsewhere in the municipality and so puts downward pressure on price. In 2019, Professor Vicki Been et al. surveyed the economic literature and concluded that unlocking supply, even without explicit inclusionary zoning requirements, helps make housing more affordable, whereas supply restrictions drive prices up.[61] While responses remain controversial and contested, zoning for affordability involves lowering regulatory barriers, reducing development restrictions and unlocking increased development potential, or directly regulating price either through rent regulation or inclusionary zoning.

I.  Historic Preservation

Although not squarely “zoning” in many places, historic preservation can motivate local officials who seek to protect buildings or neighborhoods of historic significance. Designating property as historically significant can create a new layer of regulatory oversight. It therefore triggers a kind of additional veto right that can make it more difficult to build.[62] Historic preservation ordinances vary in their details and in their strength but generally require property owners to apply for a certificate of appropriateness when seeking to tear down or modify a structure designated as historically significant.[63]

J.  Community Preservation

More than historic preservation, community preservation motivates a significant amount of land use regulation. In fact, historic preservation is often a kind of rough proxy for the real concern of preventing displacement of the existing community. Development can threaten community in a number of different ways. Most directly, an influx of new residents can affect existing social ties and threaten existing social capital.[64] Development can simultaneously price some residents out of the neighborhood.[65] This gentrification—a perennial issue in local government and land use law[66]—creates its own winners and losers. The former includes primarily in-place property owners; the latter includes renters. Nevertheless, people concerned with preserving the existing in-place community will usually object to development that changes the character of a place.[67]

Some local governments have begun to experiment with community preservation directly, enacting community preservation ordinances that do not require a showing of historical significance but rather community significance to preserve a building.[68] Most use zoning’s blunter tools, again seeking to restrict new development by erecting regulatory hurdles. While this can sometimes prove self-defeating, creating stagnation and capital flight, community members will often take that risk in order to protect their social capital and communities. There is no doubt that concerns about the fragility of existing communities motivate a significant amount of restrictive zoning.

K.  Aesthetic Regulation

Today, in many places, the motivation for many land use regulations appears to be as much aesthetics as anything else. Neighbors are concerned about the impact of new development on the look of their neighborhood for its own sake and often oppose development primarily because they think it will be ugly.[69]

Sometimes, this concern is explicitly included in zoning ordinances by requiring architectural review.[70] Such architectural review provisions tend to create greater homogeneity in building design, often specifying a narrow list of appropriate architectural styles for any new buildings.[71] Homogeneity does not ensure beauty, of course, and can in fact create the opposite.[72] But it is a proxy for uncontroversial buildings and so minimizes aesthetic outliers.

Some jurisdictions have also turned away from traditional use-based zoning ordinances to form-based codes instead. As their name implies, these codes focus on the particular form that buildings can take—on bulk, shape, and so forth—instead of on the permitted uses. These often impose quite specific design requirements that function like de facto aesthetic regulations.[73]

L.  Environmental Protection: Sustainable Development

We have now long understood the important role that land use regulations can play in climate change.[74] Real estate development contributes significantly to carbon emissions. The sprawl associated with single-family residential suburbs is much more carbon intensive than dense development closer to people’s jobs and to commercial centers.[75]

Energy conservation is a backdrop for many discussions about new development. This can translate directly into land use regulation. Zoning that minimizes sprawl and that encourages denser development near transportation will lower carbon emissions.[76] Indeed, this is the explicit goal of sustainable development, which has generated an enormous amount of zoning activity and scholarly interest.[77] The blueprint for sustainable development remains contested, but experts broadly agree that urban living produces much less carbon than suburban and rural living. They therefore favor increasing density in the urban core while discouraging the land-consuming sprawl that has characterized development for much of the past century.[78]

M.  Environmental Protection: Animals and Habitats

A related motivation for land use regulation, especially in rural areas, is more traditional environmental protection and specifically the protection of environmental resources like wetlands. Wetland regulations are often administrated at the state level, rather than the local level.[79] Nevertheless, they function as sometimes dramatic limits on development. Other kinds of environmental regulations have a similar effect. Septic regulations can prove more restrictive than zoning in controlling density in rural areas without municipal wastewater.[80] Explicit environmental review through the National Environmental Policy Act (“NEPA”) or its state analogues also shape large-scale development.[81]

Other municipalities focus environmental efforts on wildlife habitat. The most sophisticated efforts involve taking an inventory of animal pathways and then seeking to create habitat connectivity by preventing development that interferes with those pathways.[82] Wildlife overlay districts seek to preserve critical habitat and to promote ecological health. More often, however, local governments pursue what is better characterized as aesthetic environmentalism. The goal is to promote a community character that includes vegetation, trees, open space, and a general sense of nature, regardless of the actual impact on wildlife or natural resources. Proponents often object to cookie-cutter suburbs and promote more large-lot development that preserves a more rural feel.

The result for zoning is increased restriction on development, but the location for these restrictions is motivated by a concern for natural resources and not by aesthetics, community character, and so forth.

N.  Economic Intervention

Zoning and land use controls can be an important if sometimes problematic tool for local governments to affect economic outcomes. At the most parochial level, land use regulations can be used as a kind of economic protectionism for in-place businesses by excluding competition.[83] Prohibitions on new entrants, coupled with grandfather protection for existing businesses, can create a kind of regulatory mini-monopoly. This can look like pure rent seeking or just naked economic favoritism for in-place businesses.[84] Sometimes, however, local governments can justify anti-competitive zoning on broader economic grounds. For example, some local governments have tried to use zoning and land use controls to exclude large box stores like Wal-Mart, ostensibly to preserve smaller businesses and downtown commercial areas, and the positive externalities they generate.[85]

Local governments can also use zoning to pursue specific economic goals. For example, noncumulative zoning in industrial areas is best understood as a kind of subsidy for industry by keeping property values lower for industrial land.[86] In other instances, local governments can create what amount to aspirational zones for uses they seek to attract—like New York City creating a new biomedical zone.[87] And even more broadly, local governments may use land use regulations to try to generate agglomeration surplus through a sufficient density of a particular kind of business or industry: think, here, of tech in Silicon Valley; insurance in Hartford, Connecticut; theater on Broadway; and so forth.[88] These places and industries may all have their own specific land use needs, and local governments are often especially solicitous of these industry-driven zoning requirements.[89]

O.  Exclusion and Segregation

In addition to the more-or-less principled justifications for land use regulation identified above, there are also more overtly pernicious ones that are important to acknowledge. Zoning can be used to exclude disfavored groups or businesses. This is most obvious and familiar in the context of racially motivated zoning. Although explicitly race-based zoning is clearly unconstitutional and illegal, exclusionary zoning often has a racially discriminatory impact, if not motivation. Because this can be so difficult to detect and to prove, it remains widespread.[90] For example, opposition to affordable housing or simply to less expensive multifamily housing may well be motivated for some people by racial animus.[91] The political fights over such housing are therefore often accompanied by charges of racism and can be bitter and ugly.[92]

Table 1 summarizes the different municipal goals described in this Section and the resulting implications for zoning.

 

What should be immediately apparent is the extent of convergence in the resulting approaches to zoning, even as land use objectives continue to diverge. Clearly, Table 1 obscures, through simplification, important limits on the extent of convergence. New urbanists, for example, will not favor relaxed zoning restrictions in all of the same places, or in the same way, as environmentalists. Nor are these interests mutually exclusive, even in the same person or political body. Someone can prioritize aesthetic concerns in one place and affordable housing in another in the same municipality. There is nothing inherently inconsistent in those views.

Indeed, questions of location and scale create persistent tensions in each of these approaches. Increased density in one place might increase property values but make other parts of the municipality more affordable. Local renters who might find themselves priced out of that particular neighborhood might therefore object, even though the effect of increased supply is to improve affordability.[93] Similarly, favoring density, transitoriented development, or a more urban mixed-use streetscape does not mean favoring those elements everywhere. They can conflict with concerns over historic or community preservation in particular locations in ways that are not internally inconsistent.

III.  Evaluating MultiModal Convergence

A.  The Costs and Benefits of Divergence

The diverging goals of land use regulations—and the resulting property and development rights that they circumscribe—create both costs and benefits. They also create new political alliances that can make the real stakes of zoning fights increasingly opaque. Being clear eyed about these dynamics allows for a more careful assessment of the changing landscape of land use regulations.

The most obvious cost of the proliferation of land use goals comes from the difficulty in navigating divergent regulatory regimes. When zoning codified the straightforward goal of separating incompatible uses of property, it was relatively easy for property owners and developers to anticipate ahead of time what uses would be permitted on any particular property. Comprehensive plans gave a sense of the municipality’s preferences and priorities, while the zoning ordinance prescribed broad categories of uses and densities that it would allow. A developer seeking to build new multifamily housing or a new commercial center would look for property with the right physical and regulatory characteristics to decide what land to buy and where to develop. And this process was relatively transparent.

Divergence in land use goals can obscure some of zoning’s signaling and channeling functions. Today, the content of the zoning ordinance does not necessarily reveal the municipality’s underlying purposes and goals and so can make the regulatory treatment of land more opaque. The fact that property is zoned as agricultural, for example, does not necessarily mean the municipality is hostile to development there. It might mean, instead, that local officials are open to a rezoning for a price.[94] Likewise, the fact that development will require a normally routine special use permit, or a less routine variance, does not mean a developer should expect to get it if the development will occupy land that local officials believe is important for habitat or the local officials are simply opposed to growth. In other words, divergence in the underlying purposes of land use regulations—especially in specific locations within a municipality—means that it can be difficult for property owners and developers to know ahead of time what uses will be permitted in any particular place. The contours of property rights and development potential are therefore rendered at least partially obscure.

Divergence in land use regulations creates another cost, too, in the form of special interest group rent seeking.[95] Support for—or opposition to—some land use approval can now include special interest group pressure from many different directions. Those interventions are costly themselves, but they can also create a more complex and less transparent set of choices for local officials. The results can be less effective regulations, whether judged by efficiency, by public preference, or any other metric.

There are benefits of the seeming divergence, however. Most importantly, multiplicity in land use regulations can allow people to better satisfy their individual preferences by choosing to live in a place that pursues their particular regulatory priorities. And they will not always choose to live in the place where their property rights are the most expansive. Indeed, it is quite to the contrary. While no one likes to be told what they can and cannot do on their own property, almost everyone likes being able to tell neighbors what they can do on theirs. Many people will willingly trade greater restrictions on their own land for equivalent restrictions on their neighbors. The proliferation of common interest communities, many of which are subject to much more burdensome property restrictions than any local zoning ordinance would ever impose, is proof that many people prefer this tradeoff.[96] Just as people can choose to live in a place with good public schools, or low taxes, or mass transit, or lots of open space, regulatory priorities can be important selection criteria for homeowners.

Relatedly, satisfying consumers’ regulatory preferences facilitates Tieboutean sorting.[97] This has structural benefits. Desirable regulatory regimes will be capitalized into property values, at least to some extent. That provides an important feedback mechanism for local governments seeking to satisfy consumer preferences. Where regulatory choices are limited to the binary options of “more” or “less,” price becomes an unhelpful or even perverse signal. More regulation will tend to restrict supply and so drive up prices, all else being equal. The pressure from sorting will always favor more restrictive zoning. But in a world of multimodal convergence, where local governments pursue a variety of regulatory objectives, sorting starts to generate meaningful price signals in property values. For example, the fact that many local governments have sought to brand themselves as “green” cities, partly through their land use regulations, demonstrates at least their perception of the benefits of such sorting.[98]

In theory, then, the proliferation of attitudes towards land use regulations, as well as the regulations themselves, should allow for consumers to satisfy their regulatory preferences and to purchase the bundle of property rights that they want. To the extent they are visible to outsiders—sometimes an unrealistic assumption—land use priorities allow for more efficient sorting.[99]

The tension between predictability and clarity in property rights on the one hand and satisfying diverse preferences on the other creates a meaningful limit on the goals that local governments should be able to pursue and how they pursue them. Too much divergence and information costs become too high. But too little and more people will be stuck in regimes that do not actually reflect their interests. Multimodal convergence therefore represents a surprisingly appropriate compromise between the certainty of unidimensional land use goals and more chaotic divergence. It also means that not everyone in a municipality must agree on the same goals to still be able to agree on an approach to zoning. The fact that different substantive goals can produce the same attitude towards zoning in a particular dispute means that more people can satisfy their regulatory preferences with fewer options.

This is not to say that the extent of the observed divergence that exists today is appropriate. It may be too great, and so the information costs are already too high. Or it may not be enough, and people are being forced into regulatory regimes that do not satisfy their preferences. This is, fundamentally, an empirical question, and one that would require further exploration to try to resolve. The observation here is simply that some degree of divergence is desirable, and that multimodal convergence reflects a kind of tacit compromise between an overly rigid set of land use goals and a regulatory free-for-all.

Multimodal convergence also provides a useful way of thinking about political alignments and narratives in contemporary land use fights. It explains why many land use disputes today involve such unlikely bedfellows. For example, the motives of the growth machine and affordable housing advocates may be very different, but their view of zoning may be quite consistent.[100]

These dynamics also make it more difficult to understand the “real” stakes of many land use disputes. Does opposition to multifamily housing in a particular place come from concern about habitat loss, from aesthetic preferences, or from racist opposition to the likely low-income residents who are predicted to move in? Any of those views would be consistent with a vote against the new development.

The purpose of highlighting these dynamics is not, ultimately, to favor one over another. Appropriate concerns in one place may be entirely inappropriate somewhere else. But bringing awareness to the diversity of goals that can be implicated by modern land use disputes should allow for more explicit evaluations of the trade-offs in any zoning decision. Even if the motivation for restrictive zoning is aesthetic, for example, it is important to recognize the impact on affordability. Conversely, encouraging growth may help affordability or create opportunities for agglomeration, but with the possibility of burdening infrastructure beyond what it can easily support and displacing in-place local residents.

But these dynamics do reveal that different groups sometimes end up advocating for land use regulations against their expressed interests. These groups are either being disingenuous about their actual motivations or are mistaken about how different substantive policies translate into land use regulation. The survey of land use goals in the previous part makes it easier to identify these unexpected positions and to explore alternative explanations.

B.  An Example: Nashville’s Music Row

Consider a recent land use fight in Nashville, Tennessee. There is nothing particularly special about this example. Indeed, its point here is its banality—if interesting local color. Nor does it implicate every different interest identified above. But it does reveal the complicated goals of modern land use controversies.

Nashville’s Music Row is two long, multiblock streets near and roughly parallel to the campus of Vanderbilt University. Its name comes from the many recording and music studios located along these long strips.[101] The buildings, however, look residential and are an eclectic hodgepodge that includes craftsman-style bungalows from the first half of the twentieth century, some modern buildings, and a few small office buildings. Increasing development pressure, however, has led to the redevelopment of many of these music-industry uses into new apartment buildings.[102] This has led to heated conflict over the future of Music Row, culminating in a two-year building moratorium that recently ended.[103]

At first glance, fights over the future of Music Row look entirely conventional. Groups arrayed against the development include NIMBY neighbors as well as preservationists. One of the most hard-fought development battles on Music Row concerned RCA Studio A. In 2014, when a developer announced plans to tear down and redevelop the property, singer-songwriter Ben Folds wrote an open letter to the musical community imploring that the building be saved.[104] He listed the musicians who recorded hit records there, including The Beach Boys, Dolly Parton, Jewel, Kesha, Hank Williams Jr., and many, many others. Folds was himself the tenant at the time, and he organized an aggressive and ultimately successful effort to buy the building and preserve it as a recording studio.[105]

While Studio A was saved through a voluntary transaction for $5.7 million, other building and redevelopment plans remain fiercely contested by preservationists. But historic preservation is an awkward fit because many of the buildings are not historical in any way. The historic preservationists are focused less on the buildings than on the musical history that they represent. In fact, it appears that their interests are not about preserving the architecture but are instead about preserving the music industry more broadly. One preservationist, for example, articulated the agenda this way: “We can’t just sit back and let Nashville’s unique history be destroyed and its present-day musical culture lost.”[106]

Other opposition to development appears to be more about preserving the community’s character than about any historic resources.[107] One longtime bartender said of the development on Music Row: “It’s not Nashville anymore. It used to be a little place, with a little airport, that had some fantastic music and big personalities and millions of different stories. Now it’s a metropolis, this is a big city.”[108] Others have focused their opposition on the associated infrastructure burdens and, in particular, on traffic.[109] Indeed, traffic has become a flashpoint in Nashville. There is no consensus about how to address it, but many people oppose all new development until a plan is in place.[110]

Finally, additional opposition comes from community groups who worry about affordability.[111] Any new construction in and around Music Row is likely to be very expensive. Many people worry that any new housing will be unaffordable, and that this will displace current residents. Housing costs in Nashville have been skyrocketing, putting particular pressure on affordable housing. According to one study, Nashville has lost 18,000 affordable housing units since 2000, and 44% of Nashville renters are housingcost burdened.[112] Opponents of new development often focus on affordability as a central objection.[113]

On the opposite side are developers who see a significant financial opportunity in the Music Row redevelopment.[114] Their interests are predictable. But the City also sees a substantial fiscal upside. Not only does new development generate more property tax revenue, but also its net fiscal impact is even more positive. Where dense urban infill has occurred nearby, the net tax revenue per square foot is dramatically higher than anywhere else in the metro area because of the relatively low cost of building out infrastructure and the high property values.[115] This, coupled with the City’s generally lax approach to land use regulation, makes redevelopment of Music Row appear all but inevitable, despite the interests aligned on the other side. Whoever wins, the controversy seems entirely predictable and conventional.

A closer look at the stakes, however, reveals a more complicated dynamic, and one that is increasingly representative of modern land use fights. Consider, first, the effect on traffic: a central source of opposition. This is a perplexing reason to oppose redevelopment. Music Row is adjacent to Vanderbilt and in the heart of the City. Yes, new residential buildings will increase local traffic to some extent, but it should marginally reduce traffic in the City more broadly. It is not exactly transit-oriented development since there is no meaningful transit in Nashville. But it is development that is closer to the places people work and play and so will result in fewer vehicle miles traveled. Traffic has a lot of political valence, and it makes tactical sense for opponents to use it as a reason to push back against development, but it seems misguided as a basis for objecting new buildings on Music Row. For this same reason, those concerned with sustainable development should favor dense infill in places like Music Row over suburban sprawl. This also reduces development’s total carbon footprint.

Increased housing costs citywide are also a poor reason to oppose the redevelopment of Music Row. While new housing may well precipitate a change in the character of the particular neighborhood and increase prices there, the best evidence demonstrates that adding supply will decrease median property values in the City and increase affordability. This is true even if the new housing stock is exclusively market rate and expensive. Such is the power of supply and demand.[116] Opposition to new development by immediate neighbors on grounds of affordability is rational if parochial—what Professor Been has labeled City NIMBYs.[117] Opposition based on concerns about housing costs throughout the city makes little sense.

There are countervailing peculiarities on the other side as well. Focusing on the fiscal impact of redevelopment, tax implications are only part of the story. Many business leaders and politicians have argued that it is in Nashville’s economic interest to preserve the music industry.[118] Preventing redevelopment of Music Row means that music studios do not need to compete with residential developers and so amounts to a kind of subsidy for the music business. There are agglomeration economies that come from the clustering of music studios in one particular area: musicians and songwriters frequently collaborate throughout the day, musicians record together, industry executives meet and do business in person up and down Music Row.[119] And, as traffic problems worsen throughout the city, the value of spatial proximity is only increasing.

Yes, market pressures demonstrate that the property is more valuable as residential or mixed-use development. Putting the property to a higher and better use unlocks value, by definition. However, the music industry produces significant benefits—positive externalities—for the City as a whole and should perhaps be preserved for that reason. It generates significant economic activity and also creates a kind of identity that attracts businesses and residents. If those benefits exceed the marginal value of redevelopment, then the City has a fiscal reason to subsidize the industry and prevent redevelopment, even if that means missing out on some increased tax revenue.

None of this reveals what the right answer is for Nashville. But it does demonstrate how the stakes of modern land use and zoning fights often go far beyond the traditional proregulation and antiregulation camps. It also reveals how different groups’ interests do not converge around any singular goal. Instead, different constituencies are motivated by very different underlying goals. Ultimately, people choose to live, to work, and to invest in Nashville for very different reasons. Some like the small-city feel of the place, others the music industry, still others the statewide emphasis on property rights and economic liberties, and others the appealing and new housing stock in increasingly dense mixed-use neighborhoods. But ultimately, these are all different views that can be reflected in different land use policies. Allowing Nashville to make decisions about which goals it will prioritize will give voters and property owners the opportunity to pursue or protect those aspects of the city that they most want.

 


[*] *..  Elizabeth H. & Granville S. Ridley, Jr. Professor of Law, Vanderbilt Law School. Christina Jeffcoat provided excellent research assistance.

 [1]. For the seminal Supreme Court case recognizing the utility of zoning in this area, see Village of Euclid v. Ambler Realty Co., 272 U.S. 365, 387–89 (1926).

 [2]. Christopher Serkin, The New Politics of New Property and the Takings Clause, 42 Vt. L. Rev. 1, 3–6, 13 (2017).

 [3]. Robert C. Ellickson et al., Land Use Controls 95, 332–33 (4th ed. 2013) (discussing revenue related purposes of zoning and “dealmaking” by local governments); Carol M. Rose, Planning and Dealing: Piecemeal Land Controls as a Problem of Local Legitimacy, 71 Calif. L. Rev. 837, 879 (1983) (discussing local governments’ desire to retain flexibility to bargain ad hoc with developers).

 [4]. Ellickson et al., supra note 3, at 114–15, 121, 328, 858 (discussing local governments’ ability to zone for more purposes than originally anticipated in the SZEA and examples of local governments that use zoning to achieve sustainability, affordability, and preservation goals); see also Melvyn R. Durchslag, Forgotten Federalism: The Takings Clause and Local Land Use Decisions, 59 Md. L. Rev. 464, 464–65 (2000) (discussing various municipal land use goals); Serkin, supra note 2, at 6–7 (comparing differing political attitudes toward environmental zoning versus rent regulations).

 [5]. Thanks to Professor Edward Cheng for labeling the phenomenon of multimodal convergence.

 [6]. See Conor Friedersdorf, San Francisco’s Self-Defeating Housing Activists, Atlantic (Dec. 29, 2015), https://www.theatlantic.com/politics/archive/2015/12/san-francisco-is-confused-about-the-villain-thats-making-it-unaffordable/422091; Ilya Somin, Why More Liberal Cities Have Less Affordable Housing, Wash. Post: Volokh Conspiracy (Nov. 2, 2014), https://www.washingtonpost.
com/news/volokh-conspiracy/wp/2014/11/02/more-liberal-cities-have-less-affordable-housing/?utm_ter
m=.b355844b719a. See generally Vicki Been, City NIMBYs, 33 J. Land Use & Envtl. L. 217 (2018) (exploring increasing “Not In My Backyard” (“NIMBY”) policies in cities and the resulting effect on urban housing costs).

 [7]. Serkin, supra note 2, at 14–15.

 [8]. See Emily Badger, The Bipartisan Cry of ‘Not in My Backyard’, N.Y. Times (Aug. 21, 2018), https://www.nytimes.com/2018/08/21/upshot/home-ownership-nimby-bipartisan.html; Mike Rosenberg, Housing Construction in Local Suburbs Is at Historic Lows, While Seattle Is Setting Records, Seattle Times, https://www.seattletimes.com/business/real-estate/king-county-suburbs-slow-their-housing-growth-canceling-out-seattle-building-boom (last updated Aug. 11, 2018, 12:49 AM).

 [9]. A Standard State Zoning Enabling Act (Advisory Comm. on Zoning, U.S. Dep’t of Commerce, rev. ed. 1926).

 [10]. See, e.g., Christopher Serkin, Existing Uses and the Limits of Land Use Regulation, 84 N.Y.U. L. Rev. 1222, 1232–33 (2009) (briefly describing the history of the SZEA and citing sources on the topic).

 [11]. Village of Euclid v. Ambler Realty Co., 272 U.S. 365, 394–95 (1926).

 [12]. See, e.g., Rose, supra note 3, at 848–49 & n. 29 (briefly describing history of zoning in the United States).

 [13]. See, e.g., Brian Galle, In Praise of Ex Ante Regulation, 68 Vand. L. Rev. 1715, 1724 (2015) (“[Z]oning laws restrict development before it results in unwanted burdens on neighbors, while nuisance suits impose liability after the damage has begun.”); G. Donald Jud, The Effects of Zoning on Single-Family Residential Property Values: Charlotte, North Carolina, 56 Land Econ. 142, 142 (1980) (“One of the principal purposes of municipal zoning ordinances is to protect property owners from the deleterious external effects that may arise when incompatible land uses exist within the same neighborhood.”); Carol M. Rose, Property Rights, Regulatory Regimes and the New Takings Jurisprudence—An Evolutionary Approach, 57 Tenn. L. Rev. 577, 588 (1990) (“As land resources became more developed, we progressed from a regime of ‘anything goes’ with one’s landed property, to a regime of post hoc judicial control on ‘nuisances,’ to a regime of legislatively defined, ex ante regulation.”); Mariana Valverde, Taking ‘Land Use’ Seriously: Toward an Ontology of Municipal Law, 9 Law Text Culture 34, 52 (2005) (identifying a “religion of incompatible land uses that was codified in the 1916 New York City zoning ordinance”).

 [14]. See Euclid, 272 U.S. at 386–91 (analogizing a town’s ability to prevent industry from building in residential areas to the law of nuisances).

 [15]. See Ambler Realty Co. v. Village of Euclid, 297 F. 307, 316 (N.D. Ohio 1924) (stating that the true purpose of separating single-family residences and apartment buildings was to further economic class divisions), rev’d 272 U.S. 365 (1926); Richard H. Chused, Euclid’s Historical Imagery, 51 Case W. Res. L. Rev. 597, 613–14 (2001) (discussing how the Supreme Court’s language in Euclid’s majority opinion created a negative, stereotypical image of apartment buildings, validating zoning as a way to segregate based on race and class).

 [16]. Christopher Serkin, Capitalization and Exclusionary Zoning, Interdisc. Ctr. Herzliya (forthcoming 2019) (manuscript at 5) (on file with author).

 [17]. Village of Euclid v. Ambler Realty Co., 272 U.S. 365, 394–97 (discussing the effects of apartment buildings on single-family residences and concluding that as apartments come very near to being nuisances, it is within a municipality’s police powers to exclude them from single-family residential areas); see also Chused, supra note 15, at 614.

 [18]. The intuition appears to be that burdens imposed by voluntary associations, like the private governance of a homeowner’s association, are preferable to public regulatory authority. It is not obvious why that should be since people can choose their local governments just as they can choose their residential subdivisions. For early endorsement of more but not exclusive reliance on nuisance law, see Robert C. Ellickson, Alternatives to Zoning: Covenants, Nuisance Rules, and Fines as Land Use Controls, 40 U. Chi. L. Rev. 681, 68283, 761–62 (1973).

 [19]. See Serkin, supra note 2, at 6–7, 13.

 [20]. William A. Fischel, The Homevoter Hypothesis 14–16, 18 (2001) (comparing “growth machine” jurisdictions with “homevoter” jurisdictions).

 [21]. For some recognition of these changes, see Been, supra note 6, at 219–23; Serkin, supra note 2, at 13–16.

 [22]. See Been, supra note 6, at 218 (noting that cities have traditionally been viewed as “growth machines” and suburbs as favoring NIMBY policies to protect “homevoter” property values).

 [23]. See Edward H. Ziegler, Sustainable Urban Development and the Next American Landscape: Some Thoughts on Transportation, Regionalism, and Urban Planning Law Reform in the 21st Century, 42 Urb. Law. 91, 92–99 (2010) (discussing the NIMBY’s opposition to sustainable development); Ben Lockshin, Beyond NIMBY: Understanding Different Affordable Housing Advocates and Detractors (Part 1), Greater Greater Wash. (Sept. 26, 2017), https://ggwash.org/view/64879/beyond-nimby-understanding-different-affordable-housing-advocates-detractors (discussing the differences between NIMBYs and BANANAs); Alana Semuels, From ‘Not in My Backyard’ to ‘Yes in My Backyard’, Atlantic (July 5, 2017), https://www.theatlantic.com/business/archive/2017/07/yimby-groups-pro-dev elopment/532437 (discussing the rise of YIMBY views in California in response to the need for high-density housing).

 [24]. See generally Holly Doremus, Takings and Transitions, 19 J. Land Use & Envtl. L. 1 (2003) (discussing the effects of changing morals, technology, and scientific understanding on land use regulations); William A. Fischel, The Law and Economics of Cedar-Apple Rust: State Action and Just Compensation in Miller v. Schoene, 3 Rev. L. & Econ. 133 (2007) (concluding that the government should regulate land uses that harm uses with higher commercial values).

 [25]. See Wayne Batchis, Enabling Urban Sprawl: Revisiting the Supreme Court’s Seminal Zoning Decision Euclid v. Ambler in the 21st Century, 17 Va. J. Soc. Pol’y & L. 373, 379–80 (2010) (explaining that the single-use zoning structure exists in the majority of U.S. jurisdictions); Nicole Stelle Garnett, Save the Cities, Stop the Suburbs?, 116 Yale L.J. Pocket Part 192 (2006), http://yalelawjournal.org/forum/save-the-cities-stop-the-suburbs (discussing the persistence of single-use zoning in suburbs).

 [26]. See, e.g., J. Peter Byrne, The Rebirth of the Neighborhood, 40 Fordham Urb. L.J. 1595, 1596–97 (2013) (arguing that new urban residents seek vibrant, mixed-use neighborhoods).

 [27]. Doris S. Goldstein, New Urbanism—Planning and Structure of the Traditional Neighborhood Development, 17 Prob. & Prop. 9, 9 (2003) (“New Urbanism is a land planning philosophy advocating compact, mixed-use, pedestrian-friendly development.”).

 [28]. See id. at 10 (discussing how new urban developments separate residential and commercial sections but also allow a mixture of uses in residential sections).

 [29]. For an example of explicit mixed-use zoning, see Seaside, FL., Code of Ordinances ch. 158, no. 83-10 (1983); Samantha Salden, The Seaside Code: The Poster That Started It All, Seaside Res. Portal, https://seaside.library.nd.edu/essays/the-code (last visited May 11, 2019) (discussing the Seaside Code as the first application of new urbanism in a form-based code).

 [30]. Brian W. Ohm & Robert J. Sitkowski, The Influence of New Urbanism on Local Ordinances: The Twilight of Zoning?, 35 Urb. Law. 783, 785 (2003) (comparing flexible techniques such as overlay zoning to the rigidity of single-use districts); Scott B. Osborne, Planning Issues in Mixed-Use Developments, 21 Prac. Real Est. Law. 29, 30 (2005) (discussing new urbanist zoning through conditional use permits and special zoning designations).

 [31]. Fischel, supra note 20, at ix, 15–16; Harvey Molotch, The City as a Growth Machine: Toward a Political Economy of Place, 82 Am. J. Soc. 309, 30910 (1976).

 [32]. S. Rodgers, Urban Growth Machine, in 12 International Encyclopedia of Human Geography 40, 41–42  (Rob Kitchin & Nigel Thrift, eds., 2009) (describing the property investors, developers, financiers, etc. that make up the growth machine).

 [33]. See Office of Policy Dev. & Research, U.S. Dep’t of Hous. & Urban Dev., Ensuring Equitable Neighborhood Change: Gentrification Pressures on Housing Affordability 5–6 (2016), https://www.huduser.gov/portal/sites/default/files/pdf/Insights-Ensuring-Equitable-Growth.pdf (discussing the burdens of rapid urban growth on existing communities).

