Contracting for cooperation in recovery

Yale Law Journal

Volumn 117, Issue 1, 2007, Pages 3-68

  Klass, Gregory ^a  

^a GEORGETOWN UNIVERSITY LAW CENTER   (United States)

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EID: 36249017253     PISSN: 00440094     EISSN: None     Source Type: Journal    
DOI: 10.2307/20455783     Document Type: Article

References (264)

1. 507 S.E.2d 344, 347 (Va. 1998). In addition to the false certificates of compliance, Richmond claimed constructive fraud based on McDevitt's decision to seal the ends of the tubes with grout, giving the false impression that they had been filled. The Virginia Supreme Court held that these allegations were "nothing more than allegations of negligent performance of contractual duties," and therefore nonactionable as constructive fraud. Id.
2. There may be other harms as well, such as making recovery more expensive. I consider the effectiveness of compensatory damages for these harms in infra Subsection I.B.2.
3. This is a very thin concept of cooperation. My technical use of the term is obviously different from more demanding or normatively laden concepts of cooperation. See, e.g., Michael E. Bratman, Shared Cooperative Activity, in FACES OF INTENTION: SELECTED ESSAYS ON INTENTION AND AGENCY 93, 103-05 (1999).
4. The received wisdom should no longer be that compensatory damage measures are the only efficient remedies. See Richard RW. Brooks, The Efficient Performance Hypothesis, 116 YALE L.J. 568 (2006);
5. Alan Schwartz, The Case for Specific Performance, 89 YALE LJ. 271 (1979).
6. Special transactional situations where the received wisdom does not apply are collected in Aaron S. Edlin & Alan Schwartz, Optimal Penalties in Contracts, 78 CHI.-KENT L. REV. 33 (2003).
7. The most significant recent decision is the Delaware Chancery Court's holding in ABRY Partners V, L.P. v. F&W Acquisition L.L.C. that "when a seller intentionally misrepresents a fact embodied in a contract-that is, when a seller lies-public policy will not permit a contractual provision to limit the remedy of the buyer to a capped damage claim." 891 A.2d 1032, 1036 (Del. Ch. 2006);
8. see also id. at 1055-62 (discussing other holdings and authorities).
9. For recent scholarly discussions, see Kevin Davis, Licensing Lies: Merger Clauses, the Parol Evidence Rule and Pre-Contractual Misrepresentations, 33 VAL. U. L. REV. 485 (1999) ;
10. and Jeffrey M. Lipshaw, Of Fine Lines, Blunt Instruments, and Half-Truths: Business Acquisition Agreements and the Right To Lie, 32 DEL. J. CORP. L. (forthcoming 2007).
11. IAN AYRES & GREGORY KLASS, INSINCERE PROMISES: THE LAW OF MISREPRESENTED INTENT 8 (2005).
12. Robert E. Scott & George G. Triantis, Anticipating Litigation in Contract Design, 115 YALE L.J. 814, 857 (2006).
13. For an example of the neglect in a famous source, see L.L. Fuller & William R. Perdue, Jr., The Reliance Interest in Contract Damages (pt. 1), 46 YALE L.J. 52, 58 (1936) ("If a contract represents a kind of private law, it is a law which usually says nothing at all about what shall be done when it is violated. A contract is in this respect like an imperfect statute which provides no penalties, and which leaves it to the courts to find a way to effectuate its purposes.").
14. The conclusions of this Article are consistent with results in other areas of the law. See, e.g., Alex Raskolnikov, Crime and Punishment in Taxation: Deceit, Deterrence, and the SelfAdjusting Penalty, 106 COLUM. L. REV. 569 (2006) (analyzing sanctions for tax evasion and avoidance);
15. Ian C. Wiener, Note, Running Rampant: The Imposition of Sanctions and the Use of Force Against Fleeing Criminal Suspects, 80 GEO. L.J. 2175 (1992) (discussing optimal penalties for criminal flight).
16. Oliver Wendell Holmes, The Path of the Law, 10 HARV. L. REV. 457, 462 (1897),
17. reprinted in 110 HARV. L. REV. 991, 995 (1997).
