Comment, Rationalizing Liability for Nondisclosure Under 10b-5: Equal Access to Information and United States v. Chiarella,

Chiarella provided the Second Circuit with an opportunity to resolve an important issue on which there previously had been no square holding: whether a person who is not an insider and has no inside knowledge about the company whose securities he is trading nevertheless has a duty to disclose nonpublic material information in his possession about impending stock market events. The court viewed such a person as a market insider \u27 and found a duty to disclose. To evaluate the propriety of imposing liability in this situation, this comment will first trace the development and expansion of liability for nondisclosure under rule 10b-5. Section I concludes that although most of the cases tie the duty to disclose to the defendant\u27s insider status, they can plausibly be read in terms of an underlying regulatory principle of equal access to information. To test this hypothesis, Section I then examines cases involving outsiders who, since they owe no fiduciary duty to the shareholders of an issuer\u27s securities, would have no duty to disclose absent another principle. Section II of the comment then turns to the legislative history of the Exchange Act to determine if it supports an equal access principle. Section II finds, as did the case law prior to Chiarella, that legislative history fails to provide definitive support for an equal access principle. The comment concludes in Section III, however, that strong policy reasons favor adoption of such a principle. In section IV the comment focuses on the Chiarella opinion, which adopted the principle of equal access and created a test to effectuate it. The comment concludes by endorsing Chiarella\u27s adoption of the principle, criticizing the test adopted, proposing an alternative one for defining the scope of liability, and exploring its application in a variety of nondisclosure situations involving outsiders

Symposium - Incomplete Contracts: Judicial Responses, Transactional Planning, and Litigation Strategies - Introduction

This introduction introduces three articles in a Symposium by Richard Craswell, Avery Katz, Robert Scott and George Triantis on the topic of incomplete contracts. The Symposium appears in 56 CASE WES. L. REV. 135 (2005). The recognition that parties will often fail to achieve completely contingent contracts that provide for an optimal outcome in any future state of the world raises the important question of what role courts could or should play in such contracts. Scholars working in the law-and-economics tradition have suggested that courts should use a hypothetical bargain approach to incompleteness, filling in terms that are optimal (efficient) and that the parties themselves would have achieved were it not for the transaction costs. While the authors in this Symposium draw on this traditional economic analysis of contracts, they explore new insights from economics that complicate the analysis of incompleteness in contracts. Relying on economists\u27 theories of incomplete contracts, the Symposium authors identify uncertainty and the cost of and limited access to information as key problems affecting parties both ex ante when contracts are being drafted and ex post when they are being enforced. Uncertainty is a factor that makes it difficult to negotiate contracts that can simultaneously protect specific investments and also promote efficiency ex post. The Symposium authors sort out what economists and lawyers mean when they reference an incomplete contract and identify two key assumptions of the new economic literature. These two assumptions are (1) courts are imperfect and may be unable to verify certain facts, and (2) parties can renegotiate the terms of their contracts. Using these insights, the three authors address the implications of the verifiability problem and possibility of renegotiating contractual terms for (1) parties designing complete and contingent efficient contracts, (2) scholars designing theoretical solutions to the verifiability problem, (3) courts searching for rules that will best promote optimal investment beforehand and ex post efficiency once the future has resolved the prior uncertainty, and (4) contracts scholars attempting to decide what issues should be further explored

Bargaining with Uncertainty, Moral Hazard, and Sunk Costs: A Default Rule for Precontractual Negotiations

Traditionally, courts have refused to compensate disappointed bargainers for reliance costs incurred prior to the formation of a bargained-for contract. Although these results could be justified under the economic assumptions that prevailed in the late nineteenth and early twentieth centuries, they are wholly inapposite to the structure of modem contracting. Negotiations for complex or long-term transactions often proceed incrementally today, with each party learning more at successive stages before making a final decision whether to commit. Under current law, a promisor may require a promisee to make significant, transaction-specific precontractual investments (sunk costs), profit from the information produced by those investments, and yet avoid all liability should the projected deal fall through. In this Article, Professor Kostritsky proposes a new approach to this problem. Drawing from a model of bargaining behavior based on transaction cost economics, relational theories of contracting, and other economic insights, she argues that courts should impose a new default rule, enforcing the substance of an implicit bargain under which the promisor bears liability for the promisee\u27s sunk costs. She demonstrates that most parties themselves would prefer such a rule because its total costs are lower than the costs of its alternatives: various private devices and alternate legal rules fail to encourage optimal prebargain reliance investments, and thus provide less efficient results. The proposed default rule, Professor Kostritsky concludes, provides a more sound and determinate justification for prebargain liability than do other approaches, would lead courts to reach better results, and would allow parties in negotiation to structure their relationships at a minimum total cost

A Paradigm Shift in Comparative Institutional Governance: The Role of Contract in Business Relationships and Cost/Benefit Analysis