 [34]. See William K. Jaeger, The Effects of Land-Use Regulations on Property Values, 36 Envtl. L. 105, 112–17 (2006) (discussing how land use decisions can increase property values and “amenity” benefits); see, e.g., Scott Cohn, New Insights on How Cities and States Stack Up in the Race to Win Amazon’s $5 Billion HQ2, CNBC, https://www.cnbc.com/2018/07/05/new-clues-on-how-cities-stack-up-in-the-race-to-win-amazons-hq2.html (last updated July 10, 2018, 7:42 PM) (explaining that Amazon’s criteria for new headquarters includes an area with more than one million people and urban locations that can attract and retain talent).

 [35]. See Michelle Shortsleeve, Challenging Growth-Restrictive Zoning in Massachusetts on a Disparate Impact Theory, 27 B.U. Pub. Int. L.J. 361, 380 (2018) (describing how municipalities use zoning to limit population growth, and thus constrain congestion and preserve community aspects).

 [36]. Eric A. Cesnik, The American Street, 33 Urb. Law. 147, 173–84 (2001) (discussing how metropolitan planning is constrained by the status quo or the existing look and function of the area).

 [37]. See Robert C. Ellickson, Suburban Growth Controls: An Economic and Legal Analysis, 86 Yale L.J. 385, 390–92 (1977) (describing the various ways municipalities prevent all development in certain areas).

 [38]. Kristoffer Jackson, Do Land Use Regulations Stifle Residential Development? Evidence from California Cities, 91 J. Urb. Econ. 45, 54 (2016); see also Been, supra note 6, at 227–28.

 [39]. See infra Section II.F.

 [40]. Ellickson et al., supra note 3, at 649–50 (discussing the high public costs of public schools). For an analysis of the interplay between fiscal land use decisions and public schools, see Eric A. Hanushek & Kuzey Yilmaz, Land-Use Controls, Fiscal Zoning, and the Local Provision of Education, 43 Pub. Fin. Rev. 559, 563–67 (2015).

 [41]. See Paul G. Lewis, Retail Politics: Local Sales Taxes and the Fiscalization of Land Use, 15 Econ. Dev. Q. 21, 24–26 (2001) (arguing that the quest for retail development and its resulting sales tax revenue motivates California’s land use decisions).

 [42]. Christopher Serkin & Leslie Wellington, Putting Exclusionary Zoning in Its Place: Affordable Housing and Geographic Scale, 40 Fordham Urb. L.J. 1667, 1684 (2013); Smart Growth Am., Fiscal Impact Analysis of Three Development Scenarios in Nashville-Davidson County, TN 11 (2013), https://smartgrowthamerica.org/app/legacy/documents/fiscal-analysis-of-nashville-develop ment.pdf (showing the tax revenue generated by the one high-rise area as compared to two other developments).

 [43]. Been, supra note 6, at 21923.

 [44]. Rose, supra note 3, at 882, 889–91.

 [45]. See, e.g., Vicki Been, Impact Fees and Housing Affordability, 8 Cityscape 139, 143–47 (2005) (discussing the advantages and disadvantages of development fees); Arthur C. Nelson, Development Impact Fees: The Next Generation, 26 Urb. Law. 541, 548–53 (1994) (addressing various objections to development fees).

 [46]. See Jim Rossi & Christopher Serkin, Energy Exactions, 104 Cornell L. Rev. (forthcoming 2019).

 [47]. See Robert C. Ellickson, The Role of Economics in the Teaching of Land-Use Law, 1 UCLA J. Envtl. L. & Pol’y 1, 7 (1980).

 [48]. See Erin Ryan, Zoning, Taking, and Dealing: The Problems and Promise of Bargaining in Land Use Planning Conflicts, 7 Harv. Negot. L. Rev. 337, 347–49 (2002) (noting the increasingly discretionary practice of land use decisionmaking).

 [49]. Fischel, supra note 20, at 18.

 [50]. Id. at 5–6.

 [51]. Vicki Been, “Exit” as a Constraint on Land Use Exactions: Rethinking the Unconstitutional Conditions Doctrine, 91 Colum. L. Rev. 473, 483 (1991); Molly S. McUsic, Looking Inside Out: Institutional Analysis and the Problem of Takings, 92 Nw. U.L. Rev. 591, 62526 & n.162 (1998).

 [52]. Been, supra note 51, at 504, 509 (discussing how one community’s overly stringent regulation may result in an otherwise beneficial development being taken to a community with better regulatory policies).

 [53]. See Been, supra note 6, at 22729 (noting the contributions of restrictions on housing supply to the lack of affordable housing options).

 [54]. Steven J. Eagle, “Affordable Housing” as Metaphor, 44 Fordham Urb. L.J. 301, 306–21 (2017) (discussing the diverse economic and social benefits of affordable housing); see also Keith Wardrip et al., Ctr. for Hous. Policy, The Role of Affordable Housing in Creating Jobs and Stimulating Local Economic Development 10–13 (2011), https://providencehousing.org/wp-con tent/uploads/2014/03/Housing-and-Economic-Development-Report-2011.pdf.

 [55]. Serkin, supra note 16 (offering a tentative justification for rent regulation).

 [56]. For an overview of inclusionary zoning, see Cecily T. Talbert et al., Recent Developments in Inclusionary Zoning, 38 Urb. Law. 701, 70203 (2006).

 [57]. See Vicki Been et al., Supply Skepticism: Housing Supply and Affordability, 29 Housing Pol’y Debate 25, 29 (2019).

 [58]. N.Y.C., NY, The Zoning Resolution, art. II, ch. 5 (2018), https://www1.nyc.gov/site/ planning/zoning/access-text.page.

 [59]. Benjamin Schneider, YIMBYs Defeated as California’s Transit Density Bill Stalls, Citylab (Apr. 18, 2018), https://www.citylab.com/equity/2018/04/californias-transit-density-bill-stalls/558341.

 [60]. See id.

 [61]. Been et al., supra note 57, at 27–29.

 [62]. See Vicki Been et al., Preserving History or Restricting Development? The Heterogeneous Effects of Historic Districts on Local Housing Markets in New York City, 92 J. Urb. Econ. 16, 17 (2016) (“We find that construction activity falls in districts after designation, as expected given the rules accompanying designation.”).

 [63]. For a description of zoning for historic preservation, see J. Dennis Doyle, Historic Preservation Zoning in Maryland, 5 Md. L.F. 100, 101–05 (1976).

 [64]. See Catherine Hart, Community Preference in New York City, 47 Seton Hall L. Rev. 881, 905 (2017) (explaining that the influx of high-income individuals into low-income communities “replaces local residents and deprives long-time residents of the stake they have built in their community”).

 [65]. Been, supra note 6, at 242–44.

 [66]. See Sheryll Cashin, The Failures of Integration 32427 (2004); Rachel D. Godsil, The Gentrification Trigger: Autonomy, Mobility, and Affirmatively Furthering Fair Housing, 78 Brook. L. Rev. 319, 335–37 (2013) (discussing a more nuanced approach to gentrification).

 [67]. The built environment is also important for community preservation, even independent of the financial pressures that can come from gentrification. As Professor Carol Rose observed decades ago, buildings can be important for constituting community, and indeed preservation efforts should be evaluated to that end. See Carol M. Rose, Preservation and Community: New Directions in the Law of Historic Preservation, 33 Stan. L. Rev. 473, 488–91 (1981).

 [68]. See William A. Fischel, Neighborhood Conservation Districts: The New Belt and Suspenders of Municipal Zoning, 78 Brook. L. Rev. 339, 347–49 (2013) (discussing community preservation techniques other than those based on historic status).

 [69]. See, e.g., Dan Grossman, Think Those Slot Homes in Denver Are Ugly? You’re Not Alone, 9 News, https://www.9news.com/article/money/personal-finance/real-estate/think-those-slot-homes-in-de
nver-are-ugly-youre-not-alone/73-490912391 (last updated Nov. 10, 2017, 2:44 PM) (discussing Denver residents’ aesthetic opposition to homes described as “Minecraft characters, Lego characters,” and  “robots”).

 [70]. See Shawn G. Rice, Zoning Law: Architectural Appearance Ordinances and the First Amendment, 76 Marq. L. Rev. 439, 446–48 (1993) (discussing the ways that architectural appearance ordinances can limit the aesthetics of communities).

 [71]. Id. at 446 (describing architectural appearance ordinances as limiting “excessive dissimilarity” and requiring “conformity” or “harmony” (citations omitted)).

 [72]. See Edward Scissorhands (20th Century Fox Dec. 6, 1990).

 [73]. For a description of form-based codes, see Nicole Stelle Garnett, Hoover Inst., Upscaling the Neighborhood 18–32 (2018), https://www.hoover.org/sites/default/files/upscaling_ the_neighborhood_revised_final_garnett_0.pdf.

 [74]. For an overview of this dynamic, see generally David Markell, Climate Change and the Roles of Land Use and Energy Law: An Introduction, 27 J. Land Use & Envtl. L. 231 (2012) (discussing the effect that “land use, energy efficiency, and mobile and stationary source emission reduction approaches” can have on climate change).

 [75]. See Reid Ewing et al., Smart Growth Am., Measuring Sprawl and Its Impact 18–19 (2002), https://www.smartgrowthamerica.org/app/legacy/documents/MeasuringSprawl.PDF.

 [76]. Patricia E. Salkin, Sustainability and Land Use Planning: Greening State and Local Land Use Plans and Regulations to Address Climate Change Challenges and Preserve Resources for Future Generations, 34 Wm. & Mary Envtl. L. & Pol’y Rev. 121, 147–56 (2009) (surveying regulatory land use techniques meant to increase sustainability).

 [77]. See, e.g., John R. Nolon, An Environmental Understanding of the Local Land Use System, 45 Envtl. L. Rep. 10215, 10220–21 (2015).

 [78]. Other kinds of less conventional responses are possible as well. For an example of one, see Rossi & Serkin, supra note 46.

 [79]. See George F. Gramling, III, Wetland Regulation and Wildlife Habitat Protection: Proposals for Florida, 8 Harv. Envtl. L. Rev. 365, 37778 (1984).

 [80]. See Christopher Serkin, Public Entrenchment Through Private Law: Binding Local Governments, 78 U. Chi. L. Rev. 879, 913 (2011) (discussing how building infrastructure with limited capacity can be more controlling than zoning).

 [81]. See Bradley C. Karkkainen, Whither NEPA, 12 N.Y.U. Envtl. L.J. 333, 349 (2004) (arguing that environmental-informative requirements function as regulatory penalties, creating incentives to upgrade environmental standards early in projects).

 [82]. Critical Paths for Vermont Wildlife, Nat’l Wildlife Fed’n, https://www.nwf.org/Our-Work/Habitats/Wildlife-Corridors/Northeast (last visited May 12, 2019).

 [83]. See, e.g., Ensign Bickford Realty Corp. v. City Council of Livermore, 137 Cal. Rptr. 304, 309 (Ct. App. 1977); Sprenger, Grubb & Assocs., Inc. v. City of Hailey, 903 P.2d 741, 74849 (Idaho 1995).

 [84]. See Coniston Corp. v. Village of Hoffman Estates, 844 F.2d 461, 466–67 (7th Cir. 1988).

 [85]. A downtown commercial district may generate significant positive effects, which a big-box store at the edge of town can threaten. See Scott L. Cummings, Law in the Labor Movement’s Challenge to Wal-Mart: A Case Study of the Inglewood Site Fight, 95 Calif. L. Rev. 1927, 194852 (2007).

 [86]. Roderick M. Hills, Jr. & David Schleicher, The Steep Costs of Using Noncumulative Zoning to Preserve Land for Urban Manufacturing, 77 U. Chi. L. Rev. 249, 25356 (2010) (acknowledging the prevalence of the use of noncumulative zoning for these purposes but ultimately arguing against it).

 [87]. Transwestern, New York City Life Science Market 5 (2017), https://download.trans
western.com/public/Media/NY-Life-Science-Outlook_2Q2017.pdf.

 [88]. See Roderick M. Hills & David Schleicher, Planning an Affordable City, 101 Iowa L. Rev. 91, 11516 (2015) (“Many cities have no adequate substitutes, because they create agglomeration economies that rivals cannot duplicate.”).

 [89]. Broadway enjoys a special zoning district. For an interesting overview of New York’s zoning code, see Allison Meier, How Zoning Laws Shaped New York City over the Last Century, Hyperallergic (Dec. 14, 2016), https://hyperallergic.com/341092/mastering-the-metropolis-mcny.

 [90]. See Donald J. Smythe, The Power to Exclude and the Power to Expel, 66 Clev. St. L. Rev. 367, 39799 (2018) (analyzing the continued use of exclusionary zoning by local governments).

 [91]. See, e.g., Timothy J. Choppin, Breaking the Exclusionary Land Use Regulation Barrier: Policies to Promote Affordable Housing in the Suburbs, 82 Geo. L.J. 2039, 2054 (1994) (“Discrimination, both racial and economic, is one reason suburban residents oppose affordable housing.”).

 [92]. See Mick Dumke, Amid Affordable Housing Dispute, Conservatives Seek a Home on the Northwest Side, Chi. Sun-Times (May 23, 2018, 10:48 AM), https://chicago.suntimes.com/news/
affordable-housing-chicago-northwest-side-gop-conservative-republicans-northwest-side-jefferson-park-illinois-policy-institute (describing a political fight over a proposed affordable housing project in Chicago).

 [93]. See Been et al., supra note 57, at 2527.

 [94]. See Rose, supra note 3, at 862–63, 897; see also Melanie Yingst, Commission OKs Rezoning of Properties, Troy Daily News (June 14, 2018), https://www.tdn-net.com/news/43184/commission-oks-rezoning-of-properties (discussing an Ohio local zoning commission’s decision to rezone two agricultural properties to allow residential development of the area).

 [95]. See generally Jonathan R. Macey, Promoting Public-Regarding Legislation Through Statutory Interpretation: An Interest Group Model, 86 Colum. L. Rev. 223 (1986) (discussing interest-group rent seeking).

 [96]. See Robert H. Nelson, Privatizing the Neighborhood: A Proposal to Replace Zoning with Private Collective Property Rights to Existing Neighborhoods, 7 Geo. Mason L. Rev. 827, 833 (1999) (arguing that the proliferation of common interest communities demonstrates their appeal).

 [97]. Charles M. Tiebout, A Pure Theory of Local Expenditures, 64 J. Pol. Econ. 416, 417–20 (1956).

 [98]. See Denise Ryan, The $31b “Green” Branding of Vancouver, Vancouver Sun (Jan. 31, 2016), http://www.vancouversun.com/business/green+branding+Vancouver/11686117/story.html.

 [99]. See Tiebout, supra note 97, at 418.

 [100]. Serkin, supra note 2, at 13–15.

 [101]. See Jessi Maness, The History of Music Row: 60 Years of Greatness, Sports & Ent. Nashville (Oct. 13, 2015), http://sportsandentertainmentnashville.com/the-history-of-music-row-60-years-of-greatness.

 [102]. See, e.g., Michelle C. Kroft, Show Your Support—Help Save Music Row at the Rally the Row Event July 24th!, Hist. Nashivlle, Inc. (July 16, 2018), http://historicnashvilleinc.org/show-your-support-help-save-music-row-at-the-rally-the-row-event-july-24th [https://perma.cc/UVK8-R89Z] (“Since 2013, 43 buildings with music industry connections have been demolished—most to make way for apartment buildings.”); see also Margaret Renkl, The Day the Music Died, N.Y. Times (Jan. 21, 2019), https://www.nytimes.com/2019/01/21/opinion/nashville-music.html (outlining the gentrification of Music Row).

 [103]. See Tony Gonzalez, Music Row Apartments Halted, Prompting New Study, Tennessean (Feb. 12, 2015 6:44 PM), https://www.tennessean.com/story/news/local/2015/02/12/music-row-apartment-plan-halted-prompting-study/23324495.

 [104]. Open Letter from Ben Folds, owner of Grand Victor Sound (June 24, 2014), https://musicrow.com/2014/06/ben-folds-open-letter-rca-studio-a-to-be-sold.

 [105]. See Richard Fausset, Deal Saves Historic Nashville Studio, N.Y. Times (Oct. 3, 2014), https://www.nytimes.com/2014/10/04/us/deal-saves-historic-nashville-studio.html.

 [106]. Jessica Nicholson, National Trust for Historic Preservation and Historic Nashville to Hold Rally the Row Event, Music Row (July 20, 2018) (quoting Carolyn Brackett, Senior Field Officer, National Trust for Historic Preservation), https://musicrow.com/2018/07/national-trust-for-historic-preservation-and-historic-nashville-to-hold-rally-the-row-event [https://perma.cc/2DR2-6QU6%5D; see also id. (“We have to act now to save this place that is iconic and historically priceless.” (quoting Trey Bruce, Vice President, Historic Nashville)).

 [107]. See, e.g., Nashville Metro. Planning Dep’t, Music Row Detailed Plan app. (2016) [hereinafter Music Row Detailed Plan], https://www.nashville.gov/Portals/0/SiteContent/Planning/
docs/MusicRow/Music%20Row%20Detailed%20Plan%20Draft%20Recommendations__withAppendix.pdf (Survey 1 Responses Organized by Question) (listing comments from survey respondents about preserving Music Row, including: “To me, the individual buildings create an overall feel that binds the community. It’s humble and full of character.”).

 [108]. Nikki Junewicz, Historic Buildings in Danger in Music Row Redevelopment Proposal, Fox 17 Nashville (May 20, 2018) (quoting Jonathan Long, local bartender), https://fox17.com/news/local/
historic-buildings-in-danger-in-music-city-row-redevelopment-proposal [https://perma.cc/HDK4-RGL3%5D.

 [109]. See Music Row Detailed Plan, supra note 107, at app. (“GROW[TH] SHOULD NOT OCCUR BY BUILDING . . . . That would only worsen the traffic and will be less inviting for tourism.”); see also E-mail from John Dotson, Parks Broker, e-Pro, to Planning Commissioners (Dec. 6, 2016, 11:40 AM), https://www.nashville.gov/document/ID/cdd7797e-1ed5-49c7-8e20-7fc9ef4fd8a9/
December-8-2016-public-comments-received-through-December-7 (“We are most concerned about traffic, parking and infrastructure.”).

 [110]. See, e.g., Music Row Detailed Plan, supra note 107, at app. (commenting the following on getting around Music Row: “[I]nfrastructure should be considered BEFORE approval of millions of square feet of new construction, not after.”). Cf. Hiroko Tabuchi, How the Koch Brothers Are Killing Public Transit Projects Around the Country, N.Y. Times (June 19, 2018), https://www.nytimes.com/
2018/06/19/climate/koch-brothers-public-transit.html (discussing the support and opposition for a new transit plan in Nashville and other cities across the United States).

 [111]. See Office of the Mayor Megan Barry, Housing Nashville: Nashville & Davidson County’s Housing Report 1112, 40–42 (2017) [hereinafter Nashville Housing Report], https://www.nashville.gov/Portals/0/SiteContent/MayorsOffice/AffordableHousing/Housing%20Nashville%20FINAL.pdf; see also Music Row Detailed Plan, supra note 107, at app. (commenting the following concerning how to strengthen the Music Row community: “Affordability. Nashville can’t chase out all of us median income people . . . .”).

 [112]. Nashville Housing Report, supra note 111, at 11, 16.

 [113]. See David Plazas, The Costs of Growth and Change in Nashville, Tennessean, https://www.tennessean.com/story/opinion/columnists/david-plazas/2017/01/29/costs-growth-and-change-nashville/97064252 (last updated Jan. 10, 2018, 6:50 PM) (discussing how the development boom in Nashville has led to increasingly high housing costs); Stephen Trageser, Music Row Development and Neighborhood Character, Nashville Scene (Sept. 25, 2018 3:00 PM), https://www.nashvillescene.com/news/pith-in-the-wind/article/21024081/music-row-development-and-neighborhood-character (“[W]ith Nashville real estate prices as high as they are today, the chances of [neighborhood business] finding a comparable spot nearby seem slim.”) (discussing the pressure to develop Music Row and its effect on existing businesses).

 [114]. Staff Reports, Music Row Project Lands $12.8M Permit, Nashville Post (Apr. 4, 2018), https://www.nashvillepost.com/business/development/article/20999454/notes-music-row-project-lands-128m-permit (reporting that a development company has obtained a permit to build a Music Row office building expected to be worth $35 million).

 [115]. Smart Growth Am., supra note 42, at 10–11 (analyzing the significantly positive fiscal impact and tax benefit of the Gulch, a dense infill development, compared to two other Nashville developments).

 [116]. See Emily Hamilton, Three Lessons from Nashville’s Building Boom, Market Urbanism (Apr. 27, 2018), http://marketurbanism.com/2018/04/27/three-lessons-nashvilles-building-boom (“While there’s no way to legislate that great music will continue to come out of Music Row, the best way to make Nashville a good place for up and coming artists is to allow for new housing construction that will allow affordable neighborhoods to stay that way.”) (arguing that development has kept rents in other neighborhoods more affordable).

 [117]. See Been, supra note 6, at 242–43.

 [118]. See Patrick Sisson, On a Mission to Preserve Nashville’s Music Row, Meridian, https://www.meridian.net/tennessee/2016/11/10/13592846/nashville-live-music-row (last visited May 12, 2019) (describing the outsize impact Music Row has had on Nashville’s economy).

 [119]. See Carolyn Brackett & Randall Gross, Nat’l Trust for Historic Pres., A New Vision for Music Row 15 (2016), https://www.nashville.gov/Portals/0/SiteContent/Planning/docs/
MusicRow/Music%20Row%20Recommendations%20Report%20April%202016.pdf (“Like in the early days of Music Row, many industry leaders and participants still walk between offices and meet up for lunch, networking, contracting, or collaboration.”).

 

Convergence and the Circulation of Money Judgments – Article by Aaron D. Simowitz

 

From Volume 92, Number 4 (May 2019)
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Convergence and the Circulation of Money Judgments

Aaron D. Simowitz0F[*]

For half a century at least, the several states of the United States have taken a liberal attitude toward the recognition and enforcement of foreign country money judgments. The U.S. Supreme Court invoked the “grace” of sovereign nations to justify a restrictive approach to the recognition of judgments in the famous case of Hilton v. Guyot. The New York Court of Appeals laid out a more generous approach based in the vindication of private rights. Simply put, private rights won. In 1962, the Uniform Law Commission promulgated the Uniform Foreign Money-Judgments Recognition Act, which codified a liberal approach to the cross-border circulation of money judgments. The many U.S. states that adopted the uniform act were trying to lead by example. The hope was that, if they accepted incoming judgments, judgments exported to the rest of the world would be accepted, recognized, and enforced. For decades, this effort was regarded as a failure. The European Union continued to draw a sharp distinction between E.U. judgments and U.S. judgments—though acceptance of U.S. judgments by E.U. member states crept up over time. Some of the world’s largest economies—most notably, China—outright rejected recognition of U.S. money judgments.

Change has been recent and dramatic. In 2017, a Chinese court recognized and enforced a U.S. money judgement for the first time. Chinese law requires reciprocity between nations in order to recognize a foreign money judgment. The United States has no reciprocal judgment recognition treaty with any country. A U.S. district court recognized and enforced a Chinese judgment in 2009. This “reciprocity in fact” was sufficient for a Chinese court. A few months later, China announced that it would sign The Hague Convention on Choice of Court Agreements (COCA), obligating Chinese courts to recognize and enforce judgments rendered under a choice of court clause selecting the courts of any contracting state. The COCA has already entered into force between the European Union, Mexico, and Singapore. The United States has signed, but not ratified, the agreement. Meanwhile, The Hague Judgments Project gathers steam to require the free circulation of judgments arising in all but a few contexts. The drivers of this apparent convergence are obscure and likely diverse. This Article will analyze the causes of this recent, dramatic shift and will attempt to assess the likelihood of further convergence.

Introduction

The recognition of foreign judgments goes back at least as far as the sixteenth century, in the English courts of admiralty.[1] It was addressed by the 1774 Massachusetts Bay Act, the Articles of Confederation, the United States Constitution, and the First Congress.[2] The drafters of the U.S. Constitution and the creators of the European Union recognized the circulation of judgments as a key component of an integrated economic system.[3]

It is no exaggeration to say the circulation of judgments has been improving for at least five centuries. But the second half of the twentieth century was something of a pause. As judgments circulated ever more freely within economic units, like the United States or the European Union, recognition across countries stalled. Many courts of E.U. member states remained skeptical of U.S. judgments. The courts of the People’s Republic of China did not recognize a single U.S. money judgment. Indeed, this reluctance contributed to the rise of international commercial arbitration.

The Chinese approach changed dramatically in the summer of 2017. For the first time, a Chinese court recognized a U.S. commercial money judgment. Chinese law requires reciprocity: a creditor seeking recognition of a foreign money judgment in China must demonstrate that the courts of the country that rendered the judgment would recognize and enforce Chinese judgments. Previous courts had required such reciprocity to be established by treaty. In the case Liu Li v. Tao Li and Tong Wu, the Intermediate People’s Court of Wuhan City dispensed with this requirement, instead turning to the concept of “de facto reciprocity,” which it held was satisfied with regard to U.S. courts.[4]

The Chinese government followed this development quickly with an announcement that China would sign the fledgling Hague Convention on Choice of Court Agreements (COCA). The COCA came out of the ashes of the attempted Convention of Jurisdiction and Recognition of Judgments. In light of the failure of that ambitious project, the drafters prepared a more limited treaty that applied only to agreements to resolve commercial disputes in a particular national forum and, crucially, obligated signatory states to recognize judgments arising from those proceedings. At the time of the announcement, only the European Union and Mexico had permitted the treaty to enter into force. The United States had signed the treaty but refused to ratify it. Since then, the list of COCA countries has continued to grow.

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.[5] China has asserted aggressive claims to monetary,[6] informational,[7] and territorial sovereignty.[8] And yet it seems eager to cede ‘decisional sovereignty’ to foreign courts. Following these developments, scholars of international law queried whether China was pursuing an agenda of economic integration or economic power. The answer, naturally, is yes.

It is not yet clear whether we are entering a new era in the convergence of recognition of foreign judgments, in which national court judgments will resume their long march towards greater circulation among (and not merely within) economic units. It is far from clear whether China’s about-face will be lasting. The future of the COCA—and of the more ambitious Hague Judgments Project—remains uncertain. And not least of all, the consequences of the long-running inability of the United States to implement the COCA remain unclear.

This Article discusses the recent shift in China’s approach. It then proceeds to assess the forces that have lately led to greater convergence in the circulation of national court judgments.

I.  Foreign Money Judgments in Chinese Courts

The Liu decision alone would have been noteworthy, but probably not enough to significantly change the expectations for transnational dispute resolution involving China. The Liu decision coupled with China’s move to join the COCA, however, indicated a dramatic shift in the recognition and enforcement of foreign judgments in China.

A.  The Old Approach: Reciprocity by Treaty

The relevant Chinese law sets out “three channels[9] for recognition and enforcement of foreign money judgments—applicable domestic statutes, bilateral judgment recognition and enforcement treaties, and international conventions on circulation of judgments. Until recently, the third category was a null set. China has quite a few bilateral judgment treaties, but none with its largest trading partners, including the United States.[10] With the “limited impact” of treaties, Chinese domestic law has been the “predominant” channel.[11]

Chinese law “follows a modified civil/political” system.[12] The domestic legislation applicable to recognition of foreign money judgments is mainly found in the Civil Procedure Law (“CPL”). The limited provisions applying to recognition of foreign judgments were enacted in 1991 as part of the overarching CPL and have not changed since.[13] The CPL and related laws[14] provide only a general public policy defense and a reciprocity requirement.[15]

This thin legislative background has left the Supreme People’s Court (SPC) with broad influence in shaping the interpretation of the relevant law. The Chinese legal system does not have binding precedent in the common-law sense. However, the SPC has a profound effect on interpretation, both through its decisions and by issuing official interpretations of particular statutes.[16] The SPC has used this authority to “to interpret the relevant laws, including the CPL, in a conservative way, thus hindering the” recognition and enforcement of foreign judgments.17F[17]

This conservative approach was most clearly demonstrated in the SPC’s “infamous” decision in Gomi Akira v. Dalian Fari Seafood,18F[18] which touched off a “Sino–Japanese recognition feud.”[19] In Gomi Akira, the SPC rejected arguments in favor of presumed or legal reciprocity in favor of a strict interpretation of de facto reciprocity. Thus, Gomi Akira became “the most fundamental and frequently cited ground for the non-recognition of foreign judgments in China.”[20] This led China straight into a reciprocity trap—a stalemate in which recognition of foreign judgments was almost non-existent. This defensive attitude led commentators in both China and the United States to describe the Chinese approach to recognition and enforcement of foreign judgments as overly conservative and parochial.[21]

In practice, this left recognition by reciprocal treaty as the only functional “channel” by which to obtain recognition and enforcement of judgments in China. China has reciprocal judgment enforcement treaties with thirty-three countries, accounting for over 14 percent of its total trading volume.[22] Nevertheless, this “network of enforcement treaties” has been dismissed as “patchy.”[23] This may be due to the Chinese courts’ lack of awareness of the treaties, the uncertainties in the treaties (both because of their drafting and subsequent interpretation by the courts), and the ineffectiveness in enforcing commercial judgments.” Indeed, the advantages of the COCA over the patchwork of bilateral treaties may have influenced China’s adoption of the multilateral treaty.[24]

B.  The New Approach: “De Facto” Reciprocity

On June 30, 2017, a Chinese court recognized a U.S. commercial money judgment—a first in Sino-U.S. history. It was not the first time, however, that a Chinese court had recognized a foreign commercial money judgment.

