The Impossibility Doctrine in Commercial Contracts: An Empirical Analysis

The impossibility doctrine – under which a contracting party has no duty to perform the agreement if performance thereof is rendered impossible – is a basic building block of U.S. contract law. The prevailing law-and-economics analysis of this doctrine suggests that when contract performance becomes impossible, courts should assign the contractual risk of non-performance to the superior risk bearer, i.e., to the party that can bear said risk at least cost. This article empirically tests, for the first time, the economic theory of the impossibility doctrine. It first hypothesizes that most sophisticated parties to commercial contracts are unlikely to adopt the economic superior risk bearer model given its high implementation costs and its uncertain results. It then aims to expose the actual preference of real-world contract parties for the economic model. By examining 1,926 commercial contracts that were disclosed to the Securities and Exchange Commission (SEC), this article finds that most parties prefer not to adopt the economic model. This finding casts considerable doubt over the efficacy of this model for the parties

Good-Cause Statutes Revisited: An Empirical Assessment

One of the most vital debates in franchise law focuses on whether state or federal law should adopt “good-cause statutes” (GCSs), which require franchisors to show good cause before terminating contractual relations with a franchisee. The traditional law-and-economics analysis suggests that GCSs are inefficient. This inefficiency argument is based upon one central hypothesis: GCSs increase franchisee free riding since they limit the franchisor’s ability to terminate the franchise contract easily. The free-riding hypothesis has been significantly influential in the development of franchise law, as is evident in state and federal statutory regimes. To date, the majority of states and the federal government have refused to adopt GCSs. This Article investigates the free-riding hypothesis empirically and finds it wanting. Direct examination of consumer satisfaction in one of the industries most notoriously susceptible to free riding—hotels serving nonrepeat travelers—shows no significant differences between franchises subject to “at-will” laws and those subject to a GCS. We gathered a sample of 3442 franchised hotels, measured each one along several dimensions of quality, and assessed potential differences using multiple econometric methods. In none did the at-will states outperform the good-cause ones. Implications of our empirical results on the debate over GCSs are discussed in this Article

Good-Cause Statutes Revisited: An Empirical Assessment

One of the most vital debates in franchise law focuses on whether state or federal law should adopt “good-cause statutes” (GCSs), which require franchisors to show good cause before terminating contractual relations with a franchisee. The traditional law-and-economics analysis suggests that GCSs are inefficient. This inefficiency argument is based upon one central hypothesis: GCSs increase franchisee free riding since they limit the franchisor’s ability to terminate the franchise contract easily. The free-riding hypothesis has been significantly influential in the development of franchise law, as is evident in state and federal statutory regimes. To date, the majority of states and the federal government have refused to adopt GCSs. This Article investigates the free-riding hypothesis empirically and finds it wanting. Direct examination of consumer satisfaction in one of the industries most notoriously susceptible to free riding—hotels serving nonrepeat travelers—shows no significant differences between franchises subject to “at-will” laws and those subject to a GCS. We gathered a sample of 3442 franchised hotels, measured each one along several dimensions of quality, and assessed potential differences using multiple econometric methods. In none did the at-will states outperform the good-cause ones. Implications of our empirical results on the debate over GCSs are discussed in this Article

Hidden Contracts

Transparency is a promising means for enhancing democratic values, countering corruption, and reducing power abuse. Nonetheless, the potential of transparency in the domain of consumer contracts is untapped. This Article suggests utilizing the power of transparency to increase consumer access to justice, better distribute technological gains between businesses and consumers, and deter sellers from breaching their consumer contracts while exploiting consumers’ inferior position. In doing so, this Article focuses on what we dub “Hidden Contracts.” Part I conceptualizes the idea of hidden contracts. It first defines hidden contracts as consumer form contracts that firms unilaterally modify and subsequently remove from the public sphere, despite being binding on consumers. Thereafter, the Article delineates the considerable social costs of hidden contracts. Given these social costs, Part II discusses our empirical study of hidden contracts. The results of this study indicate that leading firms that supply goods and services to billions of online consumers worldwide routinely employ hidden contracts to the detriment of consumers and society. Against this background, Part III proposes introducing a novel contract transparency duty. It further explains how to design this duty to counter firms’ incentive to employ hidden contracts. Next, Part IV tackles key objections to our proposal. Concluding remarks follow

Can Franchisee Associations Serve as a Substitute for Franchisee Protection Laws?