Stewart Macaulay’s research on the ways that Wisconsin manufacturers transact debunked the centrality of contract law by revealing a disinclination to consult contract documents or invoke legal sanctions. This research revolutionized contracts scholarship, highlighting that a contract, instead of being viewed as an inevitable necessity of exchange, should be viewed as one of many institutions that might be available to parties as a solution to problems and a method for facilitating exchange. Macaulay’s research further revealed that the cost of legal sanctions, the importance of maintaining business relationships, and the desire for informal solutions actually push parties to conclude that formal contracts are either non-viable or less desirable. Parties, thus, structure their exchanges and adopt governance models that minimize their costs. Macaulay’s insights into the cost minimization paradigm influenced analysis of the role of courts in contractual intervention, committee decision-making, mitigation of opportunistic behavior, and institutional development. Macaulay’s research challenged scholars to reconceptualize contract. Instead of seamlessly and effectively sanctioning breaches, contracts now served as a repository for how-to provisions governing production, a “scaffolding” for inter-organizational cooperation, or a means of cementing relationships through information transfer. His recognition of the importance of self-adjustment and the dysfunction of contract law also led to a burgeoning field exploring customs and norms as “purposive” non-legal solutions to problems. His view also made contract a variable that parties could choose to employ or not. In this new understanding, parties build their relationships with a goal of “keeping the law out,”(L. Bernstein) representing a paradigm shift away from contract as a means for legal and formal enforcement. Macaulay believed that context mattered in business relationships. In cases where relationships are strong, informal adjustment can provide an alternative to contract. Where relationships were weaker and new, as in the innovation context, parties rely on contract in a new way: not to enforce performance obligations, but to build trust and clarify obligations over time. His work in determining why parties rely on informal adjustments rather than formal modifications to contract also helps explain why contracts might remain incomplete. Parties see no need to reach completely contingent contracts when later adjustments could be made informally in changed circumstances. This recognition that the paper contract might fail to capture implicit assumptions (the “real deal”) led to systematic exploration of when and why to fill in these incomplete contracts. Macaulay’s work has encouraged a vast array of important scholarship in the study of contracts and the underlying transactional relationships. For example, his work presaged Bob Ellickson’s analysis of Shasta county cattle farmers engaging in private non-legal solutions to cattle disputes, Lisa Bernstein’s work documenting the efforts of diamond merchants to opt for private arbitration, and Oliver Williamson’s work exploring alternative governance to hierarchy and markets. In addition, Macaulay’s work on how parties make decisions using a comparative weighing of benefits and negative effects encouraged the rich recent scholarship analyzing the arrangements governing external relationships in the supply chain. Lastly, Macaulay inspired scholars to consider a variety of other topics including informal enforcement mechanisms, committee structuring to solve myriad risks, “managerial” provisions that discard the traditional role of contract, and the avoidance of long-term agreements in favor of purchase orders. His insight that the decision to let contracts remain incomplete was based on a cost/benefit analysis of contract and informal practices provided a cost minimization paradigm for how parties structured exchange—work that prefigured current neuroscience research on brain reactions to cost minimization tools. That justificational analysis has widespread implications for understanding business decisions and laid the foundation for later scholarship on decision-making within hybrid organizations. Although not explicitly discussed by Macaulay, he outlined a comparative cost-benefit analysis for when organizations should bypass contracts and resort to alternatives. When this framework is applied to hybrid organizations, litigation and formal contract enforcement is often bypassed in favor of informal resolution due to mutual investments, partnerships, lengthy duration, and entrenched relationships. This article will focus on the reality that parties in exchange seek to control durable problems, such as opportunism, in the least costly way. It will build on Macaulay’s legacy by using a cost minimization lens to explore and to link diverse topics including: (1) organizational and contractual choices in the governance of external relationships using empirical data; (2) legal advice for business clients, given the “use and non-use” of contract law; (3) interactions between non-legal norms and legal sanctions (complement vs. substitute); (4) legal interventions that go beyond the parties’ express terms and contract interpretation; (5) the failure of private networks and the implications for legal enforcement and private counterstrategies; and, more broadly, (6) decisions on when to intervene by statute or leave solutions to private ordering or the common law

When Should Contract Law Supply a Liability Rule or Term?: Framing a Principle of Unification for Contracts