In 2014, the High Court of Singapore recognized and enforced a commercial money judgment issued by the Intermediate People’s Court of Suzhou City in Jiangsu Province.[25] Two years later, the Intermediate People’s Court of Nanjing City in Jiangsu Province in Kolmar v. Jiangsu Textile recognized and enforced a commercial money judgment issued by the High Court of Singapore.[26] The following year, the Supreme People’s Court included that recognition judgment in its Second Series of Typical Cases illustrating the “One Belt and One Road” program.[27]

The Belt and Road Initiative has become the organizing economic program of the Xi government. It was first mentioned in 2013, when President Xi spoke in Kazakhstan, but this “seemingly out-of-the-way event in an out-of-the-way country has since mushroomed into the keystone policy initiative of the Xi presidency.”[28] The program draws its name from the ambition to recreate a land and maritime “Silk Road” with China as the hub, but “the undertaking became a sort of catchall for much more than new openings for international trade and investment for China” and has grown “to include developments in law in particular that can be seen as enhancing both international trade and China’s image in the global community.”[29] In 2015, the “Vision and Actions on Jointly Building Silk Road Economic Belt and 21st-Century Maritime Silk Road” laid out the mission statement for the initiative, including that “China will stay committed to the basic policy of opening-up, build a new pattern of all-round opening-up, and integrate itself deeper into the world economic system.”[30] A 2015 statement issued by the Supreme People’s Court specifically called on Chinese courts to “promote the mutual recognition and enforcement of judgments rendered by countries along the ‘Belt and Road.’”[31] And in 2017 (only a few weeks before the Liu decision), the second China-ASEAN Justice Forum, hosted by the Supreme People’s Court, produced a statement explicitly calling “for a presumption of reciprocity, even in the absence of a treaty.”[32]

“On [June 30th,]  2017, for the first time in history, [a] Chinese court recognized and enforced a U.S. commercial monetary judgment.”[33] The plaintiff, Liu Li, concluded a Share Transfer Agreement in the United States to purchase a 50 percent stake in a California corporation owned by Tao Li. Liu transferred 125,000 dollars to Tao. Liu alleged that Tao then transferred the money to his wife, Tong Wu, and then they absconded together. Liu filed an action for fraud in California state court.[34] When direct service was unsuccessful, the California court authorized service by publication. The defendants defaulted, and the court then entered a default judgment against them with both pre-judgment interest and costs.[35]

The debtors had their habitual residence in Wuhan City, where they also owned real estate that could be used to satisfy the judgment.[36] Liu petitioned the Intermediate People’s Court of Wuhan City to recognize and enforce the U.S. money judgment.[37] The Wuhan City court held that it had jurisdiction to hear the petition due to the presence of defendants’ real property.[38] The court rejected defendants’ arguments that service had been improper and declined defendants’ invitation to reexamine the merits of the case.[39]

As the United States and China have no reciprocal judgment recognition treaty, the court noted the application would have to satisfy the requirement of de facto reciprocity. Liu pointed to the decision of the U.S. District Court for the Central District of California in Hubei Gezhouba Sanlian Industrial Co. v. Robinson Helicopter Co., [40] a products liability case in which the U.S. court had recognized and enforced a money judgment rendered by the Higher People’s Court of Hubei Province China.[41] The Wuhan City court held that this provided adequate evidence of de facto reciprocity and, after dispensing with the debtors’ final defense that the judgment violated Chinese public policy, recognized and enforced the U.S. judgment.[42]

This case goes beyond the approach to de facto reciprocity endorsed in Kolmar. In Kolmar, the de facto reciprocity between China and Singapore was established between the same courts on the same claims—the outgoing Chinese judgment was on a contract claim and was recognized by the High Court of Singapore; the incoming judgment was rendered by the High Court of Singapore in a contract action.[43] After Kolmar, doubts remained as to whether Chinese courts “would require the same cause of action and how Chinese court[s] would apply de facto reciprocity if the requested judgment is rendered in a federal country.”[44] In recognizing the U.S. money judgment, the Chinese court did not require the same cause of action—the outgoing judgment had been on a tort claim; the incoming judgment sounded predominantly in contract.

Nor did the Chinese court dwell on the influence of a particular federal or state decision in a judicial system of both horizontal and vertical federalism. In the United States, judgment recognition and enforcement law is state, rather than federal, law. Therefore, state courts have the ultimate authority to interpret U.S. judgment recognition law. The Hubei Gezhouba Sanlian Industrial v. Robinson Helicopter decision was issued by a federal court interpreting California state law. Arguably, a state court might therefore have greater influence in setting a persuasive precedent for reciprocity. No decision based on California law would bind U.S. federal or state courts applying other states’ judgment recognition laws. (Of course, a trial court decision is not binding precedent, regardless.)

The U.S. decision that was presented as evidence of de facto reciprocity had another important facet that was not mentioned by the Chinese court. The Hubei decision stemmed from a so-called “boomerang” suit.[45] The plaintiff, a Chinese corporation, brought a tort suit in a U.S. district court. The U.S. court dismissed the action on the basis of forum non conveniens. This is not particularly unusual. U.S. courts, including the U.S. Supreme Court, have dismissed transnational actions in favor of a Chinese forum.[46] In the context of the forum non conveniens standard, such a dismissal includes the finding that Chinese courts present an “adequate alternative forum.”[47] (Indeed, this is one of the reasons that it is perhaps unsurprising that U.S. courts eventually opened their doors to Chinese court judgments.) It would have been rather odd, though not unprecedented,[48] for a U.S. court to initially find that Chinese courts provided an adequate forum and then, at the judgment enforcement stage, deny recognition to the very judgment for which it was responsible. But this very particular procedural posture was not considered by the Wuhan court.

None of this is to say that the Wuhan court erred. Quite the opposite. The Hubei decision likely is persuasive evidence that U.S. courts are open to recognition and enforcement of Chinese judgments when coupled with additional factors. Such factors include the overall liberal attitude of U.S. law towards foreign judgments and the tendency of U.S. courts to conclude in other contexts that Chinese courts are an adequate forum. But the Wuhan court did not consider these factors—and touched only lightly on other issues, such as the service by publication and the default nature of the judgment.[49] This suggests either a lack of familiarity with certain aspects of the U.S. legal system,[50] an enthusiasm for the recognition of foreign judgments, or perhaps both.

C.  The New Treaty: The Hague Convention
on Choice of Court Agreements

On September 12, 2017, the People’s Republic of China signed the Hague Convention of 30 June 2005 on Choice of Court Agreements—commonly referred to as the COCA.[51] It joined the European Union, Mexico, Singapore, Ukraine, and the United States as signatory nations. The COCA had already entered into effect between the European Union, Mexico, and Singapore as those nations had ratified and otherwise acceded to treaty.[52]

In 1992, The Hague Conference on Private International Law began negotiations on a dual convention on both jurisdiction and circulation of judgments. The United States initially supported the project, but disagreements principally concerning jurisdiction eventually scuttled the proposed convention. The COCA rose from the ashes as a less ambitious treaty addressing only the least controversial aspects of the failed jurisdiction and judgments convention. The COCA is a “double convention” in the sense that it addresses both jurisdiction and judgment recognition, but only applies to disputes under forum selection clauses in cross-border commercial agreements. In essence, the COCA obligates the courts of member states to take jurisdiction over international business-to-business disputes when their courts are selected by an exclusive forum selection clause—and judgments arising from those proceedings are entitled to recognition and enforcement in the other contracting states. It has been described as a New York Convention for judgments.[53]

The COCA will radically change the Chinese approach to foreign commercial money judgments. However, the treaty creates little actual tension with Chinese statutory law.[54] In some areas, Chinese law does not permit parties to contract around grants of exclusive jurisdiction55F[55]—but the COCA permits contracting states to enter into a declaration excluding certain subject areas from the treaty’s scope. Chinese law and the COCA endorse the exclusivity of the parties’ chosen court—the derogated courts must dismiss any parallel action.[56] The COCA obligates the chosen court to hear a dispute even if it has no connection to the forum—but Article 19 of the COCA permits contracting states to issue a declaration that their court need not entertain purely foreign disputes.[57] Such a declaration would bring the COCA into alignment with Chinese domestic law.[58]

A U.S. commentator noted that “China’s signing is a hopeful sign, particularly in light of a Chinese court’s recent decision” in Liu.[59] Some suggested that the United States’ liberal recognition policy had finally had an influence and hoped the reverse might hold true—that China’s move to embrace the COCA would break the U.S. stalemate on ratification.[60]

D.  The New Questions: The Future of Foreign Judgments in Chinese Courts

These new recognition decisions, coupled with the decision to join the COCA, have dramatically changed China’s place in the framework of international litigation. Many questions remain, however.[61]

On a doctrinal level, these decisions do not resolve serious issues such as what law Chinese courts will apply to determine whether the judgment-rendering court had power to render the judgment, in terms of jurisdiction or service. Chinese courts will have to address whether any aspects of U.S. procedure or substantive law offend Chinese approaches to due process or to substantive public policy. For example, it is far from clear how Chinese courts will approach U.S. courts’ grants of punitive damages, an issue that has bedeviled the U.S.-E.U. relationship.[62]

Although China has yet to ratify the COCA, its effects are being felt in Chinese courts. On April 20, 2017, a Chinese court rendered a decision referring to the COCA—even before it was signed. In Cathay United Bank v. Gao,[63] a Taiwanese bank and a Chinese national residing in Shanghai entered into a guaranty contract with a choice of forum clause selecting a Taiwanese court to resolve disputes.[64] The Chinese party sued in a Shanghai court.[65] The clause did not specify whether it was exclusive or not,” and Chinese domestic law does not provide a rule for choice of forum clauses that are silent on exclusivity.[66] To fill the gap, the court referred to Article 3 of the COCA, which states that choice of forum clauses shall be construed to be exclusive, unless the parties expressly state otherwise.[67] The Shanghai court therefore declined jurisdiction.[68]

It is not even clear whether there is a basis in Chinese domestic law for reference to an unsigned and unratified international convention. As Professor Sophia Tang has observed, “Article 9 of the Chinese Supreme Court’s Judicial Interpretation of Chinese Conflict of Laws Act allows the Chinese courts to apply international conventions, which have not entered into effect in China, to decide the parties’ rights and obligations.”[69] However, “such an application is subject to party autonomy,” and therefore would require the parties themselves to reference the COCA as a source of applicable law.[70] Professor Tang notes that “a more relevant provision is Article 142(3) of the PRC General Principle of Civil Law, which provides that international customs or practice may be applied to matters for which neither the law of the PRC nor any international treaty concluded or acceded to by China has any provisions.”[71] This is a striking suggestion: that the COCA had attained the status of international custom or practice even before it had been signed by China (or by many other countries). Placed in context with the other developments described above, perhaps it is not too optimistic to observe a certain eagerness in the Chinese courts for greater cross-border circulation of money judgments.[72]

China’s decision to join the COCA may have decisive effects well beyond any impact that the Liu decision would have had alone. One decision, even a very promising decision, would not persuade any cross-border transactional lawyer to trust the receptivity of Chinese courts to foreign judgments over China’s long-running support of international commercial arbitration.[73] Even if China accedes to the COCA, questions will remain about whether China will support judgment circulation with the same vigor as arbitral award circulation.[74]

Days after the announcement that China would sign the COCA, Wuhan University Law School hosted the “Global Forum on Private International Law,” devoted to the theme of “Cooperation for Common Progress.”[75] Subjects included both the COCA and the Hague Judgments Project. The closing address was delivered by Professor Xiao Yongping, who focused the address on three points: (1) “the Asian regional cooperation needs a set of effective dispute settlement mechanisms;” (2) “the current international dispute settlement mechanism is dominated by western developed economies” and it “is the time for Asian countries to establish a dispute resolution body with regional characteristics;” and (3) construction of “a more equitable and reasonable regional dispute resolution body should be the ideal choice for all Asian countries to promote regional cooperation.”[76]

II.  Understanding the Improving Circulation of Judgments

China is in the midst of a dramatic shift regarding the circulation of foreign judgments. But questions remain about both the reasons behind this shift and the likelihood that it will be both effective and long-lasting. To assess these practical questions, it is important to assess the theoretical questions behind the converging (or diverging) circulation of judgments. Despite its obvious importance, relatively little theoretical attention has been paid to the circulation of judgments, compared to other areas of private international law.[77]

A.  Prevailing Economic Rationales

Three different rationales have dominated the economic approach to explaining the cross-border circulation of judgments. Individually, none of these theories has demonstrated compelling explanatory or predictive power. However, the congruencies of these theories may help in understanding China’s sudden shift and permit some inferences about likely future behavior.

The first theoretical approach to the circulation of judgments imagines sovereigns in the classic prisoner’s dilemma.[78] Each sovereign desires the judgments of its courts be freely recognized abroad, encouraging litigants to use the sovereign’s courts, exporting that sovereign’s legal norms, and offering greater relief to domestic plaintiffs that may disproportionately choose domestic courts. This account supposes that the overall optimal solution is for both sovereigns to freely recognize each other’s judgments. But neither sovereign has sufficient incentive to act first in a one-shot game. However, the recognition and enforcement of foreign judgments is a long-term, iterative process with repeat players. Therefore, the long-term benefits of cooperation overcome the short-term incentives to defect, leading to the greater circulation of national court judgments. Under this account, sovereigns can induce cooperation, as defection can be readily punished.

A second account proposes that the recognition and enforcement of foreign judgments is a “weakly dominant strategy”[79]—in essence, permitting the circulation of judgments is a unilateral good, not unlike permitting free trade.[80] The recognition and enforcement of foreign judgments prevents waste by preventing the re-litigation of previously adjudicated disputes and reducing burdens on national courts.[81] (This assumes that the costs of re-litigation are less than those of recognition and enforcement.) Therefore, even if other sovereigns refuse to recognize and enforce foreign judgments, it is still in a particular sovereign’s interest to permit free circulation of these judgments.

Neither of these accounts is entirely persuasive. The prisoner’s dilemma account is undermined by the following historical facts: (1) the United States did move first to welcome foreign judgments; and (2) decades passed before the circulation of judgments among economic units seemed to thaw (perhaps as a result of U.S. leadership, perhaps not). This severaldecade long pause also seems to undermine the unilateral good argument. But perhaps this is asking too much, too quickly. The prisoner’s dilemma account rests on the importance of long-term incentives—perhaps those are only now bearing fruit. And the United States’ behavior is consistent with the unilateral good hypothesis—though the behavior of other nations is largely not. And the “demise of the reciprocity requirement” in U.S. law seems to undercut the prisoner dilemma’s hypotheses, while supporting the unilateral good argument.8[82]

In a 2010 article, Professor Yaad Rotem offers a third theory, which focuses on the problem of asymmetric information.”[83] Rotem posits that a “forum would prefer that its judgments always be recognized abroad while retaining the ability to pick and choose which foreign judgments it itself recognizes.”[84] On the other hand, the “worst-case scenario for a forum in this regard is to recognize foreign judgments but have its own judgments ignored abroad.”[85] The difficulty arises because of limited information among sovereigns—specifically, that sovereigns are unable to assess the causes of any particular judgment of non-recognition. Therefore, a sovereign attempting to export its judgments cannot reliably determine when refusals to recognize judgments by another sovereign’s courts are merely sporadic—which would be acceptable, yet annoying—or a genuinely selective sorting of some types of judgments from others.

Professor Rotem’s account suffers for two reasons, both related to the doctrine of judgment circulation. First, virtually all laws of judgment recognition and enforcement permit non-recognition on the ground that the incoming judgment violates the public policy of the nation where recognition is sought. Indeed, this is a genuine point of convergence among national laws on the subject. Therefore, it is broadly accepted that national law can and should have an explicit ground for selective non-recognition. Second, this ground is seldom used, and when it is used, it is often subject to serious criticism. Even Chinese authorities have described the public policy ground as a very unruly horse” in the context of making the case for joining the COCA.[86] It is certainly possible that national courts are using other grounds for non-recognition to avoid invoking the disfavored ground of public policy. Though there is some evidence to suggest such behavior by Chinese provincial courts,[87] neither the practitioner nor the academic literature identify this particular sort of opportunism as a notable problem.

Simply put, broadly convergent doctrine permits an explicit ground for selective non-recognition of foreign judgments. And national courts use the public policy exception and explicitly state when they want to be selective about recognizing foreign judgments. If the public policy ground were to get out of hand, this would pose other problems for the circulation of judgments—but it is not a problem of asymmetric information. Professor Rotem’s account does prompt the question of why the public policy exception exists and is not used more often. The answer must lie, however, in the underlying incentives to create a judgment circulation system.

B.  The Spillover Effect of International Arbitration

China has embraced international commercial arbitration as the dominant mode of cross-border dispute resolution. China acceded to the U.N. Convention on the Recognition and Enforcement of Foreign Arbitral Awards (the “New York Convention”) in 1987. The New York Convention is arguably the most successful commercial treaty in history, with over 180 contracting states. The New York Convention sets the overarching framework for international commercial arbitration, obligating contracting states to enforce arbitral agreements and to recognize and enforce arbitral awards, subject to limited and exclusive defenses.

China has been enthusiastically supportive of international commercial arbitration for over two decades. In the 1990s, the SPC became concerned that provincial Chinese courts were being insufficiently deferential in their review of international arbitral awards and therefore not complying with China’s obligations under the New York Convention.[88] In 1987, China acceded to the New York Convention. In 1995, the SPC announced the “Prior Reporting System,” with further expansions of the program in 1998 and 2017. Under this system, there is an “automatic appeal” from any decision denying recognition. If a people’s court decides to refuse recognition and enforcement of a New York Convention award, it must report the decision to the appropriate high people’s court. If the high people’s court approves the rejection, it must refer the decision to the Supreme People’s Court. Only after approval from the Supreme People’s Court can the court of first instance refuse to recognize the award. This system has had a demonstrable effect on recognition rates, and likely on liberalizing doctrine as well.[89] China has also liberalized its approach to selecting arbitral institutions and procedures.

Many have described arbitration and litigation as competitors. Though this is sometimes true, it is just as often true to say that they are complements.[90] The system of international arbitration relies on national courts to enforce arbitration agreements, to recognize and enforce awards, and to offer interim assistance to arbitral tribunals. Even courts that have rejected an active role in international litigation—like China’s until recently—have become active purveyors of international arbitration.

Arbitration is appealing to nations concerned about decisional sovereignty (or the perception of infringements on sovereignty) because it appears more denationalized. Every New York Convention arbitration must be governed by a national seat, but an award rendered in a foreign seat can still seem more palatable than a judgment rendered by a foreign court. But the difference may not be so extreme. In practice, advocates of the denationalization of arbitration equate it with subservience of national courts, which in their view ought to never (or hardly ever) question arbitral award enforcement.

Even if national courts have taken a more robust view of their review of awards, they have become competitors for the business of international commercial arbitration. China is a case in point. Shanghai has actively competed to become a major center of international commercial arbitration. New arbitration centers are being opened in Beijing and Shenzhen, reflecting regional as well as national competition for the business of international arbitration. It will come as no surprise that new international commercial courts have opened in Shenzhen and Xi’an, with another coming in Beijing.[91] Relevant international and domestic law reflects the close relationship between the circulation of arbitral awards and the circulation of judgments. The COCA was deliberately modeled on the New York Convention. Even earlier, there was well-documented transmission of ideas between the New York Convention, the uniform U.S. state laws on the recognition of judgments, and proposed U.S. federal law on the recognition of judgments.

The Chinese experience liberalizing arbitration law has not been without speedbumps—especially among provincial courts[92]—but it has largely been a success. The China International Economic and Trade Arbitration Commission (CIETAC) became the leading provider of international arbitration in Asia and was regarded as both reputable by foreign parties (though perhaps giving Chinese parties a certain home-court advantage) and politically acceptable to the central government. To the extent that CIETAC, headquartered in Beijing, became a dominant provider of international arbitration services, it also provided an opportunity to centralize international dispute resolution—centralization being an ongoing priority of the Xi government. However, CIETAC splintered into three arbitral bodies in 2012, effectively empowering regional authorities in Shanghai and Shenzhen.[93] It may well be the case that, just as international arbitration once presented an opportunity to expand economic opportunity while centralizing power,[94] transnational litigation in Chinese courts now presents a similar opportunity. Particularly if the same tools, such as the automatic appeal of non-recognition judgments, are used.

C.  Free Riders in Transnational Dispute Resolution

Not all sovereigns are necessarily interested in exercising decisional sovereignty. Rather, a liberal judgment recognition policy allows sovereigns to freeride on other highly sophisticated judicial systems, particularly in commercial disputes. This freeriding approach allows resource-constrained nations to enjoy the benefits of a sophisticated transnational dispute system without internalizing any of the costs of developing such a system.

The only “cost” is the reduced ability to apply local laws and norms to transnational disputes. That concern, however, is muted in commercial disputes. Sophisticated contracting parties will exercise their autonomy to select a transnational dispute mechanism, forum, and law that suits them. Therefore, any application of foreign norms and laws to domestic litigants must flow through the expressed choice of those very domestic litigants. If domestic litigants in certain industries are subject to consistent bargaining power discrepancies, national legislatures can provide prophylactic protections specific to those industries.

China is clearly not attempting to freeride—it is attempting to leverage this effect. It is telling that each statement about “opening-up” also emphasized the need to move away from Westerndominated modes of dispute resolution. The emphasis is on developing modes of transnational dispute resolution that reflect the norms of East and South Asia—the heart of the Belt and Road—as opposed to norms and laws imposed by the West. China is attempting to carve out a decisional “sphere of influence.” It hopes that other nations on the Belt and Road will be willing to leverage the extensive benefits of commercial extraterritorial litigation,[95] while tolerating the imposition of Chinese, rather than Western, norms and laws. Under this account, China may care little about occasionally importing a U.S. or German judgment. To the extent that doing so burnishes the reputation of Chinese courts as exporters of commercial judgments, it may be beneficial. But China may not be competing with the Western centers of dispute resolution. Its ambition is to become the preeminent center of transnational dispute resolution within the aspirational Belt and Road economic unit.[96]

D.  Heterogeneous Incentives

The freeriding effect is one example of a larger concern absent from the prevailing economic theories of judgment circulation: heterogeneous incentives among the players in the “recognition game.”[97] Each of the prevailing economic approaches to understanding the circulation of judgments counterfactually assumes homogenous incentives: that all sovereigns want to export all of their judgments to all countries and to refuse to import judgments from all countries; that all countries want to import all judgments; or that all judgments want their judgments recognized abroad and will tolerate sporadic, but not selective, non-recognition.

There are more things in heaven and earth than are dreamt of in this philosophy.[98] There are nations that are predominantly judgment exporters or predominantly judgment importers. There are nations that are predominantly capital exporters or capital importers. These positions change over time, which explains some of the significant recent shifts in transnational dispute resolution; for example, the West is increasingly skeptical of international investment arbitration, as countries like the United States and Germany import more capital, with the strings attached that they themselves strung. Some nations, such as the United States, Great Britain, and Singapore, aim to export judgments to the entire world. Some nations, such as China, may aim to export judgments only to a region. These distinctions matter in determining what strategies sovereigns will adopt in their approach to recognition of foreign judgments.

Transnational law is dictated by domestic interests. Even among countries that one might expect to have similar overall strategies, particular domestic constituencies will demand different approaches to transnational law. New York is a transnational litigation hub and the lending capital of the world. The dominance of large financial institutions drives a transnational litigation system that elevates the enforcement of financial obligations. Accordingly, exporting judgments is crucial, while importing judgments is either irrelevant or advantageous. London has been shaped as a transnational litigation hub by Britain’s history as a commercial and maritime center. London’s ambition is therefore to market its expertise in commercial and maritime matters to the world—accordingly, U.K. courts want badly to export judgments, but are nonetheless less welcoming to incoming judgments than their U.S. counterparts. Chinese courts exist in the context of a political-legal system responsive to the desires of the central and regional governments. It is plainly the ambition of the Xi government to establish regional economic dominance along the so-called Belt and Road. Accordingly, China’s new international commercial courts may see themselves in competition with other Asian courts (and with each other) and not with New York or London at all.

Finally, the “recognition game” may be one where a player can occupy a strategy and effectively exclude others. There is only one preeminent global financial center—and therefore, only one player can adopt the appropriate strategy for circulation of judgments. China aims to be the dominant economic power in the so-called Belt and Road—only one player can adopt the transnational litigation strategy that comes with that position, if it is achieved.

Conclusion

Only a couple years ago, “the Chinese example” was discussed as the most prominent resistance to the growing circulation of foreign money judgments.[99] China now stands, for the moment, as the most prominent example of how quickly a nation can adopt a pro-recognition and enforcement policy after decades of refusal. The “Chinese example,” however, prompts several questions, including what forces drove the change and whether the change will stick. Prevailing theories of competition or cooperation among nations fail to adequately explain or predict the development of the circulation of judgments. This Article has sought to offer some brief suggestions as to approaches that better reflect the behavior of nations with heterogeneous incentives and strategies, embedded in a web of transnational dispute resolution in which litigation may be just one mode among many.

 


[*] *.. Assistant Professor, Willamette University College of Law; Affiliated Scholar, The Classical Liberal Institute at New York University School of Law. I owe great thanks to the participants in the CLI-NYU Symposium on Convergence and Divergence in Private International Law, as well as to Ronald Brand, Pamela Bookman, Alyssa King, Linda Silberman, and Symeon Symeonides. Thank you as well to the editors at the Southern California Law Review for their hard work and patience and to the Classical Liberal Institute for providing the occasion and support for this piece and presentation. I am also indebted to my wife for her insights into the game-theoretic consequences of heterogeneous incentives.

 [1]. David E. Engdahl, The Classic Rule of Faith and Credit, 118 Yale L.J. 1584, 1597 (2009) (footnote omitted) (“As early as 1536, there was a case for ‘execution of sentence of French Court.’”). 

 [2]. See generally id. (describing the historical underpinnings of the Full Faith and Credit Clause through a discussion of these legal regimes).

 [3]. See, e.g., Ronald A. Brand, Recognition of Foreign Judgments as a Trade Law Issue: The Economics of Private International Law, in Economic Dimensions in International Law 592, 640 (Jagdeep S. Bhandari & Alan O. Sykes eds., 1998) (“Economic theory demonstrates the the free movement of judgments is an essential element of a liberal trading system.”); Antonio F. Perez, Consumer Protection in the Americas: A Second Wave of American Revolutions?, 5 U. St. Thomas L.J. 698, 713 (2008) (“The greatest free trade areas in modern history, the United States and the European Union (EU), both have included recognition and enforcement of member-state judgments in the genome of their political economy.”); Jeffrey Wald, A Clash of Two Courts: Baker, Full Faith and Credit, and Montana’s Refusal to Recognize A North Dakota Declaratory Judgment, 89 N.D. L. Rev. 143, 143 (2013) (“The Full Faith and Credit Clause of the United States Constitution is one of the most important, but least understood, constitutional clauses.”).

 [4]. Liú táolǐ tóng (刘莉诉桃李和吴彤) [Liu Li v. Tao Li & Tong Wu], Yue Wuhan Zhong Min Shang Wai Chu Zi No. 00026 (Interm. People’s Ct. of Wuhan City, Hubei Province June 30, 2017) (China).

 [5]. See Tom Mitchell & Gabriel Wildau, China’s State Council Puts Seal on Capital Controls, Fin. Times (Aug. 18, 2017), https://www.ft.com/content/3a638d1c-8405-11e7-a4ce-15b2513cb3ff.

 [6]. See Katharina Pistor, From Territorial to Monetary Sovereignty, 18 Theoretical Inquiries L. 491, 493 (2017) (arguing that “if the question of sovereignty was tied not to effective control over territory and people but to effective control over money,” then the “only states that may be deemed sovereign in monetary terms are the United States, the United Kingdom, Canada, Japan, Switzerland, Australia, and the People’s Republic of China”).

 [7]. See Radim Polc̆ák & Dan Jerker B. Svantesson, Information Sovereignty: Data Privacy, Sovereign Powers and the Rule of Law 2 (2017); Philip Chwee, Note, Bringing in a New Scale: Proposing A Global Metric of Internet Censorship, 38 Fordham Int’l L.J. 825, 862–63 (2015) (“[M]aintaining national security and social stability are some of the PRC’s utmost important objectives. By regulating the Internet from the ground up, the PRC is able to control the data that enters and leaves its borders . . . while maintaining compliance from its end-user citizens with their broad censorship laws.” (footnotes omitted)).

 [8]. See David Tweed, China’s Territorial Disputes, Bloomberg (Oct. 3, 2018), https://www.
bloomberg.com/quicktake/territorial-disputes.

 [9]. Wenliang Zhang, Sino–Foreign Recognition and Enforcement of Judgments: A Promising “Follow-Suit” Model?, 16 Chinese J. Int’l L. 515, 518 (2017).

 [10]. King Fung Tsang, Chinese Bilateral Judgment Enforcement Treaties, 40 Loy. L.A. Int’l & Comp. L. Rev. 1, 5–6 (2017) (“Although it is true that China has never entered into bilateral enforcement treaties with her largest trading partners, it does not necessarily mean that the countries with which she has entered into bilateral treaties are insignificant.”).

 [11]. Zhang, supra note 9, at 519.

 [12]. Pamela Bookman, The Adjudication Business, 44 Yale J. Int’L L. (forthcoming 2019) (manuscript at 36) (available at https://ssrn.com/abstract=3338152); see also Guangjian Tu, The Hague Choice of Court ConventionA Chinese Perspective, 55 Am. J. Comp. L. 347, 350 (2007) (“China is a country which has inherited the civil law tradition. Thus, its law comes essentially from the legislature; judges cannot make law. International jurisdiction as well as recognition and enforcement of foreign judgments fall within the scope of basic laws which are enacted by the National People’s Congress.” (footnotes omitted)).

 [13]. See Zhang, supra note 9, at 520.

 [14]. See Wenliang Zhang, Recognition and Enforcement of Foreign Judgments in China: Rules, Practice and Strategies §§ 2.04.06, at 206–36 (2014).

 [15]. See Hu Zhenjie, Recognition and Enforcement of Foreign Judgments in China: Rules, Interpretation and Practice, 46 Neth. Int’l L. Rev. 291, 294 (1999).

 [16]. See Note, Chinese Common Law? Guiding Cases and Judicial Reform, 129 Harv. L. Rev. 2213, 221617 & n.24 (2016).

 [17]. Zhang, supra note 9, at 520 (emphasis omitted).

 [18]. Zuìgāo rénmín fǎyuàn guānyú Wǒguó Rénmín Fǎyuàn Yīngfǒu Chéngrèn Zhíxíng Rìběn Guó Fǎyuàn Jùyǒu Zhàiquán Zhàiwù Nèiróng Cáipàn de Fùbán (最高人民法院关于我国人民法院应否 认和执行日本国法院具有债权债务内容裁判的复函) [The Reply of the Supreme People’s Court of China Concerning Recognition and Enforcement of Japanese Judgment and Rulings on Credit and Debt], Min Ta Zi No. 17 (Sup. People’s Ct.1995) (China).

 [19]. Zhang, supra note 9, at 520.

 [20]. Id. at 521.

 [21]. See id. at 522; Jason Hsu, Judgment Unenforceability in China, 19 Fordham J. Corp. & Fin. L. 201, 201 (2013) (“Plaintiffs may then be in for a rude awakening when they bring their U.S. money judgments abroad, for such judgments are routinely unenforceable. China has proven no exception, and foreign judgments are rarely, if ever, enforced there.”).

 [22]. For a complete list of the treaties and an extensive analysis, see Tsang, supra note 10, at 2 (“[S]eek[ing] to dispel the misperception that bilateral treaties are not important due to the lack of such treaties with China’s major trading partners.”).

 [23]. Id. at 5 (quoting Michael Moser, Dispute Resolution In China 395 (Michael Moser ed., 2012)).

 [24]. Id. at 21, 33 (quoting Yongping Xiao & Zhengxin Huo, Ordre Public in China’s Private International Law, 53 Am. J. Comp. L. 653, 654 (2005)) (focusing on the COCA’s superior approach to the “very unruly horse” of the public policy ground for rejection).

 [25]. See Giant Light Metal Tech. Co. (Kunshan) v. Aksa Far E., [2014] 2 SLR 545 (Sing.).

 [26]. See (“尔集团股份有限公 与江苏省纺织工业(集团)进出口有限公司申请承认和执行外国法院民事判决 裁定特别程序民事裁定书) [Kolmar Grp. AG Co. v. Jiangsu Textile Indus. Imp. & Exp. Co.], Su 01 Xie Wai Ren No. 3 (Nanjing Interm. People’s Ct. of Jiangsu Province 2016) (China).

 [27]. See Sup. People’s Ct. People’s Republic China, Second Batch of Typical Cases Involving the “Belt and Road” (May 15, 2017, 11:23 PM), http://www.court.gov.cn/zixun-xiangqing-44722.html, translated in China Guiding Cases Project, B&R Typical Case 13, Stan. L. Sch. (May 15, 2017), https://cgc.law.stanford.edu/belt-and-road/b-and-r-cases/typical-case-13.

 [28]. Ronald A. Brand, Recognition of Foreign Judgments in China: The Liu Case and the “Belt and Road” Initiative, 37 J. L. & Com. 29, 30–40 (2018). Professor Brand’s article provides an extensive analysis of the context that preceded the Liu judgment, as well as an in-depth discussion of the decision itself. See id.

 [29]. Id. at 40.

 [30]. Nat’l Dev. & Reform Comm’n et al., Vision and Actions on Jointly Building Silk Road Economic Belt and 21st-Century Maritime Silk Road (Mar. 28, 2015), http://en.ndrc..gov.cn/news release/201503/t20150330_669367.html.