18. See, e.g., RICHARD POSNER, LAW, PRAGMATISM, AND DEMOCRACY 58 (2003) ("Holmes pointed out that in a regime in which the sanction for breach of contract is merely an award of compensatory damages to the victim, the entire practical effect of signing a contract is that by doing so one obtains an option to break it.");
19. Avery Wiener Katz, The Option Element in Contraaing, 90 VA. L. REV. 2187, 2202 (2004) ("In option terminology, we can restate Holmes's point by saying that the promisor holds a call option to buy her way out of the contract by paying a strike price equal to the value of court-awarded damages.");
20. Robert E. Scott & George G. Triantis, Embedded Options and the Case Against Compensation in Contract Law, 104 COLUM. L. REV. 1428, 1429 n.1 (2004) ("It is well known that contract damages effectively give the promisor an option between performing the promise or breaching and paying damages. The classic statement is by Justice Holmes___");
21. Seanna Valentine Shiffrin, The Divergence of Contract and Promise, 120 HARV. L. REV. 708, 727 (2007) ("Justice Holmes famously declared that a contract to perform should be understood not as a promise to perform full stop, but as a promise either to perform or to pay damages.").
22. OLIVER W. HOLMES, THE COMMON LAW 302 (Boston, Little, Brown & Co. 1944) (1881) ;
23. see also Joseph M. Perillo, Misreading Oliver Wendell Holmes on Efficient Breach and Tortious Interference, 68 FORDHAM L. REV. 1085, 1085-93 (2000).
24. 686 P.2d 1158, 1166 (Cal. 1984), overruled by Freeman & Mills, Inc. v. Belcher Oil Co., 900 P.2d 669 (Cal. 199s).
25. See generally DORI KIMEL, FROM PROMISE TO CONTRACT: TOWARDS A LIBERAL THEORY OF CONTRACT (2003);
26. Jules L. Coleman, Douglas D. Heckathorn & Steven M. Maser, A Bargaining Theory Approach to Default Provisions and Disclosure Rules in Contract Law, 12 HARV. J.L. & PUB. POL'Y 639 (1989).
27. For a description of the way that trust can play a role in assuring cooperation in recovery, see ANNETTE C. BAIER, Trust and Its Vulnerabilities, in MORAL PREJUDICES: ESSAYS ON ETHICS 130, 138-39 (1994).
28. For a helpful overview of such mechanisms, albeit with an emphasis more on securing ex ante reliability rather than ex post compensation, see Ronald J. Mann, Verification Institutions in Financial Transactions, 87 GEO. L.J. 2225 (1999).
29. For the parties' ability to modify discovery procedures, see FED. R CIV. P. 29. For the possible use of alternative burdens of proof, see Scott & Triantis, supra note 7, at 856-78.
30. AYRES & KLASS, supra note 6, at 165-68. This statement must be qualified by the alreadynoted reluctance of some courts to permit actions for fraud in the contractual setting. See infra Section III.B.
31. FED. R. CIV. P. 11(b)(1);
32. see, e.g., CAL. CIV. PROC. CODE § 128.7 (West 2006);
33. III. SUP. CT. R. 137;
34. N.J. CT. R. 1:4-8 (West 2007);
35. TEX. R. CIV. PROC. ANN. 13 (Vernon 2003).
36. But see Chris William Sanchirico, Detection Avoidance, 81 N.Y.U. L. REV. 1331, 1384-86 (2006) (observing the limited scope of criminal and procedural sanctions for detection avoidance).
37. A rule can be said to be "quasi-mandatory" when the parties have a limited ability to modify it, though not to contract out of it entirely. Thus Rule 29 of the Federal Rules of Civil Procedure and many state analogs allow the parties to stipulate to discovery procedures, though such stipulations are subject to court review to ensure no undue frustration of the administration of justice. See, e.g., Franklin v. White, 493 N.E.2d 161 (Ind. 1986); Garden State Plaza Corp. v. S.S. Kresge Co., 189 A.2d 448 (N.J. Super. Ct. App. Div. 1963).
38. There is an analog to promisor duties to cooperate in recovery: promisee duties not to falsely allege breach. Many of the arguments below would apply equally to such duties, though I do not consider them as such.