The most vital debate in franchise law over the last few decades has focused on whether state or federal law should protect franchisees from the potentially opportunistic behavior of franchisors. Several states, such as California, Massachusetts, and Vermont, are considering the adoption of laws protecting franchisees against franchisor opportunism. At the federal level, several franchisee protections laws have been introduced, but so far all have been rejected. Franchisor advocates suggest that franchisee protection laws are superfluous. Deeply ingrained in franchisor advocates\u27 opposition to such legislation is the belief that independent franchisee associations, namely trade associations formed by franchisees within a single franchise chain, serve as a sufficient barrier against franchisor opportunism. More specifically, franchisor advocates assume that by collectivizing a large percentage of the franchisees in the franchise system, an independent franchisee association improves the bargaining position of franchisees vis-A-vis franchisors. As a result, the association is assumed to succeed in negotiating contract terms that protect franchisees from franchisor opportunism and thereby eliminate the need for franchisee protection laws. This Article questions the idea that independent franchisee associations can prevent franchisor opportunism and otherwise serve as a substitute for franchisee protection laws. Focusing on the implicit assumption that such associations exist, or at least have the potential to exist, this Article argues that, in most cases, franchisees are unlikely to establish independent franchisee associations in the first place-mainly because under current law the expected costs borne by the franchisee in leading the establishment of an association exceed the expected benefits. That is, as federal and most state laws fail to adequately prohibit the franchisor\u27s retaliatory termination of the franchise or other reprisals against a franchisee association leader, the probability of such retribution is significant; conversely, the probability that the franchisee will form a successful and sustainable association is very low. First, franchisors often establish, fund, and control a competing franchisee committee, known as the franchisor advisory council, which is likely to reduce considerably the probability that an independent franchisee association will operate successfully. Second, franchisees normally have little incentive to join and actively participate in an already functioning independent franchisee association for several reasons, including franchisee free-riding, franchisee fear of retaliation by franchisors, and economic incentives provided by franchisors to franchisees for not joining such associations

Sneak in Contracts

Consumer contracts are a pervasive legal tool that governmany of our daily activities. Yet, consumer contracts areroutinely modified by businesses after customers accept them.Common modifications include, for example, a change in fees,alteration of a dispute resolution clause, or revision to the firm’sprivacy policy. In fact, unilateral modifications can affectvirtually every aspect of a contract.While the literature widely discusses the problem of ex anteconsent to consumer contracts, it does not adequately addressthe problem of ex post consent to unilateral modifications. Butthe practice of unilateral changes to consumer form contractscomes with significant detriments and social costs. Despitethese costs, there are no systematic empirical studies exploringthis phenomenon. This Article aims to fill this gap byempirically examining the frequency, mechanics, and degree oftransparency of unilateral change mechanisms in consumercontracts.This Article examines 500 sign-in-wrap contracts of the mostpopular websites in the United States that use such agreements.We find that the vast majority of consumer contracts in oursample are “sneak in” contracts—that is, they allow firms unilateral and broad discretion to covertly change consumers’rights and obligations after consumers accept them. Thisstudy’s findings raise concerns as to whether sneak in contractsare aligned with prominent core values and principles ofcontract law, such as consent, promise, reliance, consideration,freedom, choice, empowerment, and community. The study thuscalls for greater transparency in the law that governs themodification of consumer contracts

Have Disclosures Kept Up with the Big Data Revolution? An Empirical Test

Given the significant social benefits of the big data revolution, an important empirical legal question arises: are government-mandated disclosures designed in a way that allows society to harness the power of the big data that they include? Mandated disclosures normally include an overwhelming volume of data that can be difficult to read and understand for the average individual consumer. If, however, the voluminous data included in the disclosures is machine-readable, such that it can be automatically extracted and processed by computers, disclosures might actually assist consumers in making better-informed buying decisions. Although legal scholars have extensively studied the level of human readability of disclosures, they have yet to study their machine readability. This Article aims to fill this research gap. Using the important U.S. quick-service (fast food) restaurant franchise industry as a case study, this Article examines whether disclosure documents, provided by franchisors to prospective franchisees, have the features of machine-readable data. It specifically tests whether disclosures are provided in an adequate digital format, and include unique data identifiers, structured format, and standardized taxonomy, which can be easily read and processed by computers. The sample of this study includes the financial balance sheets disclosed by one hundred dominant quick-service restaurant chains, including Subway, McDonald’s, KFC, and Dunkin’. The disturbing empirical results of this study indicate that franchise disclosures are normally non-machine readable. Given these results, this Article presents concrete recommendations to policy-makers on how to assure that disclosures in all industries keep up with the big data revolution