 [31]. Supreme People’s Court, Several Opinions of the Supreme People’s Court on Providing Judicial Services and Safeguards for the Construction of the “Belt and Road” by People’s Courts, Peking U. L. Sch. ¶ 6 (June 16, 2015), http://en.pkulaw.cn/display.aspx?cgid=251003&lib=law.

 [32]. Brand, supra note 28, at 44–45. 

 [33]. Jie Huang, Chinese Court Recognizes US Commercial Money Judgment, Letters Blogatory (Sept. 4, 2017), https://lettersblogatory.com/2017/09/04/chinese-court-recognizes-us-commercial-money-judgment.

 [34]. Id.

 [35]. Id.

 [36]. Id.

 [37]. Id.

 [38]. Id.

 [39].  Id.

 [40]. Hubei Gezhouba Sanlian Indus. Co. v. Robinson Helicopter Co., No. 2:06-cv-01798-FMC-SSx, 2009 U.S. Dist. LEXIS 135891 (C.D. Cal. Sept. 25, 2009), aff’d mem., 425 Fed. Appx. 580 (9th Cir. 2011).

 [41]. Huang, supra note 33. For other examples of U.S. courts recognizing Chinese judgments, see generally Mark Moedritzer et al., Judgments ‘Made in China’ But Enforceable in the United States?: Obtaining Recognition and Enforcement in the United States of Monetary Judgments Entered in China Against U.S. Companies Doing Business Abroad, 44 Int’l Law. 817 (2010).

 [42]. The U.S. judgment was obtained with service by publication, authorized by the U.S. court after other methods were unsuccessful. The Wuhan court touched on the issue but seemed to “provide clear deference to the U.S. court in determining proper service.” Brand, supra note 28, at 36.

 [43]. Huang, supra note 33.

 [44]. Id. (emphasis omitted).

 [45]. See M. Ryan Casey & Barrett Ristroph, Boomerang Litigation: How Convenient is Forum Non Conveniens in Transnational Litigation?, 4 BYU Int’l L. & Mgmt. Rev. 21, 22 (2007) (coining the term “boomerang litigation” to refer to cases that return to a forum from which they were previously dismissed).

 [46].               See Sinochem Int’l Co. v. Malay. Int’l Shipping Corp., 549 U.S. 422, 435–36 (2007); Guimei v. Gen. Elec. Co., 172 Cal. App. 4th 689, 701–02 (2009).

 [47].               Iragorri v. United Techs. Corp., 274 F.3d 65, 73 (2d Cir. 2001) (articulating the standard for forum non conveniens dismissal and noting that, “[i]nitially, the court must consider whether an adequate alternative forum exists”).

 [48]. Although the standards for forum non conveniens dismissal and for recognition of a judgment are different, it takes an extraordinary case to deny recognition to such a “boomerang” judgment. See, e.g., Chevron Corp. v. Donziger, 974 F. Supp. 2d 362, 630–31 (S.D.N.Y. 2014), aff’d, 833 F.3d 74 (2d Cir. 2016).

 [49].               See Huang, supra note 33.

 [50].  This lack of familiarity may be particularly plausible with regard to the federal structure of the U.S. system, which is a constant source of confusion to foreign observers. See, e.g., Chibli Mallat, Federalist Dreams for the Middle East, Lawfare (Aug. 16, 2018, 1:59 PM), https://www.lawfareblog.
com/federalist-dreams-middle-east (“Federalism in the Middle East is a loaded word. It is contradictory and misunderstood. But this is not unique to the region.”).

 [51]. See China Signs the 2005 Choice of Court Convention, Hague Conf. Priv. Int’l L. (Sept. 12, 2017), https://www.hcch.net/en/news-archive/details/?varevent=569.

 [52]. See Status Table: Convention of 30 June 2005 on Choice of Court Agreements, Hague Conf. Priv. Int’l L., https://www.hcch.net/en/instruments/conventions/status-table/?cid=98 (last updated Aug. 23, 2018).

 [53]. See Glenn P. Hendrix et al., Memorandum of the American Bar Association Section of International Law Working Group on the Implementation of the Hague Convention on Choice of Court Agreements, 49 Int’l Law. 255, 256 (2016) (noting that the COCA “is the litigation counterpart” to the New York Convention framework for arbitral awards); Thomas N. Pieper & Samuel L. Zimmerman, The Hague Convention on Choice of Court Agreements: A Game Changer for Dispute Resolution Clauses?, 21 Int’l B. Ass’n Arb. News 101, 101 (2016) (noting that the COCA “provides a mechanism for the parties to an international commercial contract to ensure that a judgment received in the court of a member state will be enforced in the courts of other member states, much in the way arbitral awards are currently enforced under the New York Convention.”).

 [54]. See Tu, supra note 12, at 365 (“A survey of Chinese law pertaining to the key issues raised by the Convention has demonstrated that there are no unresolvable conflicts between Chinese law and the Convention although China may make some declarations in order to preserve features of its domestic law. China can and should ratify this Convention.”).

 [55]. See id. at 35354 (“The courts of the People’s Republic of China shall have exclusive jurisdiction over disputes arising out of performance in China of contracts of Sino-foreign equity joint ventures, Sino-foreign contractual joint ventures and Sino-foreign cooperative exploration and development of natural resources.” (footnote omitted)); see also id. (“[T]he court for the place where the harbor is located shall have exclusive jurisdiction over disputes arising out of harbor operations . . . .” (footnote omitted)).

 [56]. See Hu Zhenjie, International Jurisdiction of Chinese Courts in Contractual Matters: Rules, Interpretation and Practice, 46 Neth. Int’l L. Rev. 204, 20708 (1999).

 [57]. Tu, supra note 12, at 358.

 [58]. See id. at 35859 (discussing Articles 25 and 244 of China’s 1991 Civil Procedure Law).

 [59]. Ted Folkman, China Signs COCA, Letters Blogatory (Sept. 13, 2017), https://letters blogatory.com/2017/09/13/china-signs-coca.

 [60]. See id. (explaining that a “liberal US practice on judicial assistance might have borne some fruit in encouraging the Chinese decision,” and asking whether “China’s decision to sign the Convention [would] encourage [the United States] to overcome the Byzantine politics that have so far prevented the Senate from considering the treaty”).

 [61]. Suni Gong, The Chinese Court’s Enforcement of a U.S. Civil Judgement, N.Y.U. Ctr. for Transnat’l Litig., Arb., & Com. L. (Apr. 17, 2018), https://blogs.law.nyu.edu/transnational/2018/04/ the-chinese-courts-enforcement-of-a-u-s-civil-judgement.

 [62]. See Huang, supra note 33.

 [63]. (國泰聯合銀行訴高) [Cathay United Bank v. Gao], Hu Min Xia Zhong No. 99 (Shanghai High People’s Ct. 2016) (China). 

 [64].               Sophia Tang, Chinese Courts Made Decision Taking into Account of the Hague Choice of Court Convention, ConflictofLaws.net (Nov. 14, 2017), http://conflictoflaws.net/2017/chinese-courts-made-decision-taking-into-account-of-the-hague-choice-of-court-convention.

 [65]. Id.

 [66]. Id.

 [67]. Id.

 [68]. Id.

 [69]. Id.

 [70]. Id.

 [71]. Id.

 [72]. Id. 

 [73]. See Dan Harris, China Enforces United States Judgment: This Changes Pretty Much Nothing, Harris Bricken: China L. Blog (Sept. 5, 2017), https://www.chinalawblog.com/2017/09/china-enforces-united-states-judgment-this-changes-pretty-much-nothing.html; Aaron Lukken, Enforcement of U.S. Judgment in China—Don’t Pop Any Corks Just Yet, Hague L. Blog (Sept. 6, 2017), https://www. haguelawblog.com/2017/09/enforcement-u-s-judgment-china-dont-pop-corks-just-yet.

 [74]. See infra Section II.B.

 [75]. Guo Yujun & Liang Wenwen, Global Forum on Private International Law & 2017 Annual Meeting of China Society of Private International Law: Cooperation for Common Progress? Evolving Role of Private International Law” Held in Wuhan, China, ConflictofLaws.net (Oct. 4, 2017), http://conflictoflaws.net/2017/global-forum-on-private-international-law-2017-annual-meeting-of-china -society-of-private-international-law-cooperation-for-common-progressevolving-role-of-private-inter national-law-h.

 [76]. Id. Scholars have also been enthusiastically discussing ways out of the reciprocity “deadlock” for China’s other major trading partners, such as Japan and South Korea. See Wenliang Zhang, Mutual Recognition and Enforcement of Civil and Commercial Judgments Among China (PRC), Japan and South Korea, ConflictofLaws.net (Dec. 26, 2017), http://conflictoflaws.net/2017/mutual-recognition-and-enforcement-of-civil-and-commercial-judgments-among-china-prc-japan-and-south-korea.

 [77]. Professor Michael Whincop described the theoretical literature on recognition and enforcement of judgments, with some hyperbole, as a “scholarly desert.” Michael J. Whincop, The Recognition Scene: Game Theoretic Issues in the Recognition of Foreign Judgments, 23 Melb. U. L. Rev. 416, 416 (1999). It might better be described as a scholarly dessert—it comes after everything else, is overlooked by those who should know better, and is the best part of the meal.

 [78]. Michael J. Whincop & Mary Keyes, Policy and Pragmatism in the Conflict of Laws 15760 (2001); see also Brand, supra note 3, at 62526. Professor Ronald Brand hypothesized that judgment recognition and enforcement could follow the prisoner’s dilemma, in which the highest payoff for the individual player is to defect while the other players cooperates, but is likely better described by the stag hunt, in which the highest individual payoff occurs when both players cooperate. Professor Brand argued that “[r]egardless of whether the prisoners’ dilemma or stag hunt model is considered the most reflective of the judgment recognition paradigm, mutual cooperation is beneficial,” and therefore economic analysis “supports the negotiation of a multilateral judgments recognition treaty.” Id; see also Whincop, supra note 77, at 41628 (“There is no theory of judgment recognition which explains the incentives of states to recognise judgments and enter recognition conventions, or the theoretical relationship between recognition and choice of law and jurisdiction.”).

 [79]. Yaad Rotem, The Problem of Selective or Sporadic Recognition: A New Economic Rationale for the Law of Foreign Country Judgments, 10 Chi. J. Int’l L. 505, 510 (2010).

 [80]. See Milton Friedman, Free Trade, Newsweek, Aug. 17, 1970, at 71 (“However, we only increase the hurt to us—and also to them—by imposing additional restrictions in our turn. The wise course for us is precisely the opposite—to move unilaterally toward free trade.”). Professor Brand draws the connection between the two bodies of law explicitly, arguing that “any system developed to facilitate free movement of economic rights . . . must contain both rules regarding free movement and rules regarding legal acknowledgment of the existence and value of the the underlying economic rights involved in the exchange process.” Brand, supra note 3, at 613. Therefore, “the rationale for the elimination of barriers to the free movement of economic rights is also the rationale for the elimination of barriers to the free movement of of judgments.” Id.

 [81]. See Arthur T. von Mehren & Donald T. Trautman, Recognition of Foreign Adjudications: A Survey and a Suggested Approach, 81 Harv. L. Rev. 1601, 1603 (1968) (noting the need “to avoid the duplication of effort and consequent waste involved in reconsidering a matter that has already been litigated”).

 [82]. Rotem, supra note 79, at 510.

 [83]. Id.

 [84]. Id.

 [85]. Id. at 51011.

 [86]. See Tsang, supra note 10, at 33 (footnote omitted).

 [87]. See Sapna Jhangiani, Enforcement in China – What the Cases Show, Kluwer Arb. Blog (Dec. 6, 2013), http://arbitrationblog.kluwerarbitration.com/2013/12/06/enforcement-in-china-what-the-cases-show.

 [88]. This phenomenon is not limited to arbitral award enforcement. See Yun-chien Chang & Ke Xu, Decentralized and Anomalous Interpretation of Chinese Private Law: Understanding a Bureaucratic and Political Judicial System, 102 Minn. L. Rev. 1527, 1531–32 (2018) (“Because of the political and bureaucratic court system in China, examples and instances of decentralized and anomalous interpretations are far more numerous than casual observers would expect. That is, decentralized and anomalous interpretations in China have the same root: the sociopolitical pressure on courts, often from the political branch.”).

 [89]. See Jhangiani, supra note 87.

 [90].                See Bookman, supra note 12 (manuscript at 2) (“[M]any states conceive of different kinds of dispute resolution services as complementary offerings rather than solely as substitutes or competitors.”).

 [91]. See Brand, supra note 28, at 46.

 [92]. See Chang & Xu, supra note 88, at 1533–34.

 [93]. See Jie Zheng, Competition Between Arbitral Institutions in China – Fighting for a Better System?, Kluwer Arb. Blog (Oct. 16, 2015), http://arbitrationblog.kluwerarbitration.com/2015/10/16/ competition-between-arbitral-institutions-in-china-fighting-for-a-better-system.

 [94]. The theme of the 2014 annual plenary meetings of the Chinese Communist Party’s top leadership was 法治, which can be translated as “rule of law” or “rule by law.” See Josh Chin, ‘Rule of Law’ or ‘Rule by Law’? In China, a Preposition Makes All the Difference, Wall St. J. (Oct. 20, 2014, 2:03 PM), https://blogs.wsj.com/chinarealtime/2014/10/20/rule-of-law-or-rule-by-law-in-china-a-preposition-makes-all-the-difference.

 [95]. See Jens Dammann & Henry Hansmann, Globalizing Commercial Litigation, 94 Cornell L. Rev. 1, 1 (2008).

 [96]. This also raises the possibility that greater circulation of judgments among economic units—celebrated at the outset of this Article—may be simply the happy side-effect of attempts to promote circulation within the aspirational Belt and Road economic unit, at least as far as China is concerned.

 [97]. Whincop, supra note 77, at 418.

 [98]. With apologies to William Shakespeare. William Shakespeare, Hamlet act 1, sc. 5.

 [99]. Béligh Elbalti, Reciprocity and the Recognition and Enforcement of Foreign Judgments: A Lot of Bark but Not Much Bite, 13 J. Priv. Int’l L. 184, 201 (2017) (“One of the most restrictive reciprocity systems is the one adopted in China. . . . In other words, recognition is still refused on this basis regardless of how liberally foreign judgments are recognized and enforced in the rendering State.”).

 

Bluffing in Business-to-Business Contract Negotiations – Article by Stefanie Jung

 

From Volume 92, Number 4 (May 2019)
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Bluffing in business-to-business contract negotiations

The relationship between moral intuition, Rechtsgefühl, and the law in the United States and Germany

Stefanie Jung[*]

Introduction

Bluffing, deceptions, lies and misrepresentations[1] are ubiquitous parts of business-to-business (B2B) contract negotiations.[2] The literature on negotiations even explicitly proposes corresponding negotiation tactics and considers bluffing an essential skill of a good negotiator.[3] This Article investigates the relationship between the following four topics with regard to lies in B2B contract negotiations:[4]

(1) the ideas of traditional moral philosophers;

(2) people’s actual moral intuition;

(3) people’s sense of how the law should be, or, in German the “Rechtsgefühl.[5] More specifically, this concerns people’s belief regarding the question of whether legal consequences should be ordered. This then reveals their “Rechtsgefühl” since there are only legal consequences for unlawful behavior; and lastly

(4) the lawthe actual legal situationin the United States and Germany.

Put simply, the relationship between the aforementioned four aspects is as follows: Many traditional moral philosophersfrom Aristotle to St. Augustine and from Thomas Aquinas to Immanuel Kantstrictly reject almost any forms of lies. However, the results of an internationally conducted survey[6] on people’s actual moral intuition demonstrate that the survey participants from Germany and the United States do not share the same ideas as these philosophers. In fact, the respondents in both countries are more lenient with respect to bluffs and lies in negotiations. The latter is confirmed by the fact that the majority of the respondents classify several lies as morally acceptable. To a certain extent, participants do not even condemn so-called “harmful lies.” Hence, the moral intuition of people living in the United States and Germany in this day and age differs significantly from the ideas of traditional moral philosophers.

Most importantly, the study also investigates people’s Rechtsgefühl (sense of how the law should be) and reveals clearly detectable differences between the participant’s moral intuition and their Rechtsgefühl. People who assess a certain behavior as immoral do not necessarily also believe that this behavior should be unlawful. In fact, in only a few cases do the majority of U.S. and German respondents favor having legal consequences. Altogether, this Article promotes the idea that closer attention should be placed on the Rechtsgefühl. Likewise, the Rechtsgefühl should be clearly distinguished from people’s individual moral intuition as the two aspects do not necessarily go handinhand. In this Article, it is presumed that, instead of only emphasizing the relationship between morality (in the form of moral-philosophical ideas and people’s moral intuition) and the law, it is worthwhile to put more emphasis on the relationship between people’s Rechtsgefühl and the law. In general, both aspects should not drift too far apart. Hence, this Article defends the idea that the Rechtsgefühl should have a stronger effect on the law dealing with bluffs in contract negotiations compared to moral-philosophical concepts and people’s moral intuition. Moral intuition and moral-philosophical concepts regularly go beyond the Rechtsgefühl, and the study shows that people do not believe that those stricter concepts and intuition should be translated one-to-one into law.

According to the ideas put forward here, the law in Germany and the law in the United States should be alike, as the Rechtsgefühl is similar in both countries. Surprisingly, however, German and U.S. law show significant differences. In fact, only U.S. law largely corresponds with the Rechtsgefühl and is therefore in line with the theory put forward here. German law, in contrast, neither corresponds with people’s prevalent moral intuition nor with their stated Rechtsgefühl but goes beyond both of these concepts. German law rather reflects the ideas of traditional moral philosophers as it deems almost all lies unlawful. This conclusion is also astonishing from a legal-historical perspective because German law is rooted in Roman law, which distinguished lawful from unlawful forms of deception. But what caused German law to develop away from the initial Roman legal approach and to diverge from U.S. law, even though the moral intuition and the Rechtsgefühl are similar in the two countries? Different general values and legal differences in related areas in the United States and Germany partly explain the current legal divergence of German law from Roman and U.S. law. In addition, this Article argues that the German legislature was influenced by the concepts of moral philosophy.[7] In particular, this Article promotes the idea that Kant’s moralphilosophical ideas played a significant role in shaping German law, since they influenced important legal scholars like Friedrich Carl von Savigny. Moreover, the current legal interpretation in Germany has its origins in the fact that a differentiation of lies is renounced while a discussion on lies that do not concern the subject matter of the contract (“Leistungsgegenstand”) has not been initiated.

In conclusion, this Article encourages a thorough reflection of the relationship between the Rechtsgefühl and the law. In particular, it is explored whether German law should leave room to consider at least some bluffs in contract negotiations as lawful in order to better reflect people’s Rechtsgefühl.

I.  Moral Intuition and Rechtsgefühl in the United States and Germany

A.  International Study on Lies in Contract Negotiations

The international study on lies in contract negotiations referred to in this Article was conducted with the cooperation of Professor Peter Krebs of the University of Siegen. As of now, 1,896 participants from thirteen different countries,[8] including Germany and the United States, have filled out a questionnaire on the topic, each in their mother tongue. The study distinguishes between four different target groups: judges, lawyers, professional negotiators, and students. In Germany, answers from all four groups were gathered.[9] In the United States, lawyers and students participated.[10] An extensive analysis of the data will be published soon. As a preliminary overview, this Article only presents a few initial findings of the analyzed data gathered from the United States and Germany.

The questionnaire describes nine different scenarios in which one party of a business-to-business negotiation deceives the other party.[11] The lies range from simple bluffs (in other words, bluffs about a better offer, product availability, internal company policies, deadlines, personal preferences, and reservation price) to more severe deceptions (namely, deceptions about the subject matter of the contract itself and the legal situation).[12] All scenarios in the questionnaire are constructed in such a way that one side deliberately deceives the other party. Further, the other party is actually deceived and demonstrably relies on the information provided in the lie. Lastly, there is also a definite causal link between the deception and the conclusion of the contract.[13] The participants are then asked whether they consider the behavior of the lying party to be either morally acceptable or morally unacceptable (moral intuition). In a second step, the respondents are invited to state their individual opinion on whether the deceived business partner should be entitled to rescind the contract or not.[14] In this regard, the second question is not directed towards inquiring the factual legal situation, but which consequence the participants would personally favor. They are thus supposed to state their own beliefs about an entitlement to rescind the contract, specifically assessing whether a rescission should be among the available options to legally address deceptions. At the same time, this questioning method is designed to reveal their Rechtsgefühl because legal consequences only exist for unlawful behavior. The study deliberately refrains from directly inquiring about the Rechtsgefühl (for instance, there are no questions such as “Do you think this behavior should be lawful or unlawful?”) as this would be too abstract. Instead, the chosen type of question intends to exclude the possibility that the respondents confuse unlawfulness with morality. Most respondents find it easier to form an opinion on a somewhat more specific aspect. Explicitly differentiating the questions about morality and the Rechtsgefühl allows the participants to draw clear lines between these two terms. In order to avoid distorted results, the survey’s design enables the respondents to take on the role of a neutral observer.[15]

B.  Preliminary Results with Regard to the United States and Germany

First of all, the study’s results emphasize that the moral assessment of the participants is not in accord with the ideas of many traditional philosophers.[16] For example, Aristotle, St. Augustine, Thomas Aquinas, and Kant condemn almost all forms of lies.[17] Their views on deception are also shared by some modern thinkers.[18] However, the participants of the study are more permissive when it came to lying. Even when regarding a lie about the subject matter of the contract, the seemingly “most reprehensible” form of deception the survey has investigated, some participants state that they would assess this behavior as morally acceptable.[19] In four out of the nine scenarios in the survey, a majority of U.S. lawyers and students and German students consider the presented lies to be moral. A majority of German judges deem five out of the nine scenarios to be “morally acceptable” deceptions. German lawyers and professional negotiators even state this view in seven out of nine cases. As a matter of fact, the study illustrates that people, to a certain extent, accept so-called “harmful lies,[20] or in other words, lies that cannot be excused or justified on the grounds that they are somehow favorable, or at least neutral, from the point of view of the deceived party.[21]

The moral assessment varies depending on the viewed group (judges, lawyers, professional negotiators, or students). In a direct comparison of German and U.S. lawyers, the results indicate that, on average, U.S. lawyers appear to hold higher moral standards. This may be due to ethics courses which are commonly offered at American universities[22] and may also be a consequence of the Model Rules of Professional Conduct that U.S. lawyers must study and follow.[23] Moreover, this may be linked to the clear differentiation of “good” and “bad” moral behavior in the everyday lives of U.S. citizens. With regard to the Rechtsgefühl, the observed differences between U.S. and German lawyers were overall less pronounced.

The study also shows that distinguishing between moral intuition and the Rechtsgefühl is indispensable, because the answers vary significantly in that respect. This applies to all surveyed groups in Germany and the United States as well as equally to all other studied countries. With regard to clear-cut examples, such as lies about the subject matter of a contract and the reservation price, the moral assessment and the Rechtsgefühl still go hand-in-hand.[24] However, in some cases, people assess a lie as immoral, yet simultaneously do not favor ordering legal consequences. For example, such a distinction is made with regard to bluffs about product availability. In this case, 85% of American lawyers consider such a lie to be immoral, but only 15% favor ordering legal consequences. Similarly, moral intuition and the Rechtsgefühl also do not go hand-in-hand with regard to lies concerning another offer.

An initial analysis of the data also demonstrates that the given answers on the moral assessment can only partly explain the Rechtsgefühl. However, if respondents consider a behavior morally acceptable, they generally do not favor ordering any legal consequences. In contrast, the fact that the participants assess a certain behavior as immoral does not directly allow one to draw conclusions on their Rechtsgefühl. Hence, people do not believe that everything that is immoral should necessarily also be unlawful. They rather opt for differentiating between morality and law. People generally favor law provisions that set a standard below the standard of appropriate moral behavior. Viewing morality and the legal situation should thus be complemented by viewing the Rechtsgefühl.[25] This applies all the more, since opinions on how the law should be (Rechtsgefühl) vary less between the groups than is the case for people’s moral intuition.

With regard to the different deceptions, the preliminary results draw the following picture: bluffs about personal preference (for example, bluffs about a party’s favorite football or soccer team) are seen as morally acceptable by the majority of the participants. In line with that assessment, the participants do not favor legal consequences for those lies. The same applies for bluffs about deadlines and budget limitations. In the case of such bluffs, moral intuition and the Rechtsgefühl go hand-in-hand. In contrast, lies about the subject matter of the contract are seen as morally unacceptable by the majority of respondents. In such cases the respondents advocate for legal consequences. The survey also includes a question, setting a scenario, where one party presents a lawful behavior as illegal in order to block demands by the other side. Besides the lie about the subject matter of the contract, this is the only deception scenario, where across all surveyed groups a majority favors a right of the deceived party to rescind the contract. In line with this, a majority in all surveyed groups also assesses these kinds of lies as immoral.

Regarding bluffs on internal company policies and guidelines, opinions vary. More than half of the questioned German students (59.4%), American students (52.9%), and U.S. lawyers (56%) assess the behavior as immoral as opposed to the German professional negotiators, where only 13% classify this behavior as immoral. Similarly, German lawyers and judges do not view these kinds of lies as particularly problematic.[26] For the German students, the results allow the assumption that the moral assessment also influences the Rechtsgefühl, since almost 47% support the option of challenging the contract. For U.S. students, the percentage is a bit smaller (35.6%). The same is true for U.S. lawyers (33%). Among the professional negotiators, lawyers, and judges from Germany, there is a nearconsensus about the fact that this kind of deception should not entitle the deceived party to challenge the contract.[27]

Lying about another offer that is in fact non-existent is also assessed diversely by the participants. The majority of the students from both countries (71.2% from the United States and 60.1% from Germany) as well as a majority of the German judges (69%) and U.S. lawyers (80%) assess the tactic as immoral. Among German lawyers and professional negotiators, however, only a minority of the participants classify the behavior as morally unacceptable (48% of German lawyers, 36% of German professional negotiators). Regarding the Rechtsgefühl, the observed discrepancies are smaller. In none of the questioned groups does a majority favor the option of challenging the contract. The proponents of legal consequences fluctuate between 14% (German professional negotiators) and round about 44% (U.S. students).

Regarding lies on the availability of a product, the results are similar. In all groups, the majority of questioned participants view this kind of deception as immoral (for example, 54% of German judges and 85% of U.S. lawyers), with the exception of German professional negotiators (24%) and German lawyers (45%). In no group does a majority support the right to rescind the contract.

Overall, the results illustrate that there are different views about the Rechtsgefühl depending on a person’s profession or nationality. In contrast to the variations of the moral assessment, variations regarding the Rechtsgefühl do not, however, change the overall majority (in other words, as for the result for a specific question, the majority in all groups either favors or objects to legal consequences). This further indicates the importance of the Rechtsgefühl regarding law. The Rechtsgefühl in the context of lies in contract negotiations also derives its importance from the fact that all business participants can generally put themselves in the position of both sides (either the party experiencing the bluff or the party that conducts the bluff). Thus, the evaluation is carried out from a rather neutral perspective, which probably leads to a “balanced” view. German negotiators, especially, seem to consider that they occasionally use bluffs during negotiations, which leads them to hold a more “generous” view on this matter.

Above all, it should be noted that the international study confirms that Germany and the United States are relatively similar as to their results regarding moral intuition and the Rechtsgefühl. The differences with regard to results from other countries are generally greater.[28] The following table ranks the U.S. and German students’ responses to the nine scenarios of the questionnaire. The answers are ranked from most immoral to least immoral and high results in favor of rescission to low results in favor of rescission:


If the Rechtsgefühl is similar in both countries and the actual usage of such lies is approximately equal as well (as it can be initially assumed at this instance), it seems apt to infer a similar legal situation because it is difficult for any legal order to set rules contrary to a consistent Rechtsgefühl (and the actual practice).[29] Hence, it is interesting to discuss whether the observed similarities between Germany and the United States, as well as the distinction between moral intuition and Rechtsgefühl, are reflected in the actual legal situation.

II.  The Legal Situation in the United States and Germany

A.  The United States

1.  Applicable Law

Lies in contract negotiations have diverse facets and are regulated by different sets of rules. In B2B contract negotiations, however, the concept of misrepresentation is essential.[30] The following part primarily analyzes the Restatement of Contracts’ view of misrepresentations since the Restatement attempts to illustrate the legal state with all of its essential elements in simple terms. In addition, the basic differences to the Restatement of Torts on misrepresentation are outlined, and relevant case law will be discussed.

2.  Misrepresentation According to the Restatement of Contracts and the Restatement of Torts

In general, the rescission of a contract is subject to four prerequisites.[31] First and foremost, a misrepresentation must be given. A misrepresentation requires “an assertion that is not in accord with the facts.[32] Rescissions based on misrepresentations of opinion, matters of law, or intentions are subject to major restrictions.[33]

In addition, the misrepresentation has to be either fraudulent or material to grant the deceived party the right to rescind the contract.[34] This Article only addresses deceptions that are to be classified as fraudulent misrepresentations.[35] According to the Restatement of Contracts, the misrepresentation does not necessarily have to be “material.[36] However, in practice, courts often demand fulfilment of this condition[37] or indirectly require “materiality” by means of the prerequisite of “justified reliance” or “inducement” (for both see further below).[38] This aspect is one of the main differences in comparison with damage claims for the tort of deceit, which the Restatement of Torts addresses, as in that respect a misrepresentation must be fraudulent as well as material.[39] Materiality is a difficult term to define. Thus, in practice, the possible interpretations vary.[40] Generally, a matter is material according to section 538 of the Restatement of Torts if “a reasonable man would attach importance to its existence or nonexistence in determining his choice of action in the transaction in question.[41]

Another prerequisite is “inducement.[42] Based on the lie, the deceived party needs to have been induced to assent to the contract.[43] Nevertheless, it is not necessary that the deception was the main or only reason to enter into the contract. However, the lie must have been “substantial” for the decisionmaking process.[44] In this respect, in the course of the rescission, the claim is indirectly based upon the requirement of materiality.[45] With regard to the tort of deceit, “causation” is also discussed intensively.[46]

Moreover, the reliance must be justified.[47] In essence, the deceived party must have relied on the false statement and the established reliance must have been legitimate.[48] Circumstances under which a justified reliance is rejected are inter alia, misrepresentations “of only peripheral importance to the transaction” or false statements that are not expected to be taken seriously.[49] In this respect, the customary practice of market participants is also taken into account.[50] Hence, the prerequisite of “justified reliance” imposes a certain degree of individual responsibility on the deceived party.[51] Irrational behavior can serve as an indicator to determine that the deceived party did not actually rely on the lie.[52] If it can, however, be proven that the deceived party did place trust in the statement made, neither stupidity nor irrationality is harmful.[53] Only “a failure to act in good faith and in accordance with reasonable standards of fair dealing”[54] can cause a different assessment. The element of self-responsibility gains even more importance when looking at the tort of deceit.[55]

If all requirements are fulfilled, the deceived party can challenge the contract or enforce damage claims.[56] In the course of damage claims based on the tort of deceit, the deceived party also has to prove a pecuniary loss.[57] This requirement is not explicitly stated as a prerequisite for rescission.[58] Yet, in practice, some courts seem to view pecuniary loss as a prerequisite.[59]

Section 549 of the Restatement of Torts defines what is to be regarded as “pecuniary loss” in the context of the tort of deceit. There are several forms of pecuniary losses. One relevant loss is described by the out-of-pocket rule. According to this rule, it is only important whether the misrepresentation causes a situation in which the value of the purchased object is lower than its purchase price.[60] This also includes indirect or consequential damages.[61] Yet, both cases are not relevant for deceptions outside the scope of the subject matter of the contracts, which are mainly analyzed in this Article. Nevertheless, there is the option to replace the advantage the deceived party would have gained from entering into the contract. This approach refers to the so-called “benefit of the bargain.”[62] Yet, this possibility is restrained by the burden of proof. According to the latter, the deceived person has to prove his or her loss “in accordance with the usual rules of certainty in damages.[63] The question arises, whether damages based on lies about aspects other than the actual subject matter of the contract are included.