To demonstrate the need for a unified instrumental framework for deciding gaps and implying liability rules, Part II of this Article will first describe the competing visions of the role of law in contract gap-filling. Although each vision has expanded the ways in which we think about contracts and has offered more realistic models of bargaining, each still fails to offer a unified framework for deciding how courts should decide *1290 incomplete contracts. Part III of the Article outlines the methodological framework for unifying judicial approaches to law-supplied terms or rules. The framework will incorporate a: (1) realistic model of human behavior; and (2) a comparative net benefit framework to assess law-supplied interventions. Part IV traces the origin of the unifying comparative net benefit method to new institutional economics. Part IV analyzes how the failure to advert to the problems of uncertainty (and other bargaining impediments) has impaired the development of a complete comparative cost structure outlined in this Article and hampered the analysis of precontractual liability. Commentators compound these problems by employing overly restrictive cost/benefit analyses which fail to provide promisees with the optimal incentives to rely. Current analyses of reliance ignore the important issues of the problem of opportunistic expropriation of reliance investments. Accounting for these issues and applying the suggested methodology to reliance issues would improve results. Part IV applies the theory to several prototypical reliance cases. Part V explores two frameworks for dealing with incomplete contracts: a hypothetical bargain and penalty default rules. Since both approaches lack a comparative cost framework, neither can fully justify a law-supplied liability rule or term. Part VI applies the unified comparative net benefit framework to determine whether and in what fashion the law should intervene to protect the general contractor\u27s reliance on a subcontractor\u27s offer and concludes that the protections of Drennan should be modified using the framework outlined here. Part VII uses the unified framework to rationalize a myriad of cases of law-supplied interventions in contract. The section will address Professor Alan Schwartz\u27s theory for explaining judicial strategies of intervention in incomplete contracts.Part VIII offers a final assessment of why a comparative net benefit framework matters and outlines its advantages

The Promise Principle and Contract Interpretation: A Suggested Approach for Maximizing Value

The promise principle and its roots in a certain type of morality of individual obligation, which play the central role in Charles Fried’s vision of Contract law, have importantly contributed to rescuing Contract law from absorption into Tort law and from the imposition of externally imposed standards that are collective in origin. It makes a mammoth contribution to alerting us to the tyranny of interference with individual self-determination. However, this essay questions whether a promise centered system derived from a moral philosophy of promising (without an observable and testable foundation in reality) and geared to internal individual obligation and duty can provide the basis on which the public law can decide the hard cases in contract law. First, the promise-sufficient principle won’t help when the promises are incomplete. Second, this essay hypothesizes that there is an evolutionary trend toward efficient social contracts (or institutions of any kind), and therefore, if different communities at different times, using the latitude that our cultural genetic make up allow, choose to veer away from that trend, they will suffer by comparison with communities that do not. It is as if they are competing. In understanding what contract law should look like normatively, we must move beyond the purported internally reflective, a priori processes of individual will and understand, through casual and formal empirics and comparisons among economies, the background of how parties’ externally expressed natural impulses act to coordinate on social problems in the games of life. The law should look to how parties act to coordinate through exchange and produce improving welfare when they construct contracts and the rules of contractual enforcement. In that way, contract law will develop around, and not in a manner at odds with, naturalistic sources for normative principles, ones that are consonant with the parties’ own expressions

Statutes and the Common Law of Contracts: A Shared Methodology

This chapter explores the intersection between, or the impact of, statutes on contract law, and compares the relative importance of, and intersections between, statutory and common law in contract

Looking for Default Rule Legitimacy in All the Wrong Places: A Critique of the Authority of Contract Model and the Coordination Principle Proposed by Professor Burto

A central question of contract law remains: when should the law supply a term not expressly agreed to? Many scholars have addressed that question, yet the justification for law- supplied terms often remains unconvincing. Because many proposals to supply terms do not incorporate a comparative frameworkfor assessing the costs and benefits of legal interventions, they are incompletely justifled. This Article proposes that a comparative net benefit approach (developed in institutional economics to explain private arrangements) be adapted and expanded to resolve fundamental issues of legal intervention. This Article uses that framework to critique the (1) hypothetical bargain and (2) Ayres/Gertner penalty default rule approaches to law-supplied terms. Finally, this Article illustrates the benefits of the comparative framework for resolving questions of law-supplied rules in the precontractual negotiation and subcontractor bidding contexts

The Law and Economics of Norms

The Evolution of Norms Within Economics and Law: Why Norms Were Ignored and Why They Matter Under Realistic Models of Behavior in Which Norms Emerge as the Outcome of Exchange to Reduce Cost

Stepping Out of the Morass of Duress Cases: A Suggested Policy Guide

Traditional coercion theories and elements are simply inadequate as an exclusive focus of analysis in duress cases. This Article does not propose a new theory of duress. Instead, it suggests a refinement of doctrine in which the courts candidly articulate certain key policy goals and develop elements based on them. These policy goals include efficiency, disclosure of unexpected risks, judicial capability, reliance, and economic incentives. If decisionmakers adopted the policy analyses suggested here, the predictability of judicial decisionmaking would be enhanced and a supplemental analysis would be available when the doctrinal elements become difficult to apply. Moreover, this approach would preserve limited judicial resources, contribute to the efficient prevention of resource misallocation, reduce judicial capability problems,43 discourage one party from speculating at the expense of an- other, provide incentives for economic industriousness, and discourage economic negligence