3.  Case Law

Though the relevant case law on misrepresentations will not be illustrated in great detail here, it is clear that in mostthough not in allcases concerning deceptions about the subject matter of the contract, a rescission is possible. If, however, a seller makes statements about the quality of his or her product with the help of general adjectives, like it is “a good car,” usually, an assertion of opinion is assumed,[64] and the rescission of the contract is therefore granted only in exceptional circumstances. The same rationale applies to statements on the value of an object (for example, “the goods are worth $10,000”[65]).[66] Remarks on the price, such as “this is a good price” and so forth, are generally also regarded as opinions.[67] More specific deceptions that concern the nature of the price (for example, deceptions regarding the cost or stock market price), may, however, support a claim for rescission.[68] Neither U.S. literature nor traceable case law addresses how statements such as, “this is a friendship price, shall be treated. Yet, the discussion on misrepresentations of value and price indicates that such a bluff would probably not justify a rescission.[69] As for now, there also seems to be no case law on lies about the reservation price.[70]

An “assertion as to matters of law” can take two forms: (1) a statement of fact or (2) a statement of opinion.[71] If, for instance, the deception concerns whether a particular law is in force or not, the deception regards a fact. This situation is then treated equally as other misrepresentations of facts[72] and may therefore grant the deceived party the remedy of rescission.[73] Likewise, this rule also covers lies about a statutory maximum price.[74] Many deceptions about legal matters do, however, concern lies about probable outcomes of court proceedings. Such statements are classified as statements of opinion[75] and only in very exceptional cases entitle a rescission.[76] In practice, it is also relevant whether the lie concerns national or foreign law.[77]

The deception of the negotiation partner with regard to another better offer is not discussed in the Restatement of Contracts’ explanations. But occasionally case law on the topic can be found.[78] For instance, in Kabatchnick v. Hanover-Elm Building Corp. (a tort of deceit case) the court ruled in favor of a plaintiff who was deceived by a false claim of another offer.[79] Another case similarly granted tort damages for false statements of another offer (combined with time pressure).[80] However, neither of these judgments addressed the extent to which damages can or should be taken into account.[81] The judgments rather stated that damages have occurred and that it is not harmful that the deceived party cannot prove an exact amount of damages.[82]

On many other practically relevant misrepresentations in contract negotiations, such as lies about the availability of a product,[83] deadlines,[84] reservation prices, and internal company policies, almost none or only very few cases could be found. Of the few cases, some are based on special provisions not relevant to the general concept of “misrepresentation.[85]

B.  Germany

1.  Applicable Law

In Germany, there is also more than one legal concept that deals with the legal consequences of lies in contract negotiations. The main rule is, however, section 123 paragraph 1, first alternative of the German Civil Code (BGB),[86] which addresses the right to rescind a contract due to fraudulent misrepresentation. Besides this, there may be entitlement to damages according to culpa in contrahendo,[87] that means negligence in contracting (“Verschulden bei Vertragsschluss”). If a case of criminal fraud (section 263 of the German Penal Code (“StGB”)) is brought, section 823 of the BGB (dealing with the tortious liability in civil law) is also applicable. In this way, in conjunction with the aforementioned criminal law rule, tortious claims can be brought forward. Moreover, lies about the subject matter of the contract are addressed by warranty law.[88] The following part will focus on section 123 of the BGB as the main rule and in this respect only addresses the very basic structure.

2.  Section 123 of the BGB (German Civil Code)

 A rescission according to section 123 of the BGB requires a willful deception.[89] The relevant term used in law, “fraudulent” (“arglistig”), has now for a long time been equated with the term “willful” or “intentional.[90] Moreover, a causal link has to be proven, namely in two respects.[91] First, the act of deceit must induce the occurrence or maintenance of an error for the other party. Secondly, the error must have led the deceived party to have made a declaration of intent with the corresponding content.[92] In this respect, it is irrelevant whether the deceived party would not have agreed to the contract without the deception (dolus causam dans) or whether he or she would have just desired a contract with different terms (dolus incidens).[93] Viewing the deception, it is also sufficient if the deceived party would otherwise not have agreed to the contract at that exact time (but, for example, at a later point).[94]

Section 123 of the BGB establishes no further requirements for the misrepresentation such as a “reprehensible attitude”[95] (“verwerfliche Gesinnung”), intention to harm the deceived party, actual financial loss for the deceived party,[96] intention of the deceiving party to enrich him or herself or a third party,[97] materiality, or justified reliance. The fact that the negotiating partner could have been more attentive and would consequently have been able to recognize the deception beforehand does not exclude a rescission of the contract.[98]

Section 123 of the BGB only applies in cases of deceptions about facts (objectively comprehensible statements).[99] Expressions of opinion and value judgments are not included in the scope of the rule.[100] In this regard it must, however, be assessed whether the expression of “opinion” does actually contain a statement of fact at its core (“Tatsachenkern”).[101] If this occurs, the fact at the core of the opinion can give rise to a rescission claim. Accordingly, mere sales talk or puffery (“marktschreierische Anpreisungen”) does not justify a rescission based on the conduct of fraudulent deception[102] if the statement concerned has no “factual content”[103] and thus comprises no deception of fact.

Concerning fraudulent deception, unlawfulness is not an explicit prerequisite.[104] The legislative materials evince that the legislature has deliberately decided against requiring unlawfulness.[105] This is due to the fact that the legislature assumed a fraudulent deception to be unlawful in all circumstances.[106] Nonetheless, there is, in particular, one case group in which the aspect of unlawfulness is discussed: lies in response to unlawful, or, more precisely, discriminatory questions. For example, questions asked by an employer regarding whether a job applicant is pregnant[107] or questions about the applicant’s ethnic origin[108] are inadmissible (discriminatory). For this reason, these questions may also be answered untruthfully by the applicant without legal consequences.[109] Some authors hold the view that “unlawfulness” should generally be recognized as a requirement of the law.[110]

3.  Case Law

The legal situation in Germany seems to be very clear with respect to section 123 of the BGB; it entitles a deceived party to a far-reaching right of rescission. Regarding lies about the subject matter of a contract, this is alsoalmost without exceptionreflected in the corresponding case law.[111] For deceptions outside the subject matter of a contract, however, there is practically no relevant case law within the area of B2B transactions. For example, only one case addressing a misrepresentation about a better alternative offer could be found. This single judgement by a district court (Amtsgericht), however, dates back to 1933 and has not even been published fully by the district court in Berlin.[112] In this case, the right of rescission was confirmed.[113] Nonetheless, not enough details of the circumstances of the case are publicly accessible to draw clear conclusions. There are no other known cases on this aspect, despite the prominence of this deception tactic.[114] Nonetheless, there are certain similarities to court rulings in the field of labor law, in which, for example, an applicant states a false (in this case, too high) salary previously paid. However, in this respect the legal landscape does not provide any clear conclusions either.[115]

Oftentimes, lies about the price can justify a rescission even in a B2B context. Examples include misrepresentations about purchase prices and profit margins,[116] as well as the incorrect indication of a “friend’s price” or “mate’s rate,” “reasonable price,” “especially favorable price,” “special price,” or falsely stating a “non-binding recommended retail price.[117] In principle, it is also possible to claim a rescission of the contract if a deception about the legal situation is provable.[118] Alas, there is (almost) no available case law on this subject.[119] Moreover, the existing cases show that the demarcation of lies about the legal situation and of bluffs about legal views may prove very difficult.[120]

In Germany, there are almost no cases dealing with deceptions outside the actual subject matter of the contract and the contractual partner (for example, on misrepresentations of personal preferences, deadlines,[121] internal company policies, or the availability of a product).[122]

C.  Overview of the Legal Differences Between the United States and Germany

German law provides an abstract, general rule, while U.S. law leaves significant leeway for interpretation.[123] Even the Restatements of Contracts and Torts, with their primary purpose of simplifying the law, indicate the actual complexity of the legal concept of “misrepresentation” in the United States.[124] Apart from the prerequisites of an intentional misrepresentation and causality, other U.S. legal requirements are unknown to German law. This implies that German law is less flexible and does not allow for any kind of lawful lies.

Both jurisdictions are similar with regard to having very few relevant cases about deceptions outside the subject matter of a contract. This may be due to the fact that, in the majority of cases, such lies are not uncovered. However, even in cases where the deceived party exposes such lies, there are often major difficulties in presenting sufficiently substantiated evidence for an effective claim. Due to the cost of a lawsuit, lodging a claim is oftentimes not economically feasible. Moreover, for B2B relationships, there is a general tendency to resolve problems in the course of extrajudicial arrangements. Furthermore, in the United States, not only the faint chances of winning such a case but also the party’s Rechtsgefühl will probably prevent the deceived party from claiming rescission of the contract or enforcing compensation of damages. However, the faint chances of winning do not explain the low number of such cases in Germany, where the law provides (at least according to its wording) a remedy for all kinds of lies. Still, in Germany, it also runs contrary to the Rechtsgefühl to challenge a contract in many of these situations, which is probably why many people refrain from pursuing this path.

The relevant case law in both countries reveals that deceptions concerning the subject matter of a contract itself are generally covered, even though, unlike in Germany, this is not always the case in the United States. At the same time, the jurisprudence, or rather the lack of jurisprudence, in the United States shows that most deceptions outside the subject matter of the negotiation normally do not entitle the deceived party to rescind the contract. The two aforementioned cases, involving bluffing about a better offer, seem to be the exception rather than the rule. The previously illustrated prerequisites also offer the leeway to disallow any rescission for the corresponding lies. With regard to German law, the lack of jurisprudence does not necessarily indicate that the rescission is not granted in cases of deceptions outside the scope of the subject matter of the contract. Viewing only the law as it stands, it could be assumed that in most of these cases there is a possibility to rescind the contract.

D.  Summary

There are considerable differences between the law in Germany and the law in the United States. Yet, it can be noted that both legal systems are equal in that their law by no means reflects widely held moral intuitions. In the United States, both a majority of students and lawyers consider not only deceptions about the subject matter of the contract and the legal situation to be immoral, but also assess lies about better offers, the availability of a product, and internal company policies to be morally unacceptable. However, American law, in general, does not allow the deceived party to rescind the contract in all of these circumstances. At least U.S. law, mainly due to its high degree of flexibility, more or less reflects the prevalent Rechtsgefühl. This corresponds with the expectation postulated above that the general Rechtsgefühl affects or should affect the abstract law (not the individual case) in the long-term. On the contrary, in Germany, section 123 of the BGB neither reflects people’s moral intuition nor their Rechtsgefühl because it exceeds both of these concepts. In fact, it rather mirrors the ideas of traditional moral philosophers who generally condemn lies to a great extent.

The following graph depicts the relationship between (1) the ideas of traditional moral philosophers, (2) people’s actual moral intuition, (3) people’s Rechtsgefühl (sense of how the law should be), and (4) the law in the United States and Germany:

III.  Reasons for the Legal Differences between the United States and Germany

Since in both countries moral intuition and Rechtsgefühl were assessed very similarly by the respondents of the survey, the legal differences can hardly be explained by focusing on these two specific aspects. However, different general values in the United States and Germany certainly play a role in explaining the legal divergences in both countries. U.S. law, for instance, puts much more emphasis on the individual’s personal responsibility and freedom of action than does German law.[125] German law, in turn, focuses more on preserving the deceived party’s autonomy and freedom of decision.[126] Moreover, legal differences regarding related concepts, for instance the law of warranties, certainly influence the concept of misrepresentation and therefore might have contributed to the occurring divergences. Yet, this alone does not sufficiently explain why German law sets out legal consequences for virtually all lies even though the Rechtsgefühleven that of German judgesdeems a more differentiated provision appropriate.

 In this respect, legal history may provide further insights. German law has its roots in Roman law.[127] However, in contrast to section 123 of the BGB, Roman law was open to differentiations regarding deliberate deceptions of an individual in the course of a negotiation.[128] Roman law distinguished between dolus bonus and dolus malus[129] and did not include certain lies that fell within the scope of sollertia[130]—a term that stands for “skill, shrewdness, quickness of mind, ingenuity, dexterity, adroitness, expertness.[131] Overall, the concept was not clearly defined. Hence, casuistic case law was very important. Even if the concept of the dolus suggests a relatively broad scope, its central area of application was not the protection of misleading information regarding certain characteristics of the sales object. It is even questionable whether such cases were covered at all.[132] The analysis of various sources, rather, points to a wide scope for deceptive actions in contract negotiations. Usual commercial practices were probably the point of reference for distinguishing between lawful and unlawful lies.[133] Moreover, as for the Romans, the act of deception was, at least to a certain extent, part of everyday business practice.[134] With regard to pricing, Paulus is often quoted as saying that [n]aturally it is allowed to buy what is worth more for less, to sell what is worth less for more, and thus to over-benefit each other. This also applies to contracts of rent and services.[135] In the following, it will be examined when and how German law has lost the differentiated view, which was immanent in Roman law.[136]

Inspired by rationalism, the seventeenth and eighteenth centuries brought forth the quest for basic values and principles as opposed to a case by case decision practice.[137] Yet, this so-called usus modernus left the core of the law, in the form of the Ius Commune, relatively unaffected.[138] With regard to the rescission of the contract by reason of deception, the question was less about which misrepresentations should be affected but rather about determining legal consequences for this conduct.[139] The ideas promoted by the movements of the Enlightenment and natural law, in form of the so-called “law of reason,” particularly flourished in the eighteenth century.[140] In parts of what is today Germany, the General State Laws of Prussia (Allgemeines Landrecht, or ALR) of 1794, and the Austrian General Civil Code (Allgemeines Bürgerliches Gesetzbuch, or ABGB) of 1811 (until 1866 Austria was part of the German community of states), as well as the French Code Civil of 1804 (which was applied in Germany in the Rhineland and in Baden until 1900), were significantly influenced by the principles of natural law.[141] Linked to the establishment of these laws, a “charging of law” with ethical considerations occurred.[142] In this sense, the independence of social ethics from moral theology is decisive.[143]

Under the influence of the teachings of Savigny and his successors, the German Historical School of Law of the nineteenth century formally distanced itself from the Enlightenment and natural law movements.[144] The German Historical School of Law dedicated itself to the systematization and modernization of Roman law according to the “Volksgeist” (verbatim, “spirit of the people”).[145] This systematization was valued so highly that sometimes simplifications and a neglect of the search for interest-oriented results were the outcome.[146] Moreover, Savigny’s writings were in the tradition of Kant’s.[147] In turn, Kant, in a particularly radical way, rejected a right to lie, even in circumstances of emergency.[148] Savigny himself, however, still mentions the distinction between dolus malus and dolus bonus.[149] Nonetheless, at the same time, one can also read the high value that Savigny attaches to truth: “[t]he necessary condition of all community, however, is truthfulness and the trust that it establishes.”[150] His remarks demonstrate that he attributed the element of an ethical perspective to the dolus malus.[151] At the same time, the idea of the “independent existence”[152] of law, established by the German Historical School of Law, “which should not force but enable autonomous morality,[153] must be taken into consideration. The subsequent generation of lawyers, the so-called Pandectists,[154] based their works on legal positivism, assuming that regulations could be derived solely “from system, concepts and doctrines” and without the external influence of religious, social, or scientific considerations.[155] A “clearly contoured law” without much scope for interpretation was therefore rather aligned with the tendencies of the Pandectists.[156]

In the context of the establishment of the German Civil Code (“BGB”), the legislature did not discuss misrepresentations outside the subject matter of the contract, which are explored in this Article.[157] However, the initially introduced BGB left some leeway for interpretation. Above all, the pre-contractual phase was less regulated. Only over time, did this area increasingly become the subject of different rules. Moreover, even though the Roman dichotomy between dolus malus and dolus bonus is not explicitly discussed in the documentation of the legislative process of creating the BGB, a distinction between lawful and unlawful lies still seemed to be included[158] in the wording of the provision: “arglistige Täuschung,” which literally translates to “malicious deception.[159]Arg” was originally an old swearword[160] that the Brothers Grimm even used as a synonym for the Latin term malus.[161] While in this context “arglistig” has a negative connotation, “listig” (“cunning”) is not necessarily negatively connoted and likewise derives its meaning from fromklug or schlau (“clever”).[162] The documentation of the legislative process leading to section 123 of the BGB also states that[i]n general, any malicious offense against the principles of good faith (“Treu und Glaube”) to the detriment of another presents itself as fraud.”[163] Hence, in the early years of the German Civil Code, the required malicious deception (“arglistige Täuschung”) was often interpreted as malicious, immoral deception.[164] Yet, soon, in jurisprudence and literature, the opinion that malice was equated with intent prevailed.[165] The focus was rather on promoting the idea that the deceiving parties’ actual attitude is not relevant. The provision was not supposed to have a sanctioning character. Moralizing deliberations should not be significant for the interpretation of the rule.[166] The “free self-determination in the field of legal transactions,”[167] as already the motives state, came to the fore[168] and left less room for distinguishing between lawful and unlawful lies.

In theory, there is still the recognition of trade customs, which is recognized in a general manner within the German Civil Code[169] and is in particular also applicable with regard to commercial transactions.[170] One of the leading representatives of an intensified liability for negligence in contracting, Walter Erman, admitted, still back in 1934, that commercial customs create a leeway, according to which certain untrue expressions are to be tolerated in the negotiations.[171] According to the present status of German law, in contrast to the original ideas of the German Civil Code legislature, common trade customs became almost insignificant.[172] Hence, nowadays, trade customs do not represent a practical possibility to exclude certain intentional deceptions from the scope of section 123 of the BGB. The abolition of the possibility to differentiate by means of the “fraudulent intent” or “trade customs” was the main reason for the comprehensive scope of section 123 of the BGB. The rediscovery of the unwritten element of “unlawfulness” in this way constitutes a (small) counter-movement, since it permits the exclusion of “lawful” misrepresentations from the comprehensive scope of application. Yet, up until now this possibility has only been exercised for undoubtedly unlawful (in particular, discriminatory) questions (for example, asking job applicants about an existing pregnancy). There are no further exceptions established in judgments.[173]

In summary, it can be stated that the German legal system never conducted a separate in-depth discussion on deceptions outside the subject matter of the contract. Originally, these kinds of deceptions were presumably not included by section 123 of the BGB either, but the progressive legislative coverage of cases concerning pre-contractual actions de facto led to a comprehensive coverage. Eliminating the possibility of evaluation within the provision, up to this day had the effect that exceptions can be granted only to a nearly insignificant extent. Compared to the United States, this has caused a divergence of the two legal systems.

IV.  Possible Future Developments

The theoretically complete unlawfulness of deceptions in contract negotiations in Germany neither corresponds with people’s prevalent Rechtsgefühl nor with their moral intuition. This can serve as a strong indication that one should reconsider a different interpretation of German law or even implement adaptions. In the spirit of bringing German law back on the path “to its roots,” specifically back to its Roman foundations, German law should reintroduce a differentiation between lawful and unlawful lies. Naturally, the question arises where exactly the German legal order should draw a distinct line between lawful and unlawful lies. This specific question will be discussed in a separate paper, solely dedicated to examining this topic in depth.

However, this Article promotes the idea, that, next to other arguments, people’s Rechtsgefühl should be taken into account regarding this question. In contrast, people’s moral intuition is considered to be less crucial for finding a legal solution. These claims are limited to bluffs and lies in business-to-business contract negotiations. The discussion on the more general relationship between moral intuition, the Rechtsgefühl, and the legal situation deserves a more in-depth analysis.

Besides economic aspects also have to be considered with regard to distinguishing lawful from unlawful lies.[174] In this respect, it will be important to ensure that the parties involved in transactions will not lose their faith in the market and its regulating forces. In addition, the proposed rule should be formulated as unambiguously as possible and align with the existing laws, especially with regard to the rules on disclosure. Even though this paper does not address misrepresentations based on omissions, the presented findings certainly have an influence on the following aspect: if a party is legally allowed to bluff about a certain aspect in a negotiation, it will also be allowed to not disclose any information on that issue. In return, if the law requires disclosure, the given information has to be correct.

 However, German law should not just copy respective concepts from U.S. law because, even though U.S. law reflects people’s Rechtsgefühl more or less, it leaves a lot of room for interpretation due to the broad concepts like “materiality,” which complicate predicting the likely outcome of certain cases. Hence, it could be considered trying to achieve the same result by means of both clearer and more precise rules. In that way, people who wish to act lawfully would have a better sense for differentiating lawful from unlawful lies.

 

 


[*] *.. Junior Professor (Associate Professor) of Civil Law and Company Law at the University of Siegen (Germany). I would like to thank Peter Krebs, Richard Epstein, Constantin Willems, Robert Miller, Nick Cowen, Charles Delmotte and all the participants of the Symposium on Convergence and Divergence in Private Law (November 3–4, 2018, New York University) for their insightful comments. I would also like to thank Melissa Dowse (University of Siegen) for her help translating this Article into English.

 [1]. All four terms will be used synonymously in this Article. Accordingly, a lie (or a bluff, deception, or misrepresentation) is given when an intentionally false statement is made. More precisely, this encompasses all scenarios where a statement does not correspond with the actual situation and the deceiver deliberately intends to deceive the opposite party. For a corresponding definition, see Sissela Bok, Lying 13–14 (2d ed. 1999).

 [2]. Saul Levmore, A Theory of Deception and Then of Common Law Categories, 85 Tex. L. Rev. 1359 passim (2007) (describing deceptions in very different areas and their common denominations).

 [3]. See, e.g., Stephen R. Guth, The Contract Negotiation Handbook, at iii (2008); James H. Michelman, Deception in Commercial Negotiation, 2 J. Bus. Ethics 255, 255 (1983); G. Richard Shell, When Is It Legal to Lie in Negotiations?, 32 Sloan Mgmt. Rev. 93, 93 (1991).

 [4]. This Article does not address lies based on silence and omissions of information.

 [5]. The English terms “sense of justice” and “sense of unlawfulness” are not exact translations of the German term, which is why I will use “Rechtsgefühl” throughout this Article. German literature distinguishes different forms of the “Rechtsgefühl.” E.g., Erwin Riezler, Das Rechtsgefühl: Rechtspsychologische Betrachtungen 78 (1946) (distinguishing between: (1) the sense of what is lawful, (2) the sense of how the law should be, and (3) the sense of respect towards the legal order). This Article refers to the second meaning: the sense of how the law should be. See Franz-Xaver Kaufmann, Rechtsgefühl, Verrechtlichung und Wandel des Rechts, in Lampe 185, 185–99, 197 n.4 (1985).

 [6]. For further explanation on this topic, see infra Section I.A.

 [7].               See infra Part III.

 [8]. The United States, Germany, China, Russia, England, Ireland, Austria, Spain, Argentina, Italy, Poland, Ukraine and Turkey participated in the survey. See Siegen Study on Bluffs in B2B Contract Negotiations, Univ. of Siegen [hereinafter Siegen Study], https://www.wiwi.uni-siegen.de/contract
governance/survey/?lang=de (last accessed June 18, 2019).

 [9]. See id. (surveying 907 students, 78 professional negotiators, 31 lawyers, and 26 judges).

 [10]. Id. (surveying 104 students and 21 lawyers).

 [11]. The terms “deception” or “lie” are not used at all in the questionnaire. Id.

 [12]. Id.

 [13]. The term “causal” refers to the fact that the lie actually induced the deceived party to enter into the contract.

 [14]. Siegen Study, supra note 8. For the sake of simplification, the study only inquired the sense of justice with regard to rescission and not to damages. Id.

 [15]. For a discussion of the influence of the identification of participants on moral assessments, see Shirit Kronzon & John Darley, Is This Tactic Ethical? Biased Judgments of Ethics in Negotiation, 21 Basic & Applied Soc. Psychol. 49, 49–58 (1999).

 [16]. See Siegen Study, supra note 8. The answers of German students to an additional questionnaire reveal that they generally responded by taking into consideration their personal moral intuition, at least in some capacity.

 [17].               Aristotle, Nicomachean Ethics bk. IV, at 105 (Martin Ostwald trans., Macmillan Publ’g Co. 1962) (c. 384 B.C.E.); Saint Augustine, Against Lying, in 16 Treatises on Various Subjects 125 et seq. (Roy J. Deferrari ed., Harold B. Jaffee et al. trans., 1952) (c. 420); Thomas Aquinas, 41 Summa Theologiae: Virtues of Justice in the Human Community 157–59 (T. C. O’Brien trans., Hartford Seminary Found. 1971) (1274); Immanuel Kant, On a Supposed Right to Tell Lies from Benevolent Motives (1797), reprinted in Kant’s Critique of Practical Reason and Other Works on the Theory of Ethics 361–65 (Thomas Kingsmill Abbott trans., 6th ed. 1909) [hereinafter Kant, Supposed Right]; Immanuel Kant, The Metaphysics of Morals 429 (Mary Gregor ed. & trans.,1996) (1797) [hereinafter Kant, Metaphysics] (briefly discussing the immorality of even well-intentioned lies). For a general discussion, see Bok, supra note 1, at 3346; Larry Alexander & Emily Sherwin, Deception in Morality and Law, 22 Law & Phil. 393, 395–97 (2003). Other influential thinkers are less strict and consider at least some lies to be justifiable. See, e.g., 1 Jeremy Bentham, The Works of Jeremy Bentham 105 (John Bowring ed., Russell & Russell, Inc. 1962) (1838–1843) (“Falsehood, take it by itself, consider it as not being accompanied by any other material circumstances, nor therefore productive of any material effects, can never, upon the principle of utility, constitute any offence at all.”); 2 Hugo Grotius, On the Rights of War and Peace 892 (Richard Tuck ed., Liberty Fund, Inc. 2005) (15831645) (“As also he that procures a Contract or Promise by Force, Fraud, or unjust Terror, is bound to release the Person who made the Contract or Promise, from any Obligation of Performance . . . .”); John Stuart Mill, Utilitarianism 33–34 (Longmans, Green & Co. 1901) (1863) (permitting lying in only a few narrow circumstances).

 [18]. See, e.g., Seana Valentine Shiffrin, Speech Matters: On Lying, Morality, and the Law 3 (2014).

 [19]. Participants who state that lying about the subject matter of a contract was morally acceptable included 16.5% of German students, 21.8% of U.S. students, 22% of German professional negotiators, 13% of German lawyers, 12% of U.S. lawyers, and 4% of German judges. Siegen Study, supra note 8. It should be noted that the survey deals with an exaggeration and not with a completely invented fact.

 [20]. Id. With regard to their responses to harmful lies, differences between the U.S. and German test groups can be noted.

 [21]. On excuses and justifications of lies and white lies, see, for example, Bok, supra note 1, at 57–106; Richard Epstein, Smart Consequentialism: Kantian Moral Theory and the (Qualified) Defense of Capitalism, in Are Markets Moral? 32, 43–49 (Arthur M. Melzer & Steven J. Kautz eds., 2018).

 [22]. The American Bar Association’s Standards and Rules of Procedure for Approval of Law Schools requires that a class on professional responsibility be taught to all students for a law school to receive accreditation. Standards and Rules of Procedure for Approval of Law Schools r. 303(a)(1) (Am. Bar Ass’n 2018). In Germany, courses on business ethics are not part of the standard curriculum of law and business programs. See, e.g., Juristenausbildungsgesetz [Legal Education Act] Nordrhein-Westfalen [JAG NRW], Apr. 11, 2019; Ausbildungs– und Prüfungsordnung für Juristen [JAPO] [Training and Examination Regulation for Lawyers], Bavaria, March 1, 2018.

 [23]. The Model Rules of Professional Conduct serve as the models for the ethics rules in most U.S. jurisdictions. Model Rules of Prof’l Conduct pmbl. (Am. Bar Ass’n 1983).

 [24]. For example, if the lie was morally acceptable there would be no legal consequences and vice versa.

 [25]. On the effects of the sense of legal consequences on other legal questions, no general statements shall be made.

 [26]. Only 31% of German lawyers and 26% of German judges view bluffs on internal company requirements as immoral. Siegen Study, supra note 8.

 [27]. Among the Germans who participated in the study, only 9% of professional negotiators, 6% of lawyers, and 8% of judges favor entitling the deceived party to challenge the contract based on a bluff about an internal company policy. Siegen Study, supra note 8.

 [28]. It should be noted that the answers of participants from other countries have not yet been analyzed fully. Nonetheless, the first results strongly point in this direction.

 [29]. In the case of changes to the Rechtsgefühl, the adaptation of the law can take some time due to path dependencies.

 [30]. Hence, rules on warranties, professional conduct, criminal law, the Uniform Commercial Code, as well as on the terms of consumer contracts and transactions in securities are not part of the analysis. The same is true for the concepts of “mistake” and “bargaining in good faith.” Possible contractual clauses (like non-reliance clauses) that deviate from the rules on misrepresentations are not taken into account either. Also, the parol evidence rule will not be discussed.

 [31]. See Restatement (Second) of Contracts §§ 159–73 (Am. Law Inst. 1981).

 [32]. Id. § 159. Situations in which a party lies in the course of the negotiation, but the true fact is mentioned in the concluded contract, are excluded here. In this case, it is usually not possible to challenge the contract. Shell, supra note 3, at 97.

 [33]. Restatement (Second) of Contracts §§ 168–71 (Am. Law Inst. 1981).

 [34]. Id. § 162.

 [35]. In this context, usually the term “requirement of scienter” is applied. E.g., id. § 162; Robert W. Miller, Scienter in Deceit and Estoppel, 6 Ind. L.J. 152, 152 (1930).

 [36]. Restatement (Second) of Contracts § 164(1) (Am. Law Inst. 1981).

 [37]. See, e.g., Crooker v. White, 50 So. 227, 228 (Ala. 1909); Melvin v. Stevens, 458 P.2d 977, 980 (Ariz. Ct. App. 1969); Grane v. Grane, 473 N.E.2d 1366, 1373 (Ill. App. Ct. 1985); Stephanie R. Hoffer, Misrepresentation: The Restatement’s Second Mistake, 2014 U. Ill. L. Rev. 115, 130 & n.94 (2014).

 [38]. Hoffer, supra note 37, at 130; see also Emily Sherwin, Nonmaterial Misrepresentation: Damages, Rescission, and the Possibility of Efficient Fraud, 36 Loy. L.A. L. Rev. 1017, 1020–21 (2003) (analyzing the complex relationship between materiality and justified reliance).

 [39]. Restatement (Second) of Torts § 538(1) (Am. Law Inst. 1979); see also Sherwin, supra note 38, at 1021–25.

 [40]. See Hoffer, supra note 37, at 130.

 [41]. Restatement (Second) of Torts § 538(2)(a) (Am. Law Inst. 1979).

 [42]. See Restatement (Second) of Contracts § 167 (Am. Law Inst. 1981).

 [43]. Id. § 167.

 [44]. Id. § 167 cmt. a.

 [45]. See id. § 167 cmt. b (explaining that the “materiality of the misrepresentation is a particularly significant factor” in determining whether a misrepresentation induced assent).

 [46]. Restatement (Second) of Torts §§ 546–48A (Am. Law Inst. 1979).

 [47]. Restatement (Second) of Contracts § 164 (Am. Law Inst. 1981).

 [48]. Id.

 [49]. Id. § 164 cmt. d.

 [50]. Fleming James, Jr. & Oscar S. Gray, Misrepresentation – Part II, 37 Md. L. Rev. 488, 488 (1978).

 [51]. Alexander & Sherwin, supra note 17, at 411.

 [52]. James & Gray, supra note 50, at 518.

 [53]. Id.; see also Chamberlin v. Fuller, 9 A. 832, 836 (Vt. 1886) (“No rogue should enjoy his ill-gotten plunder for the simple reason that his victim is by chance a fool.”).

 [54]. Restatement (Second) of Contracts § 172 (Am. Law Inst. 1981).

 [55]. See Restatement (Second) of Torts §§ 541–541A (Am. Law Inst. 1979).

 [56]. Id. § 525; Restatement (Second) of Contracts § 164 (Am. Law Inst. 1981).

 [57]. Restatement (Second) of Torts § 549 (Am. Law Inst. 1979).

 [58]. See Joseph M. Perillo, Calamari and Perillo on Contracts § 9.15 (6th ed. 2009).

 [59]. Alexander & Sherwin, supra note 17, at 409; see, e.g., Leibowitz v. Great Am. Grp., Inc., 559 F.3d 644, 648–49 (7th Cir. 2009); Wootan & Saunders v. Diaz, No. 2017-0820, 2018 La. App. LEXIS 575, at *2021 (La. Ct. App. Mar. 28, 2018).

 [60]. Restatement (Second) of Torts § 549 cmt. b (Am. Law Inst. 1979).

 [61]. Id. § 549 cmt. d.

 [62]. Id. § 549 cmt. l.

 [63]. Id. § 549 cmt. h.

 [64]. Restatement (Second) of Contracts § 168 cmt. b (Am. Law Inst. 1981).

 [65]. Id. § 168 cmt. c, illus. 2.

 [66]. Id. § 168 cmt. c.

 [67]. This can be deduced from the Restatement of Contracts’ explanation that similar remarks, for example, that an automobile is a “good car,” should be regarded as opinions. See id. § 168 cmt. b.

 [68]. Id. § 168 cmt. d, illus. 6; see also Voorhees v. Cragan, 112 N.E. 826, 828–29 (Ind. App. 1916); Stewart v. Salisbury Realty & Ins. Co., 74 S.E. 736, 737 (N.C. 1912).

 [69]. On that discussion, see Restatement (Second) of Contracts § 168 cmts. b–c, illus. 2. (Am. Law Inst. 1981).

 [70]. Shell, supra note 3, at 95 (rejecting the notion that lies about the reservation price are material and therefore grounds for rescission).

 [71]. Restatement (Second) of Contracts § 170 cmts. a–b (Am. Law Inst. 1981).

 [72]. Id. § 170 cmt. a.

 [73]. Id. § 164.

 [74]. Id. § 170 cmt. a, illus. 1.

 [75]. Id. § 170 cmt. b.

 [76]. Id. §§ 168–69.

 [77]. Id. § 170 cmt. c (“The rule stated in this Section applies to statement of foreign as well as domestic law. Some courts have refused to recognize that statements of the law of a state or country where the recipient neither resides nor habitually does business are mere statements of opinion, even though they purport to cover only the legal consequences of facts known to both parties.”).

 [78]. See Hayes v. Equine Equities, Inc., 480 N.W.2d 178, 182 (Neb. 1992) (stating that a seller’s false assertion that he had a “ready, willing and able purchaser” was not mere “sales talk or puffing” but rather “positive representations of fact upon which [a purchaser] could rely.”); see also Barron G. Collier, Inc. v. Braunig & Sons Baking Co., 202 N.W. 442, 443 (Minn. 1925) (describing a bluff about a “waiting list” of customers).

 [79]. Kabatchnick v. Hanover-Elm Bldg. Corp., 103 N.E.2d 692, 692–95 (Mass. 1952).

 [80]. Beavers v. Lamplighters Realty, Inc., 556 P.2d 1328, 1329, 1333 (Okla. Civ. App. 1976).

 [81]. Id. at 1333; Kabatchnick, 103 N.E.2d at 692–95.

 [82]. Kabatchnick, 103 N.E.2d at 695. Note, however, that this is a business-to-consumer case rather than a business-to-business case.

 [83]. There are, however, cases that deal with the availability of mortgage financing in connection with the purchase and sale of real estate. See, e.g., Stephenson v. Capano Dev., Inc., 462 A.2d 1069, 1070 (Del. 1983).

 [84]. There are, however, cases of false ultimatums concerning payments. See, e.g., Lawton v. Nyman, 327 F.3d 30, 34–35 (1st Cir. 2003) (dealing with a false deadline concerning a bank’s waiver); Koepplinger v. Seterus, Inc., No. 1:17cv995, 2018 U.S. Dist. LEXIS 144270, at *6–9 (M.D.N.C. Aug. 24, 2018); see also Ohlson v. Cadle Co., No. 04 Civ. 318 (DRH), 2008 U.S. Dist. LEXIS 77328, at *3–7 (E.D.N.Y. Sept. 30, 2008) (discussing a false deadline of payment).

 [85]. See, e.g., Koepplinger, 2018 U.S. Dist. LEXIS 144270, at *6–9.

 [87]. BÜRGERLICHES GESETZBUCH [BGB] [CIVIL CODE], § 280, para. 1, § 241, para. 2, § 311, para. 2.

 [88]. Moreover, demarcation questions with breach of public morals may arise. BÜRGERLICHES GESETZBUCH [BGB] [CIVIL CODE], § 138 (“Sittenwidrigkeit”). Besides this, the German Law Against Unfair Competition should be taken into account. Gesetz gegen den unlauteren Wettbewerb [UWG], §§ 5, 5a (discussing misleading commercial practices and omissions), translation at https://www.gesetze-im-internet.de/englisch_uwg/englisch_uwg.pdf. Furthermore, sections 267 and 187 of the German Criminal Code may play a role. Strafgesetzbuch [StGB] [Penal Code], § 267 (penalizing document forgery), translation at https://www.gesetze-im-internet.de/englisch_stgb/
englisch_stgb.pdf; Strafgesetzbuch [StGB] [Penal Code], § 187 (penalizing defamation).

 [89]. Holger Wendtland, in Beck’scher Online Kommentar zum BGB [Beck Commentary on the Civil Code] § 123, para. 17 (50th ed. 2019).

 [90]. See, e.g., Bundesgerichtshof [BGH] [Federal Court of Justice] June 13, 2007, Neue Juristische Wochenschrift [NJW] 3057 (3059), 2007; see also Christian Armbrüster, in 1 Münchener Kommentar zum Bürgerlichen Gesetzbuch [Munich Commentary on the Civil Code] § 123, para. 18 (8th ed. 2018).

 [91]. See, e.g., Reinhard Bork, Allgemeiner Teil des Bürgerlichen Gesetzbuches para. 871 (4th ed. 2016); Andreas Feuerborn, in 1 Nomos Kommentar BGB: Allgemeiner Teil § 123, para. 41 (3d ed. 2016).

 [92]. Armbrüster, supra note 90, § 123, para. 21; Feuerborn, supra note 91, § 123, paras. 41–43.

 [93]. Bork, supra note 91, para. 871; Jürgen Ellenberger, in Palandt: Bürgerliches Gesetzbuch § 123, para. 24 (78th ed. 2019). Contra Martin Josef Schermaier, in 1 Historisch-kritischer Kommentar zum BGB §§ 116–24, para. 119 (Mathias Schmoeckel, et al. eds., 2018). See Andreas Wacke, Circumscribere, gerechter Preis und die Arten der List, 94 Zeitschrift der Savigny-Stiftung für Rechtgeschichte [ZRG] 184, 236–45 (1977) (discussing dolus causam dans and dolus incidens).

 [94]. Feuerborn, supra note 91, § 123, para. 43; Ellenberger, supra note 93, § 123, para. 24.

 [95]. Armbrüster, supra note 90, § 123, para. 18; Wendtland, supra note 89, § 123, para. 19.

 [96]. Bundesgerichtshof [BGH] [Federal Court of Justice] June 21, 1974, Neue Juristische Wochenschrift [NJW] 1505 (1506); Oberlandesgericht Stuttgart [OLG] [Higher Regional Court] December 7, 2011, 3 U 135/11, BeckRS 01235, 2012 (discussing the issue in paragraphs 47–50); Armbrüster, supra note 90, § 123, para. 19.

 [97]. Bork, supra note 91, para. 874.

 [98]. OLG Düsseldorf, July 3, 2017, 4 U 146/14, BeckRS 130307, 2017 (discussing the issue in paragraph 163); Bork, supra note 91, para. 870; Armbrüster, supra note 90, § 123, para. 23.

 [99]. Bundesgerichtshof [BGH] [Federal Court of Justice] September 19, 2006, Neue Juristische Wochenschrift [NJW] 357, (358) 2007; Armbrüster, supra note 90, § 123, para. 29; Wendtland, supra note 89, § 123, para. 8.

 [100]. Bundesgerichtshof [BGH] [Federal Court of Justice] September 19, 2006, Neue Juristische Wochenschrift [NJW] 357, (358) 2007; Armbrüster, supra note 90, § 123, para. 29; Wendtland, supra note 89, § 123, para. 8.

 [101]. OLG Stuttgart, December 7, 2011, 3 U 135/11, BeckRS 1235, 2012, paras. 4750; Ellenberger, supra note 93, § 123, para. 3.

 [102]. Bundesgerichtshof [BGH] [Federal Court of Justice] September 19, 2006, Neue Juristische Wochenschrift [NJW] 357 (358), 2007; Ellenberger, supra note 93, § 123, para. 3; Wendtland, supra note 89, § 123, paras. 8–9.

 [103]. Armbrüster, supra note 90, § 123, para. 29.

 [104]. Id. § 123, para. 19.

 [105]. Bericht der XII. Kom. v. 12. Juni 1896 [Report of the XII. Commission on the General Chapter of the German Civil Code] (1896), reprinted in 1 Die gesamten Materialien zum Bürgerlichen Gesetzbuch für das Deutsche Reich 965 (Benno Mugdan ed., 1899).

 [106]. Id.

 [107]. Armbrüster, supra note 90, § 123, para. 48 (describing pregnancy-related questions in job interviews); Feuerborn, supra note 91, § 123, para. 56.

 [108]. Feuerborn, supra note 91, § 123, para. 54.

 [109]. See Holger Fleischer, Informationsasymmetrie im Vertragsrecht 254–56 (2001).

 [110]. Armbrüster, supra note 90, § 123, para. 19 (defending a teleological reduction of section 123 of the BGB). However, the methodological solution is still discussed.

 [111]. At this point, many judgements could be mentioned. Below, a few concise examples are illustrated.

 [112]. Amtsgericht Berlin [AG] [District Court], Mar. 22, 1933, 171 C 130/33 (published incompletely in Deutsche Justiz: Rechtspflege und Rechtspolitik; amtl. Blatt d. deutschen Rechtspflege, 82324 (1933)).

 [113]. Id.

 [114]. Paul Bockelmann, Kriminelle Gefährdung und strafrechtlicher Schutz des Kreditgewerbes 17 Zeitschrift für die gesamte Strafrechtswissenschaft [ZStW] 28, 33 (1967) (favoring some room to maneuver in this respect with regard to fraud); Gerhard Wagner, Lügen im Vertragsrecht, in Störung der Willensbildung bei Vertragsschluss 70, 70–71, 95–97 (Reinhard Zimmermann ed., 2007) (favoring a right to lie with regard to statements on reservation prices).

 [115]. Bundesarbeitsgericht [BAG] [Federal Labor Court] May 19, 1983, Zeitschrift für Wirtschaftsrecht [ZIP] 210 (213), 1984 (rejecting the possibility to rescind the contract); see also Fleischer, supra note 109, at 256–60. Contra Arbeitsgericht Bad Oldesloe [ArbG] [Labor Court], July 15, 1969, 1 C 128/69, FHZivR 16 Nr. 126. It should be noted that the quoted case law cannot be transferred one-to-one to B2B situations, as a special relationship of trust is often assumed between employees and employers.

 [116]. Bundesgerichtshof [BGH] [Federal Court of Justice] Jan. 22, 1964, Neue Juristische Wochenschrift [NJW] 811, (811) 1964 (describing the margin of earnings); Fleischer, supra note 109, at 261 (describing the right to challenge the contract in those cases); Benjamin Junglas, Bankenhaftung bei der Finanzierung von Schrottimmobilien, Neue Juristische Online Zeitschrift [NJOZ] 49, 62 (2013); Wendtland, supra note 89, § 123, para. 9.

 [117]. AG Düsseldorf, Sep. 10, 2008, 32 C 6293/08, BeckRS 5960, 2009. See also Oberlandesgericht Hamm [OLG] [Higher Regional Court] June 12, 1992, Neue Juristische Wochenschrift Rechtsprechungsreport Zivilrecht [NJW-RR] 628 (62829), 1993; OLG Jena Dec. 6, 2005, 8 U 338/05, BeckRS 18097, 2011 (denying the causality in a case concerning the calculation of rent); OLG Frankfurt May 12, 1982, 17 U 273/81, DAR 1982, 294.

 [118]. Kammergericht [KG], Neue Juristische Wochenschrift [NJW] 1219 (1220), 1971; Armbrüster, supra note 90, § 123, para. 30.

 [119]. For two examples of cases rejecting a rescission, see Kammergericht [KG], Neue Juristische Wochenschrift [NJW] 1219 (1220), 1971; OLG Karlsruhe, Dec. 6, 2005, Zeitschrift für Wirtschaftsrecht [ZIP] 557, 558–59, 2006.

 [120]. OLG Karlsruhe, Dec. 6, 2005, Zeitschrift für Wirtschaftsrecht [ZIP] 557, (55859) 2006.

 [121]. Stephan Lorenz, Der Schutz vor dem unerwünschten Vertrag 483 n.1525 (1997) (assuming liability according to the rules of the c.i.c. (culpa in contrahendo) in a case dealing with faked time pressure and “unique opportunities”).

 [122]. However, an online fashion store, Zalando, was sued in 2015 by the competition authorities based on a corresponding misrepresentation. Press release, Peter Brammen, Zentrale zur Bekämpfung unlauteren Wettbewerbs, Wettbewerbszentrale erhebt Klage gegen Zalando wegen irreführender Werbung (Nov. 11, 2015), https://www.wettbewerbszentrale.de/de/_pressemitteilungen/?id=268.

 [123]. Perillo, supra note 58, § 9.24.

 [124]. Id.

 [125]. Especially regarding the right of rescission, personal responsibility is virtually irrelevant in Germany.

 [126]. See, e.g., Armbrüster, supra note 90, § 123, para. 1. In this context, the German discussion about the theory of will, the theory of expression and the theory of trust (“Willens-, Erklärungs– und Vertrauenstheorie”) is to be taken into consideration. See Schermaier, supra note 93, §§ 116–24, paras. 4–6.

 [127]. Initially the Roman legal rules in the form of the so-called “Ius Commune” (literally “common law,” but at that time referred to as Ius Commune throughout Europe), were applied in Italy, but later also in Germany. For more on this development, see 1 Helmut Coing, Europäisches Privatrecht 13–14 (1985); Franz Wieacker, Privatrechtsgeschichte der Neuzeit 114–24 (1967).

 [128]. Antonio Carcaterra, Dolus Bonus / Dolus Malus passim (1970); Sebastian Martens, Durch Dritte verursachte Willensmängel 45–54 (2007) (describing Roman Law and its differentiation with respect to these forms of deception); Reinhard Zimmermann, The Law of Obligations: Roman Foundations of the Civilian Tradition 664–70 (1990); Ralph Backhaus, Ethik und Recht in Cicero: de officiis 3.12.50 ff, in Humaniora: MedizinRechtGeschichte (Festschrift für Adolf Laufs) 3, 3–13 (Bernd-Rüdiger Kern et al. eds., 2006); Wacke, supra note 93, at 221.

 [129]. In the classical period, the term dolus was used instead of dolus malus. See Martens, supra note 128, at 49 n.191; see also Wacke, supra note 93, at 227.

 [130]. Wacke, supra note 93, at 229 (pointing out that dolus bonus had a small scope of application). The Romans, to a large extent, tolerated deception during negotiations within the framework of sollertia. The distinction between dolus bonus and sollertia is not important for the purposes of the present argument. The decisive factor is that there was a certain amount of leeway; see also Zimmermann, supra note 128, 669–70 (describing dolus and sollertia).

 [131]. Charlton T. Lewis & Charles Short, A Latin Dictionary 1721 (E.A. Andrews ed., 2d ed. 1891) (defining sollertia).

 [132]. Martens, supra note 128, at 52; Backhaus, supra note 128, at 8 (listing examples).

 [133]. Martens, supra note 128, at 52.

 [134]. Id. at 53.

 [135]. This quote is a translation of “naturaliter concessum est quod pluris sit minoris emere, quod minoris sit pluris vendere et ita invicem se circumscribere, ita in locationibus quoque et condictionibus iuris est.” Dig 19.2.22.3 (Alan Watson ed. & trans., 1985).

 [136]. The Glossators then introduced the terminological distinction between dolus causam dans and dolus incidens, whereby unlawful deceptions are classified according to their severity. See Martens, supra note 128, at 87; Sprenger, Ueber dolus causam dans und incidens, 88 Archiv für die civilistische Praxis 359, 361 (1898). Yet, according to the vast majority of opinions, German law does not include this differentiating approach. See Bork, supra note 91, para. 871; Feuerborn, supra note 91, § 123, para. 43.

 [137]. Coing, supra note 127, at 69–72; Wieacker, supra note 127, at 217–24 (explaining the practices in the seventeenth and eighteenth centuries).

 [138]. Wieacker, supra note 127, at 243.

 [139]. Martens, supra note 128, at 138–39.

 [140]. Wieacker, supra note 127, at 249–80, 312 (describing the right to reason as part of natural law and the relationship between the Law of Reason and Enlightenment); see also James Gordley, The Philosophical Origins of Modern Contract Doctrine 85111 (1991).

 [141]. Wieacker, supra note 127, at 265, 327–47 (“The profane Law of Reason of the modern age, after the Corpus Iuris the strongest potency of the newer legal development at all . . . .”). This is a translation of “[d]as profane Vernunftsrecht der Neuzeit, nach dem Corpus Iuris die stärkste Potenz der neueren Rechtsentwicklung überhaupt . . . .” Id.

 [142]. A famous example of this is the French general clause in tort. The Code Napoleon; Or, The French Civil Code art. 138283, at 378 (A Barrister of the Inner Temple trans., 1827), http://files.libertyfund.org/files/2353/CivilCode_1566_Bk.pdf (providing a translation the French Civil Code of 1804).

 [143]. Wieacker, supra note 127, at 266.

 [144]. Id. at 352–53 (explaining Kant’s role in the “destruction of uncritical older natural law”).

 [145]. 1 Friedrich Carl von Savigny, System des heutigen Römischen Rechts 14–18, 39–44 (1840). See also Wieacker, supra note 127, at 353–77 (“Hervorbringung des Volksgeistes . . . .”).

 [146]. Martens, supra note 128, at 183.

 [147]. Wieacker, supra note 127, at 360, 370, 385.

 [148]. Compare Kant, Metaphysics, supra note 17, at 429 (discussing briefly the immorality of even well-intentioned lies), with Kant, Supposed Right, supra note 17, passim (providing a more concrete and sharp analysis).

 [149]. 3 Friedrich Carl von Savigny, System des heutigen Römischen Rechts 118–19 (1840); 1 Bernhard Windscheid, Lehrbuch des Pandektenrechts 211 n.4 (5th ed. 1879) (referring to the meaning of the term fraud in the sense of dolus malus).

 [150]. Savigny, supra note 149, at 115.

 [151]. Id.

 [152]. This is a translation of “selbständigen Daseyn.” Wieacker, supra note 127, at 397; see also Savigny, supra note 149, at 331–32.

 [153]. This quote is a translation of “welches die autonome Sittlichkeit nicht erzwingen, sondern ermöglichen soll.” Wieacker, supra note 127, at 397.

 [154]. See John. P. Dawson, The Oracles of the Law 450–59 (1968) (describing the Pandectists).

 [155]. This quote is a translation of “aus System, Begriffen und Lehrsätzen.” Wieacker, supra note 127, at 431.

 [156]. Martens, supra note 128, at 185 (focusing on the clearly contoured facts of the case).

 [157]. Id. at 195–96 (demonstrating how the legislature particularly viewed technical matters).

 [158]. See Michael Jüttner, Die Zurechnung der arglistigen Täuschung Dritter im rechtsgeschäftlichen Bereich unter besonderer Berücksichtigung des Problems der “gespaltenenArglist 8 (1998) (describing the impression of the wording).

 [159]. Fleischer, supra note 109, at 333 (drawing the connection to dolus malus and therefore considering the term “not fitting”).

 [160]. See Friedrich Kluge, Etymologisches Wörterbuch der deutschen Sprache 29 (24th ed. 2002) (defining the keyword “arg”).

 [161]. 1 Jacob Grimm & Wilhelm Grimm, Deutsches Wörterbuch cols. 546–47 (1854).

 [162]. See Kluge, supra note 160, at 443 (defining the keyword “List”); see also Grimm & Grimm, supra note 161, cols. 1070–73.

 [163]. The quoted language is a translation of “Im Allgemeinen stellt sich jeder arglistige Verstoß gegen die Grundsätze von Treu und Glauben zum Nachtheil eines Anderen als Betrug dar.” The wording “by fraud” (“durch Betrug”) in the first draft had been changed to “fraudulent deception” in the second draft. Motive zum allgemeinen Theile des BGB, reprinted in 1 Die gesammten Materialien zum Bürgerlichen Gesetzbuch für das Deutsche Reich 467 (Benno Mugdan ed., 1899) (describing motives concerning section 103).

 [164]. E.g., Reichsgericht [RG] [              Supreme Court of the German Reich] July 11, 1888, 23 Entscheidungen des Reichsgerichts Zivilsachen [RGZ] 130 (137), 2008 (requiring malicious intent, or “bösliche Absicht”); 1 Carl Crome, System des Deutschen Bürgerlichen Rechts 429 (1900) (describing malicious, or “böswillig,” deception); 1 Hugo Rehbein, Das Bürgerliche Gesetzbuch mit Erläuterungen für das Studium und die Praxis 148 (Verlag von Müller 1899) (using the term “böslicher Absicht”).

 [165]. Fleischer, supra note 109, at 334.

 [166]. Jüttner, supra note 158, at 22–29.

 [167]. Motive zum allgemeinen Theile des BGB, supra note 163, at 465 (describing motives concerning section 103). The quoted language is a translation of “freie Selbstbestimmung auf rechtsgeschäftlichem Gebiete.”

 [168]. Fleischer, supra note 109, at 244 (explaining the protective content of the provision).

 [169]. See Bürgerliches Gesetzbuch [BGB] [Civil Code], § 242, translation at https://www.
gesetze-im-internet.de/englisch_bgb.

 [170]. See Handelsgesetzbuch [HGB] [Commercial Code], § 346, translation at http://www.
gesetze-im-internet.de/englisch_hgb; see also id., § 310, para. 1, sentence 2.

 [171]. Walter Erman, Beiträge zur Haftung für das Verhalten bei Vertragsverhandlungen, 139 Archiv für die civilistische Praxis [AcP] 273, 282–83 (1934).

 [172]. See Nadia Al-Shamari, Die Verkehrssitte im § 242 BGB: Konzeption und Anwendung seit 1900, at 143 (2006) (describing a study of the BGH’s decisions in volumes 1 through 151).

 [173]. See supra Section II.B.3.

 [174]. Fleischer, supra note 109, at 263; Richard A. Posner, Economic Analysis of Law 119, 121–22 (9th ed. 2014) (rejecting a right to lie based on economic reasons); Anthony T. Kronman, Mistake, Disclosure, Information, and the Law of Contracts, 7 J. Legal Stud. 1, 15 n.42, 1819 n.49 (1978); see also Saul Levmore, Securities and Secrets: Insider Trading and the Law of Contracts, 68 Va.               L. Rev. 117, 137–42 (1982) (explaining optimal dishonesty). See generally Ariel Porat & Omri Yadlin, A Welfarist Perspective on Lies, 91 Ind. L.J. 617 (2016) (supporting the lawfulness of some lies based on economic reasons).

 

Private Law Statutory Interpretation – Article by Shyamkrishna Balganesh

From Volume 92, Number 4 (May 2019)
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Private Law Statutory Interpretation

Shyamkrishna Balganesh[*]

Introduction

While scholars routinely question the normative significance of the distinction between public law and private law, few—if any—question its conceptual basis. Put in simple terms, private law refers to bodies of legal doctrine that govern the horizontal interaction between actors, be they individuals, corporate entities, or on occasion the state acting in its private capacity.[1] Public law on the other hand refers to doctrinal areas that deal with vertical interaction between the state and non-state actors, wherein the state exerts a direct and overbearing influence on the shape and course of the law.[2] The latter is epitomized by the areas of constitutional law, administrative law, and criminal law, while the areas of contract law, tort law, property law, and the law of unjust enrichment exemplify the former.

Underlying this basic distinction is an important institutional dimension. Most areas that are treated as exemplifying private law are areas of the common law, meaning that they are judge made in origin. Common law rules continue to be policed and developed by courts incrementally, from within the context of individual disputes.[3] Consequently, private law and the common law are routinely treated as synonymous and analytically coterminous with each other. While this characterization may have had few problems in simpler times, the emergence of the modern administrative state has served to render it grossly misleading in important respects.

Treating private law as subsumed entirely within the common law has produced a critical blindspot for private law thinking. It causes discussions of private law to overlook the role of the legislature in governing horizontal legal interactions.[4] In numerous areas, statutory intervention has come to supplement and modify common law rules. Indeed, several domains of horizontal interaction between private actors are today governed entirely by statutory law. While this neglect is for the most part seen in all common law countries, in the context of the United States it has come to be further entrenched by an influential development in post–World War II legal thinking that has given it a superficial structural legitimacy. And this is the reality that under the influence of the Legal Process school of thought, the subjects of “legislation” and “statutory interpretation” have come to be understood and theorized as public law subjects. By prioritizing form over substance and thus focusing on the institutional origin of the law rather than on its substantive content, this public law approach to legislation dominates American legal thinking today. As such, it has served to turn private law’s legislative blindspot into a serious threat to the very analytical significance of private law thinking.

This Article is an attempt to describe the basis and consequences of the disconnect between private law and legislation, both for private law theorizing and legal thinking more generally. It does so by focusing on “private law statutes,” legislation (and legislative provisions) that creates or modifies rights and obligations between parties in their private capacities. Private law statutes do more than merely create private causes of action. While they create private causes, they do so on the basis of principles that are specific to the horizontal interaction between parties, rather than entirely for public-regarding policy reasons. While statutes in the areas traditionally identified as private law remain obvious examples, the category extends to altogether new domains as well.

Private law statutes are today well known in the United Kingdom (and numerous other common law jurisdictions that follow the U.K. model),[5] where statutory interpretation is far from being regarded as a purely public law subject. Courts (and increasingly scholars) in these jurisdictions remain willing to interpret and understand these statutes using private law principles and ideas, without necessarily allowing considerations of form, structure, and policy to override substance. This presents an interesting contrast to the United States, where courts and scholars take the public law orientation of a statute for granted and search exclusively for public policy considerations in interpreting it, despite its content.[6] The contrast—between what is best described as private law statutory interpretation and public law statutory interpretation—offers helpful lessons for how U.S. legal thinking might reorient its approach to statutory interpretation in order to recognize the distinctiveness of private law statutes.

Part I begins with an overview of the dominant approach to legislation and statutory interpretation in the United States, which views the subject as a public law area. Part II then introduces the idea of private law statutes and private law statutory interpretation. It describes the operation and significance of private law statutes in the United Kingdom and contrasts the approach to interpretation that courts adopt in interpreting them with the approach adopted by U.S. courts on similar issues. Part III then moves to the prescriptive and offers a few tentative suggestions for how U.S. courts might develop an approach to interpreting private law statutes and provisions.

I.  Statutory Interpretation as Public Law in the United States

While the subjects of “legislation” and “statutory interpretation” had been in existence in U.S. legal scholarship since the nineteenth century, they remained significantly under-theorized until the middle of the twentieth century.[7] To classical legal thinkers (“Legal Formalists”) legislation was at best an imperfect source of law, given its political (and therefore unprincipled) overtones.[8] And to the Legal Realists who came after them, statutory interpretation promoted a variety of post-hoc rationalizations that masked the indeterminacy of legal doctrine.[9]

All of this changed with the advent of the Legal Process school of thought, developed and advanced by Professors Henry M. Hart, Jr. and Albert Sacks, which sought to develop the central insights of the Realists but grounded it in a structural theory about law-making and state institutions.[10] The Legal Process approach is routinely described as one of the most influential approaches to “public law” in U.S. history, and as having charted the direction of public law thinking for several generations.[11] Describing it as a “theoretical watershed in [U.S.] statutory interpretation,” Professor Bill Eskridge notes how Legal Process thinking advocated looking beyond statutory text and legislative history in interpreting legislation.[12] Implicit in their theory, according to Professor Eskridge, was a recognition that statutory interpretation ought to be guided by a “public values analysis”—a set of public law based background principles that guide the interpreter.[13] Central to the idea of public values is the recognition that the law is driven by conceptions of justice and the common good, rather than individualist or private considerations unique to any individual or group.[14] The Legal Process approach to statutory interpretation proved to be enormously influential in the U.S. context postWorld War II.

Critical to Legal Process thinking, especially in its application to legislation, was the belief that underlying every statute was an overarching collectivist “policy” or common purpose.[15] This policy or purpose was worth discerning, explicating, and applying during the interpretive process—even at the cost of other variables. Speaking of Professor Hart’s own theory of statutory interpretation, two theorists of Legal Process thus note that he “preferred practical, dynamic, policy-oriented applications of statutes over legalistic, static, linguistically or historically oriented interpretations.”[16] He also took the view that legislative interventions in statutes could form arbitrary starting points, such that background principles could be legitimately sacrificed.[17]

This last point is particularly important for the analysis here, since it suggests a few things of importance about this approach to statutory interpretation. It tells us that an overarching “policy,” understood as the overall purpose behind the statute, takes precedence over unarticulated background principles, which merely represent the means needed to achieve the purpose. The distinction between policy and principles is a well-known if complicated one, made famous by Professor Ronald Dworkin. Professor Dworkin understood a policy in terms of the law’s overall goals, which were usually externally defined, in contrast to principles, which to him were to be derived from within the law and its commitment to justice, fairness, or morality.[18] The distinction is of some significance to private law theories, wherein principles deriving from the horizontal interaction between parties are seen as just as important (if not of greater normative import) than the policy goals at hand.

Fidelity to an identified legislative policy was therefore the overarching ideal of the Legal Process approach to interpretation. Quite naturally, this also meant ignoring any principles enmeshed in the substantive content of the law, when in conflict with such policy. The working of this public law approach to interpretation is best captured by the first example that Professors Hart and Sacks use to illustrate their theory: “The Case of the Spoiled Cantaloupes.”[19] While not offered (by them) as an illustration for statutory interpretation, its deployment of the statute effectively captures this policy-focused thinking within the domain of interpreting and applying legislation. Drawn as it was from the context of an actual set of opinions, it also aptly illustrates the approach to legislation that had become entrenched by the time of their writing.

In 1930, Congress passed a federal law known as the Perishable Agricultural Commodities Act (PACA).[20] Its principal provision made it unlawful for “any dealer to reject or fail to deliver in accordance with the terms of the contract without reasonable cause any perishable agricultural commodity” that had been entered into interstate commerce.[21] Structurally, it was therefore a law that was parasitic on (state) contract law and the terms of the contract. A depression era legislation, the PACA was enacted to protect vendors of perishable commodities against unfair dealings by receivers, who had the ability to hold the vendors hostage given the perishable nature of the goods at issue.[22] As a piece of economic legislation, the PACA was therefore designed to produce a more efficient and egalitarian marketplace. Yet at the same time, it was also a piece of contract law, in that it merely added a federal remedy for the breach by simply providing that a violation will result in “liab[ility] to the person or persons injured thereby for the full amount of damages sustained in consequence of such violation.”[23]

Professors Hart and Sacks use the case L. Gillarde Co. v. Joseph Martinelli & Co.,[24] which employed the PACA, to illustrate their theory. The case involved a contract for the supply of cantaloupes of a certain quality, sold under the term “rolling acceptance final.” When the vendor supplied them, the recipient rejected them claiming that they were not of the specified quality since they had been infected with rot, and the dispute that arose was whether the rejection was lawful.[25] The vendor began the action by filing a complaint with the Department of Agriculture, which ruled that the recipient had no right of rejection.[26] The recipient then took the matter to the federal courts. The district court treated the case as a simple contract law dispute and applied the traditional principles of the law of sales. On that basis, it concluded that the rejection was lawful since a rolling acceptance merely required the recipient to accept responsibility for any in-transit damage or deterioration. When the goods were not as described in the contract, the implied warranties of description and quality were violated, which allowed for the rejection.[27]

On initial appeal, at the First Circuit Court of Appeals reversed the district court—but on purely contract law grounds—finding that under the express terms of the contract, the recipient’s right to reject had been waived.[28] It concluded that in light of the breach of warranties, the recipient was entitled to no more than a claim for damages sustained from the breach.[29] The respondent filed a petition for rehearing, which was supported by the Department of Agriculture in an amicus brief. The Department advanced an interpretation of the statute that consciously underplayed the role of general contract law. Instead, it argued that as a matter of public policy, the court ought to be more aware of how rejections of perishable commodities impacted the market for them. Specifically, it emphasized that the court was to pay attention to the “rejection evil,” which “was one of the principal factors which led to the enactment of the” PACA.[30]

Somewhat surprisingly, the First Circuit gave in and reconsidered its decision. In its new opinion, it adopted an interpretation of the statute that in many ways showcases the Legal Process-driven public law approach. The new opinion said nothing of traditional contract law principles as it once had, and instead focused on discerning the “intent[ion]” behind the statute, which was the court’s term for the overall purpose and policy which had motivated its passage.[31] The court bought the argument that the rejection “evil[]” was of paramount importance, and accordingly signed on to the Department’s interpretation, reversing its own decision on the availability of a damages remedy.[32]

While Hart and Sacks use the case to illustrate the working of their overall theory of institutional settlement in the law, it is also a useful lesson in the approach to statutes and legislation that they advance in the course of their theory—and which has since come to dominate U.S. thinking since. The straightforward private law question of whether a party was entitled to seek damages for nonperformance even after wrongfully rejecting the goods (discounting for the loss occurring from that wrongful rejection) was rendered altogether irrelevant by a collectivist policy consideration that had to do with the overall regulation of the market. It was not that the court sought to balance the parties’ private considerations against broader public ones, but instead that it allowed the latter to eviscerate the need for the former altogether. Principles of basic contract law would have had the court focus on the parties’ contractual intent or whether the contractual consideration covered the claim at issue, or both. Yet none of that now mattered to the First Circuit once the public purpose behind the statute was seen to be paramount.

The case epitomizes the public law approach to statutory interpretation that has since taken hold of U.S. legal thinking. The approach makes obvious (and perfect) sense when the underlying substance of the legislation is collectivist in orientation, such as it is with regulatory enactments. All the same, when it involves horizontal interactions—most commonly in the form of private causes of action—those interactions are seen as adding nothing of normative import at all to the legislation. Instead, they are seen as mere means to the overall public end.

With the elimination of federal general common law by Erie Railroad Co. v. Thompkins,[33] most U.S. federal legislation has come to be understood almost exclusively in public law terms. The pervasiveness of this approach is best captured by the following observations of the Supreme Court in a 1953 decision interpreting the provisions of a labor statute:

Statutes may be called public because the rights conferred are of general application, while laws known as private affect few or selected individuals or localities. . . . [The] distinction between public and private law is less sharp and significant in this country, where one system of law courts applies both, than in the Continental practice which administers public law through a system of courts separate from that which deals with private law questions. Perhaps in this country the most usual differentiation is between the legal rights or duties enforced through the administrative process and those left to enforcement on private initiative in the law courts.

Federal law has largely developed and expanded as public law in this latter sense. It consists of substituting federal statute law applied by administrative procedures in the public interest in the place of individual suits in courts to enforce common-law doctrines of private right.[34]

The Court’s language here is telling and vividly showcases the two core points previously made: (1) statutory law—especially federal law—is public law, and (2) public (interest and) policy is paramount in the construction and understanding of these statutes. Principles take a veritable backseat.

II.  Private Law Statutory Interpretation

The idea of statutory law as public law regardless of its substantive content is today well ensconced in U.S. legal thinking. While public law thinking is principally responsible for this reality, U.S. private law scholars share a good deal of responsibility for it as well. In limiting their focus principally to private law doctrine produced through the common law method, private law scholars have done surprisingly little to challenge the dominance of the public law view of statutes. This is despite the abundance of what are best described as private law statutes: legislative enactments on private law subjects (in other words, those dealing with the horizontal interaction between parties) that seek to influence and mold the relationship between parties using principles specific to their horizontal interaction rather than entirely through collectivist ideals.

Ironically, private law statutes are today far more common in non-U.S. common law jurisdictions including the United Kingdom, the birthplace of the common law. And while courts and scholars in these jurisdictions do not refer to such statutes by that name, they nonetheless understand, interpret, and apply them in a way that is faithful to their substantive (private law) content without defaulting into an overly deferential search for a collectivist legislative policy. The remainder of this Part explores the divergence between U.S. and non-U.S. thinking (namely towards statutory interpretation) on the issue, even within the common law world. It does so by examining how courts approach the interpretation of a U.K. statute that is self-consciously within an area traditionally defined as private law (contract law); and then by looking to another area (copyright law) that has in the United States come to be understood as public law, in contrast with the United Kingdom, where it is implicitly treated as a private law subject, and comparing the interpretive approaches of U.S. and U.K. courts therein.

An important caveat about line drawing should be discussed before proceeding further. The term “private law statute” refers not just to statutes that are entirely private law focused but also to provisions within otherwise sprawling statutes in which this private law orientation manifests itself. A more precise term for these provisions might be “private law provisions,” yet to avoid a multiplicity of terms the former is used to cover the latter as well. Situations involving private law provisions within broader statutes present their own set of line drawing and classificatory complexities, which this Article does not address. In particular, the issue of how to deal with statutes that are principally regulatory and policy driven in their orientation, but then deploy private law thinking to realize their policy goals, presents its own set of questions about the desirability of this public law/private law synthesis and the effect of this interaction on the normative values that each body of thought brings to the statute.

A.  The [U.K.] Contract (Rights of Third Parties) Act of 1999

A bedrock principle in the common law of contracts has long been the doctrine of privity.[35] The doctrine was understood as precluding third parties—who were not party to the actual contract—from being able to enforce the contract, even if they had been expressly identified as such.[36] The logic for this prohibition was tied to the rule that non-parties obtained neither benefits nor burdens from a contract that could be legally enforced.[37] In due course it also came to be tied up with the idea of contractual consideration, such that some courts justified the prohibition on the basis that the third party had given no consideration to the original contracting parties to justify the conferral of enforceable rights on it.[38]

Over the years, the principle was seen as unduly restrictive and of little practical utility, especially in situations where all the parties involved had actively wanted a third party to take some benefit from the contract. This was especially true in cases involving maritime contracts, where parties consciously try to extend contractual benefits to third parties involved in the transportation chain. English common law courts thus began to craft tailored exceptions to the general rule and in their decisions openly noted the impracticality of the prohibition, when applied as a bright line rule.[39]

After years of deliberation, Parliament enacted the Contract (Rights of Third Parties) Act in 1999, based on the Law Revision Commission’s study of the topic and its recommendations for reform through legislation.[40] The principal aim of the law was to relax the rigidity of the privity rule for third party beneficiaries. A short statute (of ten sections), its principal provision is Section 1(1), which allows a third party to enforce a term of a contract “in his own right” if the contract either expressly allows for such enforcement or purports to confer a benefit on him.[41]

A few things are noteworthy about the statute and its passage. Despite having clear commercial effects on different sectors of the economy, in its actual framing, it is sector neutral and couched in the abstract language of contract law. Further, this is so despite the Commission study on which it was based, which conducted an elaborate survey of the need for the law from the perspective of various market sectors.[42]

Despite dealing with contract law, an area traditionally classified as private law, the Act could have been understood and interpreted in either public law or private law terms. Under the public law rubric (characteristic of Legal Process thinking), it could have been understood as a piece of economic legislation directed at facilitating contractual arrangements commonly seen in certain sectors—such as the shipping and transportation industries—and therefore reflecting a grand bargain of sorts that balances the multiple interests at issue. Then, when an interpretive question arises a court would treat the bargain as the starting point for its identification of a policy and arrive at an interpretation aligned with that policy and purpose. The First Circuit’s amended opinion in the Gillarde case is a prime example of how this might have happened, perhaps even inviting the intervention of federal agencies dealing with contractual arrangements, such as the Federal Trade Commission.

By contrast, in the private law approach, the Act would be understood as itself driven by the contract law principle of prioritizing contractual intent over all else absent concerns of morality or public policy. The legislation would thus be seen as simply allowing contractual intent to override concerns about privity and consideration, when abundantly clear—a simple rearrangement of horizontal contract law principles. The interpretive approach accompanying this understanding would eschew any reference to an external, or market, purpose or policy underlying the statute and defer to contract law principles rather than a legislative policy, if any.

Indeed, scholarly analyses and interpretation of the Act have almost uniformly treated the statute as a private law enactment and attempted to analyze it using the rubric of contract law principles.[43] Even those critical of the Act appear to concede that it is best understood as a principle-driven legislation, and that attempting to understand it in terms of overarching commercial policy is futile.[44] One private law scholar takes issue with the statute’s deviation from the traditional rationales and principles for private law liability in the common law, arguing that the mere reliance on contractual intent is insufficient as an independent (principled) basis for civil liability.[45] Notably though, this scholar stops well short of identifying the statute in anything but private law terms; to the contrary, his own criticism is premised on the statute being a private law statute.[46]

In the years since the enactment of the Act, the few courts interpreting it have almost uniformly understood it in private law terms. The earliest cases interpreting the principal provisions of the Act treated it as applying a purely objective test of contractual intention, an established principle that the statute was seen as incorporating.[47] In one notable case, a plaintiff relied on the Act to claim that it was an identified beneficiary in a transfer agreement between two corporations.[48] The agreement had the transferee assume any liabilities of the transferor, and made the transferee agree to complete any outstanding customer orders. The plaintiff sought to argue that this satisfied the statute’s requirement that the beneficiary be “expressly identified.”[49] The court disagreed, and in so doing rejected a plausible argument grounded in consumer protection policy, though noting that the “temptation” to accept such logic was “great.”[50] Instead, the court relied on the logic that the Act was clear about the distinction between an identified and an unidentified class, and sought to limit its relaxation of the privity doctrine to the former; again, it kept with the idea that contractual intention was the principle at the root of the legislation.

The Act thus illustrates the working of a statute that was self-consciously designed as a private law statute and interpreted and understood by courts and scholars as such. In dealing with the statute, courts’ and scholars’ interpretive focus has been on the basis and logic for the private cause of action brought by the third party, and for which they have made primary resort to contract law principles, eschewing—at times consciously—reference to collectivist goals and ideals.

B.  U.K. and U.S. Copyright Legislation

Given that the Act of 1999 was in an area traditionally thought of as private law to begin with, it may seem altogether unsurprising that courts (and scholars) interpret it using private law ideas and principles. Additionally, drawing a comparison to U.S. courts’ approach on similar issues poses obvious difficulties since general contract law remains an area beyond the purview of federal legislation except under rare circumstances relating to national concerns (such as, the PACA). Highlighting the divergence in interpretive approaches between U.S. and U.K. courts more fully necessitates looking to an area that (1) presents comparable statutes in both jurisdictions, and (2) is amenable to both public law and private law interpretations such that the adoption of one over the other is a matter of choice. Copyright law fits both criteria rather well and evinces this divergence between the two jurisdictions.

The most recent copyright statutes in both countries were enacted within a decade of each other, the U.S. Act in 1976,[51] and its U.K. counterpart in 1988.[52] Both are elaborate pieces of comprehensive legislation that build on prior statutes and case law. Covering the entirety of copyright law in order to compare how courts have approached interpreting the statute in the two countries is well beyond the scope of this Article. Consequently, the discussion that follows focuses on two important domains (both covered by the respective statutes) where this divergence is most apparent: joint authorship and originality.

1.  Joint Authorship

The phenomenon of multiple authorship is ancient; and yet copyright law around the world has struggled to develop a coherent framework to analyze the practice and accord it appropriate importance. All the same, it remains an excellent example to compare public and private law thinking in so far as it combines elements from contract law, tort law, and property law within the overall skein of copyright law’s other normative ideals.

The U.S. copyright statute approaches joint authorship through the nature of the work produced through the process, which it defines as “a work prepared by two or more authors with the intention that their contributions be merged into inseparable or interdependent parts of a unitary whole.”[53] The U.K. statute—the Copyright, Designs and Patent Act of 1988—does something very similar and defines a work of joint authorship as “a work produced by the collaboration of two or more authors in which the contribution of each author is not distinct from that of the other author or authors.”[54]

A notable distinction between the two provisions is that the former expressly incorporates a reference to “intention” while the latter does not. Unsurprisingly, this has caused courts to interpret the provisions differently. All the same, one interpretation adopted an overt policy-driven public law approach, while the other treated copyright like the private law institution that it always was as a historical matter.

In the U.S. context, it wasn’t until the year 1991 that the provision invited serious judicial scrutiny. In Childress v. Taylor,[55] a case brought by a producer of a play against its principal author wherein the former claimed to be a joint author of the play, the Second Circuit was called to interpret the statute’s requirements for joint authorship. In so doing, the Second Circuit concluded that most of the statutory definition of the idea was “straightforward” except for its emphasis on intention,[56] for which it looked to the legislative history accompanying the enactment of the 1976 Act, which noted that “the touchstone [in the definition] is the intention, at the time the writing is done, that the parts be absorbed or combined into an integrated unit.”[57] Using this language, the court then concluded that the requirement of intention was so overarching that a collaboration as such was insufficient to generate joint authorship unless the requisite intention could be independently proven.[58]

The court’s rationale for this interpretation was to avoid joint authorship being extended to “many persons who are not likely to have been within the contemplation of Congress” because it would allow an individual making a minimal contribution to the work to unfairly claim an “undivided half interest” in the work.[59] This last set of considerations had little to do with the nature and form of the collaboration at issue, the process through which the work was created, or indeed the text of the statutory provision; it was instead motivated by an important policy consideration: avoiding contributors from overreaching in their claims, which would itself deter additional collaboration and joint authorship. This higher threshold—in the nature of proof of intention—was thus meant to send a signal for the future.

The court’s interpretation was thus driven by its identification of a policy-rationale, and was overtly collectivist in orientation in that it was more about Congress’s presumptive concerns with contributor overreach. Missing altogether in the opinion, even if intention were taken as central to the provision, was any reference to what such intention was meant to serve and its role as a mechanism of evidencing a common design, a consensus ad idem, which is an idea well developed in contract law.

The Childress opinion is to be contrasted with how courts in the United Kingdom have interpreted the definition of a joint work under the 1988 Act. In a 2003 case, Hodgens v. Beckingham,[60] the Court of Appeals was asked to consider introducing the idea of intention into the definition, as an implicit requirement underlying the idea of a collaboration. Specifically, the court was asked to follow the example of Childress.[61] It balked at the idea, noting that the logic of Childress was entirely policy-driven, and premised on the belief that the U.S. Congress would have wanted to limit joint authorship. U.K. courts, the Court of Appeals concluded, were to limit themselves to the statute and principles implicit within it, rather than delving “into the uncertain realms of policy.”[62]

Rejecting a policy-driven approach, as the U.K. courts have, is a far cry from suggesting that they instead do no more than apply the plain text of the provision. To the contrary, U.K. case law has embellished the statutory definition as well, but in doing so has looked entirely to principles internal to the idea of joint authorship and collaborative design. The High Court decision of Martin v. Kogan[63] offers a useful contrast in so far as it addressed the same question as Childress, namely whether there needed to be a sufficiency threshold for a contribution to qualify for joint authorship. In answering that in the affirmative, the court chose to look at the idea of authorship and derive from it the principle that each type of work (literary, artistic, etc.) had a “primary skill” associated with its creation, and that for a joint work each author had to contribute a substantial amount of primary skill.[64] While “secondary skills” did not imply the absence of joint authorship, they nevertheless made its occurrence difficult owing to evidentiary reasons relating to copyright’s protectability doctrines.[65] The court in Martin also emphasized that joint authorship was related to the idea of co-ownership, but that as with co-ownership there could well be disparate shares of ownership involved, which required an apportionment.[66]

Relying thus on principles drawn from (1) the nature of authorship (the skills involved), (2) the connection between authorship and ownership (the apportionment), and (3) the centrality of copyright’s protectability rules (the secondary skills and substantiality), the court arrived at nearly the same place as Childress. Yet, its logic was principle-oriented, driven by the interior design of authorship and ownership, and eschewed any reference to a collective legislative design that it was merely seeking to give effect to for the collective good.

2.  Originality

The doctrine of originality is copyright’s most important protectability requirement. While initially a creation of courts in both countries (the United States and United Kingdom), the doctrine was later incorporated into their respective copyright statutes—with the understanding that courts could continue to develop it incrementally and contextually as they had before. As a formal matter, originality today therefore derives from these statutes but affords courts significant interpretive leeway—akin to common law statutes.[67] This dimension injects an additional point of interest into the comparison.

The U.S. Act of 1976 accords copyright protection to all “original works of authorship.”[68] The absence of a definition in the statute was intended to allow for the incorporation of the extant judicial understanding of the term.[69] The originality doctrine had evolved in different ways over the lifetime of American copyright law,[70] but under the 1976 Act it received its most elaborate treatment and interpretation by the U.S. Supreme Court in the case of Feist Publications, Inc. v. Rural Telephone Service Co.[71] Feist showcases the dominance of the public law approach to statutory interpretation and construction and a rather complete disregard of private law ideals during that process.

Feist involved the question of whether a telephone directory was copyrightable when it was nothing more than a compilation of facts. In a pathbreaking move, the Court departed from the doctrine as it had been understood previously and added a requirement of “minimal creativity” to it, noting that “[o]riginal . . . means only that the work was independently created by the author (as opposed to copied from other works), and that it possesses at least some minimal degree of creativity.”[72] The Court’s logic for this interpretation, which it drew from past precedent, was the text of the Constitution.[73] Reading the Constitution’s mandate that copyright “promote the Progress of Science and useful Arts,” the Court concluded that an originality requirement that focused on a minimal level of creativity and eschewed a bare reliance on creative labor was essential.[74] The Court’s construction was therefore “the means by which copyright advances the progress of science and art.”[75]

Feist’s invocation of the Constitution to interpret originality in a manner that denies protection to pure works of information has been understood as “implement[ing] a policy favoring general, free access to disclosed data,” and seen as driven by an impulse to reorient law-making power between Congress and the courts.[76] Leaving aside the merits of the actual originality standard set out in the opinion, Feist’s decision to look to the primary source of public policy (the Constitution) for guidance, rather than to copyright’s internal principles is quite telling. In constitutionalizing an established copyright law doctrine, it effectively confirmed the primacy of copyright policy (as defined in the constitution) over any of the doctrine’s underlying principles: a rather direct and bold instantiation of the Legal Process approach.

Just what might those principles have been instead? For that, we merely have to look to how U.K. courts have approached the question. Since the early twentieth century, U.K. courts have consistently held that originality in copyright law was primarily a question of individual skill and effort in the production of expression.[77] As long as an author applied skill and labor in the creation of a work, such that it might be said to have originated with that author, the standard was satisfied.[78] This approach might be understood to embody the principle of “skill and effort origination” emanating from copyright’s fundamental idea of authorship, predicated on the connection between creator and work.[79] The approach consciously abandons any assessment of the merits of the work, which the Feist court implicitly adopted in its emphasis on the work showing a minimal amount of creativity.

U.K. courts have had little problem applying this interpretation of originality to the Act of 1988. They have extended it to databases as well, emphasizing that the test involves assessing the “process of creation and the identification of the skill and labour that has gone into it.”[80] Once significant effort, skill, and time are seen to have been applied in the process of creating a work, the requirement is seen as satisfied since the individual has effectively become the author of the work. Under the influence of E.U. law, courts have insisted that the standard requires that the work bear the imprint of the author’s “own intellectual creation,” which does not modify the prior standard significantly.[81] If anything, it reiterates the “skill and effort origination” principle that the U.K. originality doctrine has been crafted on.

In practice and application, little may turn on the difference between the two countries. Yet, it represents a fundamental divergence in the interpretation and understanding of the doctrine. In theory, a work (such as the telephone directory in Feist) could be denied copyright protection in the United States for being insufficiently creative in its result, while it would obtain protection in the United Kingdom for reflecting the skill and labor of its compiler in its process of creation. And the former outcome would have been driven by the policy of using copyright to promote the progress of the sciences and useful arts, while the latter would remain rooted in the principles of authorship, skill and effort origination that it embodied. Leaving aside which one is preferable, the methodological divergence in approach is obvious.

* * *

The copyright statute is thus for the most part treated as a private law statute in the United Kingdom (and indeed in most other common law countries), where the rights of the individual creator and his or her interactions with others forms the focal point of the analysis, and from which doctrines are interpreted and expounded on in a principled manner. Courts do of course occasionally look to the broader socio-economic objectives of the law—its policy—in their analysis, but rarely ever do they either start with this policy in their interpretation of the law, or let the policy override existing principles. In the United States, the opposite is true. The law’s overarching goals—often drawn from congressional reports accompanying the legislation, economic theory, or the text of the Constitution—operate as starting points for the analysis and often function as complete substitutes for principles. While it would be a far cry to suggest that this has had the effect of converting U.S. copyright law into an area of public law, it is certainly the case that interpretations of the U.S. copyright statute readily partake of the Legal Process phenomenon of public law statutory interpretation, which has an overtly collectivist orientation rather than one that is individualist and focused on the author’s rights and allied obligations.

III.  Private Law Values in Statutory Interpretation

Obviously, the methods of private law statutory interpretation merit application to statutes when the interpreter determines that the statute incorporates ideals and values from private law thinking. This is most likely to be the case when (1) the statute creates a private cause of action for a new wrong, or (2) is parasitic on an area of the law traditionally understood as private law in orientation.

It bears emphasizing that a statute need not abjure all collectivist ideals for courts to see it as incorporating private law elements. This is especially true of statutes that fall under the first category above, involving the creation of a new wrong and corresponding private cause of action. Anti-discrimination statutes, such as Title VII, are good examples here. Deriving from the constitutional goal of equality, the statute works by creating a private wrong and rendering it actionable by the individual harmed. The collectivist ideal at its heart interacts with the private harm and wrong that it identifies to produce a confluence of normative ideals, and interpretations of the statute would do well to avoid ignoring the private law ideals that it incorporates.[82]

This then brings us to the obvious task of identifying these “private law values” that interpretations of private law statutes and provisions should pay attention to. The remainder of this Part provides a brief overview of three such values, and while more may indeed exist these three remain central to the functioning of private law statutes and are worthy of recognition in the interpretive process.

A.  Redressive Autonomy

A hallmark of numerous statutes is their allowance for a private cause of action, when a breach of a statutory obligation or directive results in harm. Civil rights legislation,[83] antitrust law,[84] qui tam statutes,[85] intellectual property statutes,[86] environmental legislation,[87] just to name a few, all embody important private actions that afford parties a mechanism of civil redress against wrongdoers. As a general matter, these provisions have been understood almost entirely in public law terms, as embodying what scholars have long described as a mechanism for a “private attorney general” which is generally defined as “a plaintiff who sues to vindicate public interests not directly connected to any special stake of her own.”[88] This definition captures the collectivist stance in the understanding of private enforcement provisions, which are thus seen as doing nothing more than allowing an individual to stand-in for the state and enforce collectivist ideals and concerns. In this understanding the state is seen as using private individuals as a mere means towards its collective end, and that use (so to speak) adds no normative content of its own.

As should be apparent, this approach denies altogether the autonomy of the private individual in the overall skein of the statute. By assuming that the right set of monetary incentives will motivate actors to bring actions whenever there is a sufficient recovery at stake, it undervalues the complex set of motivations that ordinarily accompany a private lawsuit and the claims made therein.[89] In other words, it fails to recognize that there could well be reasons—deriving from the horizontal relationship that a private action entails—for an individual to bring or forego a private action even when there is a clear basis for recovery. Sometimes the norms of human interaction involve tolerating otherwise clear breaches of the law, for relational reasons.[90] And in so doing, the toleration produces its own set of norms that make their way into conventional morality.[91]

A private law approach to such private enforcement provisions would instead recognize the intrinsic autonomy of the private actor involved, a form of autonomy best described as “redressive autonomy.” Recognizing this autonomy would in turn allow the analysis to move away from the banal treatment of such actions as driven entirely by public interest considerations. It would instead acknowledge the complex relational dimensions involved in the action and the set of norms and values at stake in such actions, which may not be to the exclusion of the public interest but can at times certainly influence or modulate it.

B.  Individuation of Directives

Individuation refers to the idea that private law, at its core, operates by creating individual private rights and obligations. They are private in the sense that they have a normative existence that is analytically independent of the state and they operate relationally between parties at the horizontal level. Private law statutes thus work by creating rights and duties between parties. Yet, after such formal creation, these rights and duties operate between the parties on their own quite independently of the state—through market and non-market interactions and other forms of interpersonal relationships. An exclusive focus on statutes as nothing more than embodiments of collective ideals ignores the centrality of such individuation that statutes can indeed produce.

Individuation can emanate from a statute, when it is the starting point for an area of law such as it is with copyright. Here, the statute sets up a framework of author’s rights and copier’s obligations; yet thereafter authors, copiers, and other actors interact and deal with each other on a regular basis without the direct involvement of the statute or the state.[92] To be sure, this doesn’t mean that the possibility of state action doesn’t loom large over such interactions, just that the interactions assume a life of their own at the individual—rather than collective—level, which is of the missed in the public law approach to interpretation. At other times, a statute may be parasitic on a pre-existing set of interpersonal interactions. Legislation in the domain of contract law is a good example.[93] Here, readings of the statute again need to be sensitive to the individuated substructure that they are premised on and the manner in which that individual interaction is likely to be affected and impacted by its terms.

To be clear, recognizing the importance of individuation in private law statutes does not require jettisoning collective ideals and goals in the interpretive process. Instead, it recognizes a separate set of messages that the provision communicates to actors shaping their lives and interactions around the statute’s rights and responsibilities that operate at the level of the individual.

C.  Principled Horizontal Coherence

A third value of importance involves the repudiation of an idea that was central to Professor Hart’s thinking about statutes—namely, that they could operate as arbitrary “starting points” for the interpretation.[94] In other words, the public law approach assumes that the statutes can identify their own purposes and values (policy), which need to be taken at face value given the supremacy of the legislative as law-making body. Private law statutory interpretation would question this and instead operate on the assumption that the legal directives at issue operate to govern a set of horizontal relationships or interactions, and that they are to be understood and interpreted using principles and values that derive from that horizontality.

A hypothetical example might illustrate this idea. Assume that tomorrow Congress decides to amend the U.S. copyright statute to introduce a provision that defines originality by merely saying, “a work is original if it is created by the author.” On its face now, in plain terms originality requires creation. A court—such as Feist—reading it in public law terms and looking to the Constitution could interpret the idea of “created” to require an examination of some minimal creativity on the face of the work for it to obtain protection. A private law approach that takes the horizontal coherence of copyright’s authorship ideal seriously would instead seek to render the definition compatible with the law’s understanding of authorship and its principles for identifying who an author is in different contexts. This interpretation would merely see the originality standard as a continuation of the system’s emphasis on author’s rights.

The idea of principled horizontal coherence builds on Professor Dworkin’s idea of “law as integrity” but in a limited manner.[95] It seeks integrity in the set of ideas and principles underlying the particular private law area at issue and not beyond, but takes seriously the idea that such interpretation must operate as a chain novel, rather than allowing for each provision to become an arbitrary and independent starting point each time.[96]

Conclusion

Statutory law is today ubiquitous and an undeniable reality of the modern state. Private law theory and thinking would do well to pay greater attention to statutory law. This is especially true in the United States, where statutory interpretation has come to be co-opted by public law thinking, such that the idea of private law statutes remains something of a novelty. As this Article has shown, this is less true in other common law countries, especially in the United Kingdom, where the common law has come to be either codified or supplemented by legislation, or both. The effect of this neglect in the United States is that statutory subjects that deserve to be understood—even if only partially—through private law ideas never really obtain such treatment.

Solving this problem in U.S. legal thinking is obviously more complex than it might seem. Among other things, it involves uprooting decades of skepticism about the distinctiveness of private law, while challenging the general dominance of public law thinking in all areas of American legal scholarship. While that remains a tall order, an important first step remains having courts and scholars acknowledge the existence of independent private law values that are worthy of incorporation into the exercise of statutory interpretation. And for this, they would do well to acknowledge the divergence between U.S. and non-U.S. legal thinking on this matter and recognize the shortcomings of U.S. exceptionalism in this area.

 


[*] *. Professor of Law, University of Pennsylvania Law School. Many thanks to Ryan Doerfler and Bill Eskridge for helpful comments and conversations.

 [1]. See, e.g., Hanoch Dagan & Avihay Dorfman, Just Relationships, 116 Colum. L. Rev. 1395, 1397 n.2 (2016); Michel Rosenfeld, Rethinking the Boundaries Between Public Law and Private Law for the Twenty First Century: An Introduction, 11 Int’l J. Const. L. 125, 125–26 (2013).

 [2]. See, e.g., Dagan & Dorfman, supra note 1, at 1397 n.2; Rosenfeld, supra note 1, at 125–26.

 [3]. See Melvin Aron Eisenberg, The Nature of the Common Law 4–7 (1991).

 [4]. For prior efforts to identify this shortcoming, see TT Arvind & Jenny Steele, Introduction: Legislation and the Shape of Tort Law, in Tort Law and the Legislature: Common Law, Statute and the Dynamics of Legal Change 1, 1 (TT Arvind & Jenny Steele eds., 2012); Kit Barker, Private Law: Key Encounters with Public Law, in Private Law: Key Encounters with Public Law 3, 5–6 (Kit Barker & Darryn Jensen eds., 2013). For what is to date the only discussion of this in the U.S. context, see Jeffrey A. Pojanowski, Private Law in the Gaps, 82 Fordham L. Rev. 1689, 1691 (2014).

 [5]. Examples in this category include Australia, New Zealand, Canada, India, Singapore and other members of the Commonwealth, consisting mostly of prior British colonies. See Howard W. Leichter, The Patterns and Origins of Policy Diffusion: The Case of the Commonwealth, 15 Comp. Pol. 223, 224 (1983) (describing the process of policy diffusion among members of the commonwealth, all former British colonies).

 [6]. Pojanowski, supra note 4, at 1692 (“[M]uch scholarship on statutory interpretation, a field that has also witnessed great theoretical development, considers itself to be operating in the realm of public law.”).

 [7]. For a useful account of this revival, see generally Philip P. Frickey, From the Big Sleep to the Big Heat: The Revival of Theory in Statutory Interpretation, 77 Minn. L. Rev. 241 (1992) (discussing the development of scholarship in legislation).

 [8]. Thomas C. Grey, Langdell’s Orthodoxy, 45 U. Pitt. L. Rev. 1, 34–35 (1983); Christopher C.C. Langdell, Dominant Opinions in England During the Nineteenth Century in Relation to Legislation as Illustrated by English Legislation, or the Absence of It, During That Period, 19 Harv. L. Rev. 151, 152–53 (1906).

 [9]. Jerome Frank, Words and Music: Some Remarks on Statutory Interpretation, 47 Colum. L. Rev. 1259, 1266 (1947); Karl N. Llewellyn, Remarks on the Theory of Appellate Decision and the Rules or Canons About How Statutes Are to Be Construed, 3 Vand. L. Rev. 395, 400 (1950).

 [10]. See generally Henry M. Hart, Jr. & Albert Sacks, The Legal Process: Basic Problems in the Making and Application of the Law (William N. Eskridge, Jr. & Philip P. Frickey eds., 1994) (providing an extensive overview of the nature, construction, and application of the law and in the process developing a new theory of law).

 [11]. William N. Eskridge, Jr., Public Values in Statutory Interpretation, 137 U. Pa. L. Rev. 1007, 1012–13 (1989).

 [12]. Id.

 [13]. Id.

 [14]. Id. at 1008 (“Public values appeal to conceptions of justice and the common good, not to the desires of just one person or group.”).

 [15]. See Hart & Sacks, supra note 10, at 3; William N. Eskridge, Jr. & Philip P. Frickey, The Making of The Legal Process, 107 Harv. L. Rev. 2031, 2043 (1994).

 [16]. Eskridge, Jr. & Frickey, supra note 15, at 2038.

 [17]. William N. Eskridge, Jr. & Philip P. Frickey, An Historical and Critical Introduction to The Legal Process, in Hart & Sacks, supra note 10, at lxxx (drawing these conclusions from a detailed review of Professor Hart’s notes and papers).

 [18]. See Ronald Dworkin, Taking Rights Seriously 82 (1978); Ronald Dworkin, The Model of Rules, 35 U. Chi. L. Rev. 14, 23 (1967).

 [19]. Hart & Sacks, supra note 10, at 10.

 [20]. Perishable Agricultural Commodities Act (PACA), Pub. L. No. 71-325, 46 Stat. 531 (1930) (codified as amended at 7 U.S.C. §§ 499a–499s (2018)).

 [21]. PACA § 2(2), 46 Stat. at 532 (codified as amended at 7 U.S.C. § 499b(2) (2018)).

 [22]. See J.W. Looney, Protection for Sellers of Perishable Agricultural Commodities: Reparation Proceedings and the Statutory Trust Under the Perishable Agricultural Commodities Act, 23 U.C. Davis L. Rev. 675, 675–76 (1990). 

 [23]. PACA § 5(a), 46 Stat. at 534 (codified as amended at 7 U.S.C. § 499e(a) (2018)).

 [24]. L. Gillarde Co. v. Joseph Martinelli & Co., 169 F.2d 60 (1st Cir. 1948).

 [25]. Joseph Martinelli & Co. v. L. Gillarde Co., 73 F. Supp. 293, 294–95 (D. Mass. 1947).

 [26]. Id. at 294.

 [27]. Id. at 296.

 [28]. L. Gillarde Co., 168 F.2d at 280–81.

 [29]. Id.

 [30]. Hart & Sacks, supra note 10, at 56–57 (reproducing portions from the brief filed by the Department).

 [31]. L. Gillarde Co., 169 F.2d at 61.

 [32]. Id.

 [33]. Erie R.R. v. Tompkins, 304 U.S. 64, 78 (1938) (“There is no federal general common law.”).

 [34]. Garner v. Teamsters Union, 346 U.S. 485, 494–96 (1953) (Jackson, J.) (emphasis added) (citations omitted). It is worth noting that the Court’s observations in this quote appear analytically unsophisticated and conclusory in nature. Yet, they likely reflect the dominant understanding of the time, given the confidence with which the pronouncement was made.

 [35]. For an overview of privity, see generally Robert Merkin, Historical Introduction to the Law of Privity, in Privity of Contract (Robert Merkin ed., 2000). The fundamental nature of the doctrine was famously echoed by former Lord Chancellor Viscount Haldane in Dunlop Pneumatic Tyre Co. v. Selfridge & Co. [1915] AC 847 (HL) 853 (appeal taken from Eng.).

 [36]. This rule was known as the “third-party rule;” for further discussion on this rule, see Stephen A. Smith, Contracts for the Benefit of Third Parties: In Defense of the Third-Party Rule, 17 Oxford J. Legal Stud. 643, 644–45 (1997).

 [37]. For a defense of the third-party rule, see id. at 645–49.

 [38]. Id. at 644–45 (separating the “third-party rule” and the “consideration rule”); Merkin, supra note 35, at 10–12.

 [39]. See, e.g., New Zealand Shipping Co. v. Sattherwaite Ltd. [1975] AC 154 (PC) [1014] (Eng.) (holding that a shipping company was able to gain the benefit of exemption from liability for damage to goods shipped even though it was not explicitly a party to the contract between a manufacturer and purchaser and even though the contract did not specify consideration on the shipping company’s part in exchange for such liability exemption because the consideration was implied to be the performance of shipping services); Pyrene Co. v. Scindia Navigation Co. [1954] 2 QB 402 at 425–26 (Eng.) (finding it would have made no sense to hold that a shipowner was not liable for goods not loaded when he was not a party in a contract between a buyer and seller of those goods); The Mahkutai [1996] 3 All ER 502 (PC) 1–4, 13–17 (appeal taken from H.K.) (finding that the owner of goods could sue a sub-contractor despite a lack of privity, but that an exclusive jurisdiction clause in the original contract between the owner and shipping contractor was not binding on the owner in its suit against the sub-contractor); K.H. Enter. v. Pioneer Container [1994] 2 All ER 250 (PC) 1–17 (appeal taken from H.K.) (finding by reference to bailment law that an owner of goods could sue a sub-contracted shipping company for lost goods even though the owner did not have privity of contract with the shipping company, but also finding that the owner was held to an exclusive jurisdiction clause in the sub-contract because the owner’s contract with the initial shipping company stipulated that its goods may be shipped by a sub-contractor “on any terms” and the exclusive jurisdiction provision was not unreasonable).

 [40]. Contracts (Rights of Third Parties) Act 1999, c. 31 (Eng.).

 [41]. Id. at § 1(1)(a)–(b).

 [42]. Law               Comm’n, Consultation Paper No. 121, Privity of Contract: Contracts for the Benefit of Third Parties ¶¶ 4.1–.35 (1991), https://s3-eu-west-2.amazonaws.com/lawcom-prod-storage-11jsxou24uy7q/uploads/2016/08/No.121-Privity-of-Contract-Contracts-for-the-Benefit-of-Third-Parties.pdf.

 [43]. See Neil Andrews, Strangers to Justice No Longer: The Reversal of the Privity Rule Under the Contracts (Rights of Third Parties) Act 1999, 60 Cambridge L.J. 353, 357–78 (2001); Catharine MacMillan, A Birthday Present for Lord Denning: The Contracts (Rights of Third Parties) Act 1999, 63 Mod. L. Rev. 721, 723–38 (2000); Robert Stevens, Contracts (Rights of Third Parties) Act 1999, 120 L.Q. Rev. 292, 292–306 (2004).

 [44]. See Stevens, supra note 43 at 323 (noting how “the Act has left English law in an incoherent state”).

 [45]. Peter Kincaid, Privity Reform in England, 116 L.Q. Rev. 43, 46–47 (2004).

 [46]. Id. at 47. He nevertheless does suggest that the Act appears to be more concerned with collectivist considerations than private law ones. Id.

 [47]. Nisshin Shipping Co. v. Cleaves & Co. [2003] EWHC (Comm.) 2602 [10] (Eng.); Laemthong Int’l Lines Co. v. Artis [2005] EWHC (Comm.) 1595 [1314] (Eng.).

 [48]. Avraamides v. Colwill [2006] EWCA (Civ) 1533 [3–5] (Eng.).

 [49]. See id. at [13, 17].

 [50]. Id. at [18].

 [51]. Copyright Act of 1976, Pub. L. No. 94-553, 90 Stat. 2541 (codified as amended at 17 U.S.C. § 101 (2018)).

 [52]. Copyright, Designs and Patents Act 1988, c. 48 (Eng.).

 [53]. 17 U.S.C. § 101 (2018).

 [54]. Copyright, Designs and Patents Act 1988 § 10(1).

 [55]. Childress v. Taylor, 945 F.2d 500, 501 (2d Cir. 1991).

 [56]. Id. at 505.

 [57]. Id. (quoting H.R. Rep. No. 94-1476, at 120 (1976)).

 [58]. Id. at 50506.

 [59]. Id. at 507.

 [60]. Hodgens v. Beckingham [2003] EWCA (Civ) 143 [11] (Eng.).

 [61]. Id. at [52].

 [62]. Id. at [53].

 [63]. Martin v. Kogan [2017] EWHC (IPEC) 2927 (Eng.).

 [64]. Id. at [44–49].

 [65]. Id. at [51].

 [66]. Id. at [53].

 [67]. Common law statutes are those that delegate lawmaking to courts. See Frank H. Easterbrook, Statutes’ Domains, 50 U. Chi. L. Rev. 533, 544 (1983).

 [68]. 17 U.S.C. § 102(a) (2018).

 [69]. H.R. Rep. No. 94-1476, at 51 (1976).

 [70]. For a wonderful historical account of this evolution, see Oren Bracha, The Ideology of Authorship Revisited: Authors, Markets, and Liberal Values in Early American Copyright, 118 Yale L.J. 186, 200–24 (2008). 

 [71]. Feist Publ’ns, Inc. v. Rural Tel. Serv. Co., 499 U.S. 340, 355–61 (1991). For commentary on the case, see generally Howard B. Abrams, Originality and Creativity in Copyright Law, 55 Law & Contemp. Probs. 3 (1992); Jane C. Ginsburg, No “Sweat”? Copyright and Other Protection of Works of Information After Feist v. Rural Telephone, 92 Colum. L. Rev. 338 (1992); Jessica Litman, After Feist, 17 U. Dayton L. Rev. 607 (1992).

 [72]. Feist, 499 U.S. at 345 (citation omitted).

 [73]. Id. at 346 (“Originality is a constitutional requirement.”).

 [74]. Id. at 349–50 (citation omitted).

 [75]. Id. at 350.

 [76]. Ginsburg, supra note 71, at 339. 

 [77]. See, e.g., Ladbroke (Football), Ltd. v. William Hill (Football), Ltd. [1964] 1 All ER 465 (HL) 470 (Eng.); Univ. of London Press Ltd. v. Univ. Tutorial Press Ltd. [1916] 2 Ch 601 at 609–10 (Eng.); Walter v. Lane [1900] AC 539 (HL) 542–43 (Appeal taken from Eng.).

 [78]. Andreas Rahmatian, Originality in UK Copyright Law: The Old “Skill and Labour” Doctrine Under Pressure, 44 Int’l Rev. Intell. Prop. & Competition L. 4, 13 (2013) (noting how the jurisprudence describes this as the “personal touch” requirement).

 [79]. For more on this connection and its normative dimensions, see Shyamkrishna Balganesh, Causing Copyright, 117 Colum. L. Rev. 1, 11–34 (2017).

 [80]. Newspaper Licensing Agency Ltd. v. Meltwater Holding BV [2010] EWHC (Ch) 3099 [71] (Eng.).

 [81]. Rahmatian, supra note 78, at 25–29.

 [82]. For an important account making this move and emphasizing the role of private law, and considerations of individualism in discrimination law, see Sophia Moreau, What is Discrimination?, 38 Phil. & Pub. Affs. 143, 145–47 (2010).

 [83]. 42 U.S.C. § 1983 (2018).

 [84]. 15 U.S.C. § 15 (2018).

 [85]. 31 U.S.C. § 3730(b) (2018).

 [86]. 17 U.S.C. § 501 (2018); 35 U.S.C. § 271 (2018).

 [87]. 42 U.S.C. § 7604 (2018).

 [88]. See Trevor W. Morrison, Private Attorneys General and the First Amendment, 103 Mich. L. Rev. 589, 590 (2005).

 [89]. Much of this thinking relies on the idea of a rational actor motivated entirely by individual self-interest, measured in terms of costs and benefits. See Sean Farhang, The Litigation State: Public Regulation and Private Lawsuits in the U.S. 3, 23–24 (2010).

 [90]. This is the premise of an idea in copyright law that identifies a set of exceptions produced entirely by creators tolerating acts of infringement by choosing not to enforce them, for a variety of different reasons. See Shyamkrishna Balganesh, The Uneasy Case Against Copyright Trolls, 86 S. Cal. L. Rev. 723, 752 (2013); Tim Wu, Tolerated Use, 31 Colum. J.L. & Arts 617, 633–34 (2008).

 [91]. Balganesh, supra note 90, at 760.

 [92]. Undoubtedly, they do so in the shadow of the law. Cf. Robert H. Mnookin & Lewis Kornhauser, Bargaining in the Shadow of the Law: The Case of Divorce, 88 Yale L.J. 950, 950–52 (1979).

 [93]. Such as it was with the Uniform Commercial Code, which built on existing contract law rules and self-consciously enabled courts to continue to develop common law rules in its domains. For a fuller account, see Roger J. Traynor, Statutes Revolving in Common-Law Orbits, 17 Cath. U. L. Rev. 401, 421–23 (1968).

 [94]. Esrkidge Jr. & Frickey, supra note 17, at lxxx.

 [95]. See Ronald Dworkin, Law’s Empire 226 (1986).

 [96]. The “chain novel” metaphor was used by Professor Dworkin in his description of law as integrity. Id. at 229–32.

 

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

From Volume 92, Number 4 (May 2019)
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Institutional Design in Patent Law: Private Property Rights or Regulatory Entitlements

Adam Mossoff[*]

INTRODUCTION

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.

Conclusion

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.

Id.

 [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.

Id.

 [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), https://ssrn.com/abstract=244836.

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.

Id.

 [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.

Id.

 [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), https://ssrn.com/abstract=2704028.

 [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.
edu/wp-content/uploads/sites/31/2018/02/Letter-to-DOJ-Supporting-Evidence-Based-Approach-to-Anti
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), http://eh.net/encyclopedia/an-economic-history-of-patent-institutions (“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), https://ssrn.com/abstract=2816701.

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.

Id.

 [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), https://ssrn.com/abstract=
2835617.

 [84]. See Adam Mossoff & Bhamati Viswanathan, Explaining Efficient Infringement, Antonin Scalia L. Sch.: CPIP Blog (May 11, 2017), https://cpip.gmu.edu/2017/05/11/explaining-efficient-infringement.

 [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), https://www.firstpost.com/tech/news-analysis/apple-reported-to-be-7-billion-behind-in-patent-royalty-payments-by-qualcomm-5456151.html. 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), https://www.cnbc.com/2019/04/18/apple-paid-5-billion-to-6-billion-to-settle-with-qualcomm-ubs.html.

 [87]. See Don Clark & Daisuke Wakabayashi, Apple and Qualcomm Settle All Disputes Worldwide, N.Y. Times (Apr. 16, 2019), https://www.nytimes.com/2019/04/16/technology/apple-qualcomm-settle.html.

 [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), https://www.washingtonpost.com/
technology/2019/04/19/apple-said-qualcomms-tech-was-no-good-private-communications-it-was-best.

 [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), https://www.ipwatchdog.com/2019/03/19/apple-pays-patent-infringement-important-legal-cases-continue/id=107425.

 [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), https://www.uspto.gov/about-us/news-updates/examination-software-patents (“[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.

Id.

 [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), https://www.law360.com/ip/articles/1095772/ptab-nixes-part-of-garage-door-opener-patent-uphe

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), https://www.law360.com/articles/
567550/ptab-s-death-squad-label-not-totally-off-base-chief-says.

 [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 https://ssrn.com/abstract=3289338). 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), https://www.ipwatchdog.com/2018/04/22/ptab-challenges-costly-uphil-battle-patent-owners/id=96158 (“[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), http://www.ipwatchdog.com/2017/08/01/china-stream
lines-patent-examination-internet-big-data-patent-applications/id=86356.

 [110]. Elizabeth Chien-Hale, A New Era for Software Patents in China, Law360 (May 25, 2017, 11:55 AM), https://www.law360.com/articles/924934/a-new-era-for-software-patents-in-china; see also Jack Ellis, China Relaxes Rules on Software Patentability – And the United States Loses More Ground, IAM (Mar. 3, 2017), https://www.iam-media.com/law-policy/china-relaxes-rules-software-patent
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), https://www.law360.com/articles/1072015.

 [112]. See id.

 [113]. Id.

 [114]. See Bing Zhao, China Introduces Legislation to Create a National IP Appeals Court, IAM (Oct. 24, 2018), https://www.iam-media.com/law-policy/china-introduces-legislation-create-national-ip-appeals-court.

 [115]. Grant Clark & Shelly Hagan, What’s Intellectual Property and Does China Steal It? Bloomberg: Quicktake (Mar. 22, 2018, 4:58 AM), https://www.bloomberg.com/news/articles/2018-03-22/what-s-intellectual-property-and-does-china-steal-it-quicktake.

 [116]. See Don Clark & Jack Nicas, Chinese Court Says Apple Infringed on Qualcomm Patents, N.Y. Times (Dec. 10, 2018), https://www.nytimes.com/2018/12/10/technology/apple-qualcomm-patents-ruling.html.

 [117]. See Kristen Jakobsen Osenga, Making Important Patents Worthless, Wash. Times (Oct. 15, 2018), https://www.washingtontimes.com/news/2018/oct/15/international-trade-commission-judge-gives-apple-a.

 [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), https://foreignpolicy.com/2018/10/15/chinas-great-leap-backward-xi-jinping (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)
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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.

Introduction

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.

Conclusion

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

G. Marcus Cole[*]

Introduction

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.

Conclusion

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, Oldest.org, http://www.oldest.org/structures/banks (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), https://platform.mi.spglobal.com/web/client?
auth=inherit#news/article?id=44033607&cdid=A-44033607-14380.

 [27]. Stefania Vitali et al., The Network of Global Corporate Control, PLoS ONE (Oct. 26, 2011), https://doi.org/10.1371/journal.pone.0025995.

 [28]. Id.

 [29]. Press Release, All Aboard With Barclays’ New £500m Fund for Northern SMEs, Barclays (May 31, 2018, 4:00 PM), https://home.barclays/news/2018/05/thornton/#back=%2Fcontent%2Fhome-barclays%2Fen%2Fhome%2Fresults.html%3Fq%3Dlaunches%2Bmajor%2Bnorthern%2Bpowerhouse%2Bboat%26_charset_%3DUTF-8%26offset%3D0%26origin%3Dhelp.barclays.co.uk (“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), https://www.theguardian.com/money/2016/jun/29/put-it-plastic-barclaycard-uk-first-credit-card-50-1966.

 [31]. Brian Milligan, The Man Who Invented the Cash Machine, BBC News (June 25, 2007, 5:35 AM), http://news.bbc.co.uk/2/hi/6230194.stm.

 [32]. Barclays technology archive blog is worth a read, available at Technology, Barclays: Group Archives, https://www.archive.barclays.com/items/show/5412 (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, https://www.ibtimes.co.uk/barclays-smart-contract-templates-heralds-first-ever-public-demo-r3s-corda-platform-1555329 (last updated July 11, 2016, 11:44 AM).

 [34]. See James Chen, Derivative, Investopedia, https://www.investopedia.com/terms/d/deriv
ative.asp (last updated May 19, 2019); Definition of A Derivative, Econ. Times, https://economic
times.indiatimes.com/definition/derivatives (last visited May 10, 2019).

 [35]. Arjun Kharpal, Barclays Used Blockchain Tech to Trade Derivatives, CNBC (Apr. 19, 2016, 6:37 AM), https://www.cnbc.com/2016/04/19/barclays-used-blockchain-tech-to-trade-derivatives.html.

 [36]. ISDA & Linklaters, Whitepaper: Smart Contracts and Distributed Ledger ­– A Legal Perspective (2017), https://www.isda.org/a/6EKDE/smart-contracts-and-distributed-ledger-a-legal-perspective.pdf.

 [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), https://ambcrypto.com/barclays-uses-isda-standard-for-blockchain-derivatives.

 [40]. Id.

 [41]. See Derivative Contracts Sample Clauses, Law Insider, https://www.lawinsider.com/clause/
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], https://blog.sfox.com/what-29-985-328-transactions-say-about-the-state-of-smart-contracts-on-ethereum-2ebdba4bea1c.

 [44]. Ethereum Transacting $166 Million Per Hour, 53% to Smart Contract Dapps, Trustnodes (May 6, 2018, 1:06 PM), https://www.trustnodes.com/2018/05/06/ethereum-transacting-166-million-per-hour-53-smart-contract-dapps.

 [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), https://www.americanbar.org/groups/business_law/publications/blt/2017/09/09_ng.

 [47]. Raskin, supra note 45, at 310.

 [48]. See Jason Wong, The 6 Most Common Blockchain Programming Languages, Very Possible (Aug. 14, 2018), https://www.verypossible.com/blog/the-6-most-common-blockchain-programming-languages.

 [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), https://medium.com/@tjayrush/smart-contracts-are-immutable-thats-amazing-and-it-sucks-e0fbc7b0ec16; Marcin Zduniak, Blockchain Immutability: Behind Smart Contracts, Espeo Blockchain: Blog (May 29, 2018), https://espeoblockchain.com/blog/ethereum-smart-contract.

 [52]. See Loi Luu et al., Making Smart Contracts Smarter, Proc. 2016 ACM SIGSAC Conf. Computer & Comm. Sec. 254, 255 (2016), https://loiluu.com/papers/oyente.pdf (“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), https://www.nber.org/papers/w24399.

 [54]. Deloitte, Impacts of the Blockchain on Fund Distribution 68 (2018), https://www2.deloitte.com/content/dam/Deloitte/lu/Documents/technology/lu_impact-blockchain-fund-distribution.pdf; Mayank Pratap, Everything You Need to Know About Smart Contracts: A Beginner’s Guide, Hackernoon (Aug. 27, 2018), https://hackernoon.com/everything-you-need-to-know-about-smart-contracts-a-beginners-guide-c13cc138378a.

 [55]. See What is an Enterprise Blockchain Smart Contract?, BlockApps (July 30, 2018), https://blockapps.net/enterprise-blockchain-smart-contract.

 [56]. See Jackson Ng, Escrow Service as a Smart Contract: The Business Logic, Medium: Coinmonks (May 19, 2018), https://medium.com/coinmonks/escrow-service-as-a-smart-contract-the-business-logic-5b678ebe1955 (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), https://www.bloomberg.com/opinion/articles/2014-12-04/law-puts-us-all-in-same-danger-as-eric-garner (“[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), https://www.telegraph.co.uk/fashion/style/signet-rings-went-traditional-heirloom-modern-must-have; see also Chritopher Austin, A Brief History of Signet Rings, History Press, https://www.thehistorypress.co.uk/articles/a-brief-history-of-signet-rings (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), http://polisci2.ucsd.edu/foundation/documents/03

Weber1918.pdf.

 [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), http://theconversation.com/how-tencent-became-the-worlds-most-valuable-social-network-firm-with-barely-any-advertising-90334.

 [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), https://www.businessinsider.com/wechat-has-hit-1-billion-monthly-active-users-2018-3 (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, https://aq.qq.com/en/
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), https://legalinc.com/blog/the-history-of-the-ucc.

 [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, https://www.uniformlaws.org/aboutulc/overview (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), https://slate.com/news-and-politics/2005/09/is-louisiana-under-napoleonic-law.html (“[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), https://www.new
yorkfed.org/medialibrary/media/research/staff_reports/sr90.pdf.

 [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, https://iicl.law.pace.edu/cisg/page/cisg-list-contracting-states (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), https://www.cisg.law.pace.edu/cisg/biblio/winship2.html (“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) https://foreignpolicy.com/2016/02/22/a-looming-crisis-for-chinas-legal-system (“[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.

 [213]. Id.

 [214]. See Andrew Mayer, The Rocky Road to Democracy: A Few Comments on Legal Development in China Since the Cultural Revolution, 6 China L. Rep. 1, 2 (1989).

 [215]. Baerg, supra note 210, at 243.

 [216]. See Carlos W.H. Lo, Deng Xiaoping’s Ideas on Law: China on the Threshold of a Legal Order, 32 Asian Surv. 649, 650 (1992) (“For Deng after 1979, legal reform was the first step in restoring political order.”).

 [217]. Nicole Kornet, Contracting in China: Comparative Observations on Freedom of Contract, Contract Formation, Battle of Forms, and Standard Form Contracts, 14 Electronic J. Comp. L., no. 1, 2010, at 1, 3.

 [218]. Id.

 [219]. Id.

 [220]. Id.

 [221]. See Jianfu Chen, Chinese Law: Context and Transformation 58384 (Rev. ed. 2015) (“Clearly the ‘Three Pillars’ system was a complicated one, fraught with many problems . . . [including] the lack and inconsistency of provisions on freedom of contracts . . . .”).

 [222]. See Kornet, supra note 217, at 4.

 [223]. See Chen, supra note 221, at 284.

 [224]. Id.

 [225]. Kornet, supra note 217, at 4.

 [226]. Id.

 [227]. Id.

 [228]. Id.

 [229]. Id.

 [230]. See Patricia Pattison & Daniel Herron, The Mountains Are High and the Emperor Is Far Away: Sanctity of Contract in China, 40 Am. Bus. L.J. 459, 470–71 (2003) (explaining the relationship between the New Contract Law and other laws of general application).

 [231]. Chen, supra note 198, at 15354.

 [232]. Jingen & DiMatteo, supra note 12, at 52.

 [233]. Id.

 [234]. Id.

 [235]. See John H. Matheson, Convergence, Culture and Contract Law in China, 15 Minn. J. Int’l L. 329, 356 (2006).

 [236]. Contract Law of the People’s Republic of China (promulgated by the Standing Comm. Nat’l People’s Cong., Mar. 15, 1999, effective Oct. 1, 1999), art. 110 (China).

 [237]. See Alan Schwartz, The Case for Specific Performance, 89 Yale L.J. 271, 272 (1979), https://digitalcommons.law.yale.edu/ylj/vol89/iss2/2 (arguing that specific performance ought to be the presumptive form of relief for breach of contract).

 [238]. See, e.g., Sedmak v. Charlie’s Chevrolet, Inc., 622 S.W.2d 694, 699–700 (Mo. Ct. App. 1981) (awarding specific performance of a Corvette pace car to wealthy car collectors with twenty-six other Corvettes in their collection because a substitute was available only at a much higher price and a great distance away).

 [239]. U.C.C. § 2-716(1), (3) (Am. Law Inst. & Unif. Law Comm’n 2018).

 [240]. Id.

 [241]. U.C.C. § 2-208, cmt. 1 (Am. Law Inst. & Unif. Law Comm’n, withdrawn 2013) (“The parties themselves know best what they meant by their words of agreement . . . .”).

 [242]. See U.C.C. §§ 3-101–4A-507 (Am. Law Inst. & Unif. Law Comm’n 2018).

 [243]. See Ndubuisi Ekekwe, Arrival of AliPay and WeChat Will Challenge MPESA in Kenya, Tekedia (June 19, 2018), https://www.tekedia.com/alipay-wechat-challenge-mpesa-kenya (describing all three mobile payment systems and the choices they afford consumers).

 [244]. See George Lee Flint, Jr. & Marie Juliet Alfaro, Secured Transactions History: The Impact of English Smuggling on Chattel Mortgage Acts in the Spanish Borderlands, 37 Val. U. L. Rev. 703, 703 (2003).

 [245]. See 1 Grant Gilmore, Security Interests in Personal Property 26 (1999).

 [246]. George Lee Flint, Jr. & Marie Juliet Alfaro, Secured Transactions History: The First Chattel Mortgage Acts in the Anglo-American World, 30 Wm. Mitchell L. Rev. 1403, 1405 (2004) (detailing the adoption of the first chattel mortgage acts as an acknowledgment of the growth of secured transactions in the Eastern United States).

 [247]. See Gilmore, supra note 245, at 26.

 [248]. See U.C.C. §§ 9-101–9-809 (Am. Law Inst. & Unif. Law Comm’n 2018).

 [249]. See Adam B. Badawi, Self-Help and the Rules of Engagement, 29 Yale J. on Reg. 1, 7 (2012) (describing the availability of the remedy of self-help to secured creditors).

 [250]. See U.C.C. § 9-102(a)(73) (Am. Law Inst. & Unif. Law Comm’n 2018).

 [251]. See id.

 [252]. For a detailed analysis on the intricacies of self-help, see generally Badawi, supra note 249.

 [253]. See id. at 1417.

 [254]. See Blockchain-Based Lending, Medium (July 11, 2018), https://media.consensys.net/block
chain-based-lending-1eee5edabe8a (describing the ways in which blockchain technology can facilitate self-help in the context of smart loan agreements).

 [255]. See Ben Sparango, How Blockchain Based Lending Could Take Us from Billions to Trillions, Coinmonks (May 20, 2018), https://medium.com/coinmonks/how-blockchain-based-lending-could-take-us-from-billions-to-trillions-a1de3f948c88 (describing the various blockchain based lending platforms).

 [256]. Id.

 [257]. Id.

 [258]. See generally Robert S. Lopez, The Commercial Revolution of the Middle Ages, 9501350 (Cambridge Univ. Press 1976) (detailing the rise of commercial paper, bills of lading, and warehouse receipts as negotiable instruments during the Middle Ages).

 [259]. Sandra Lim, Bill of Lading, Investopedia, https://www.investopedia.com/terms/b/billoflad
ing.asp (last updated Apr. 2019).

 [260]. See U.C.C. §§ 7-101–7-704 (Am. Law Inst. & Unif. Law Comm’n 2018).

 [261]. See id. § 7-202.

 [262]. David Mellinkoff, The Language of the Law 179 (1963) (explaining that the “bill of lading” is derived from the Old English word for “loading”).

 [263]. See Richard Aikens et al., Bills of Lading 19–20 (2d ed. 2016) (describing the functions of bills of lading).

 [264]. Id.

 [265]. Id.

 [266]. See, e.g., Vishnu Rajamanickam, Can Blockchain Revolutionize the Bill-of-Lading?, FreightWaves (Dec. 8, 2017), https://www.freightwaves.com/news/2017/12/8/can-blockchain-revol
utionize-the-bill-of-lading (exploring the efficiencies of blockchain bills of lading).

 [267]. See Brian L. Betker, An Empirical Examination of Prepackaged Bankruptcy, 24 Fin. Mgmt 3, 3 (1995) (defining a prepackaged bankruptcy as when “a firm . . . negotiate[s] a reorganization plan with its creditors, and possibly solicit[s] acceptances of the plan, prior to filing for bankruptcy”).

 [268]. Id. at 5–7.

 [269]. See Lemma W. Senbet & James K. Seward, Financial Distress, Bankruptcy and Reorganization, in 9 Handbooks in Operations Research and Management Science: Finance 921, 951 (R.A. Jarrow et al. eds., 1995) (“[A] pre-packaged bankruptcy effectively circumvents the holdout problem by allowing the court to force dissenting creditors to accept the proposed reorganization plan.”).

 [270]. Id.