39. Examples of noninfbrmational duties to cooperate include requirements that the promisor keep funds available to pay any first-order damage award, that the promisor remain within the reach of a jurisdiction, or that the promisor voluntarily pay damages for clear breach. Many of my conclusions apply to these duties as well, though the details of the argument and the remedies required are different. For example, as Richard Craswell pointed out to me, a contractual liquidity requirement might be most effective if its breach triggered accelerated first-order remedies, such as the rfght to demand adequate assurance.
40. I follow here the convention of using "observability" to refer to the parties' ability to detect some fact, and "verifiability" to refer to the ease with which that fact can be demonstrated in court.
41. See Exxon Corp. v. Dep't of Conservation & Natural Res., 859 So. 2d 1096 (Ala. 2002); Post-Judgment Order, Alabama v. Exxon Corp., No. 99-2368 (Ala. Cir. Ct. Mar. 29, 2004).
42. 859 So. 2d at 1100; Post-Judgment Order, supra note 22, at 9.
43. Post-Judgment Order, supra note 22, at 21, 52-54.
44. Id. at 19-22.
45. Id. at 21.
46. Id. at 21-22.
47. Id. at 20.
48. Id. at 21 (citations omitted). A similar description of the same dynamic can be found in the legislative history of a California bill that would have penalized recording companies for underpaying and misreporting royalties. The bill's sponsor, Senator Murray, explained: "[T]his bill addresses the core issue that has allowed record companies to under-report royalty earnings without any penalty___ Under the current structure, there is no disincentive or penalty if record companies do not properly account royalties to artists; therefore, bad behavior is rewarded." Cal. Assem. Comm. on Arts, Entertainment, Sports, Tourism, and Internet Media, Bill Analysis, S. 1034, 2002-2003 Leg., Reg. Sess., at 1-2 (Cal. 2003) (as amended May 12, 2003) (statement of Sen. Murray), available at http:// info.sen.ca.gov/pub/03- 04/bill/sen/sb_1001-1050/sb_1034_cfa_20030630_102556_asm_comm.html.
49. Post-Judgment Order, supra note 22, at 32; see also Reis v. Peabody Coal Co., 997 S.W.2d 49, 68, 72 (Mo. Ct. App. 1999) (rejecting the fraud defendant's argument that the plaintiff incurred no actual damages because plaintiff had already recovered for breach of the royalty contract in arbitration).
50. Post-Judgment Order, supra note 22, at 19-37, 62.
51. Exxon Corp. v. Dep't of Conservation & Natural Res., No. 1031167 (Ala. filed Apr. 30, 2004).
52. RESTATEMENT (SECOND) OF CONTRACTS § 350 cmt. b (1981).
53. Discouraging frivolous lawsuits is but one of the claimed advantages of fee shifting. See, e.g., W. Kent Davis, The International View of Attorney Fees in Civil Suits: Why Is the United States the "Odd Man Out" in How It Pays Its Lawyers?, 16 ARIZ. J. INT'L & COMP. L. 361, 399-430 (1999) (arguing that fee shifting can reduce the number of lawsuits and ensure access to litigation);
54. Amy Farmer & Paul Pecorino, A Reputation for Being a Nuisance: Frivolous Lawsuits and Fee Shifting in a Repeated Play Game, 18 INT'L REV. L. & ECON. 147 (1998) (finding that fee shifting can reduce frivolous litigation costs, where lawyer reputation is relevant) ;
55. James W. Hughes & Edward A Snyder, Litigation and Settlement Under the English and American Rules: Theory and Evidence, 38 J.L. & ECON. 225 (1995) (finding that efficient settlement, costs, and successful plaintiff suits are more common under the English rule);
56. Walter Olson & David Bernstein, Loser-Pays: Where Next?, 55 MD. L. REV. 1161, 1161-63 (1996) (arguing that fee shifting can diminish speculative lawsuits, can decrease litigation costs, and is more fair) ;
57. John F. Vargo, The American Rule on Attorney Fee Albcation: The Injured Person's Access to Justice, 42 AM.U.L.REV. 1567, 1590-93 (1993) (describing common arguments against the American rule).
58. The plausibility of recovery of attorney fees for obstructive breach is demonstrated by some contemporary reactions to California's experiment with punitive damages for obstruction of recovery in Seaman's Direct Buying Service, Inc. v. Standard Oil Co., 686 P. 2d 1158 (Cal. 1984).
59. See C. Delos Putz, Jr., & Nona Klippen, Commercial Bad Faith: Attorney Fees-Not Tort Liability-Is the Remedy for "Stonewalling, " 21 U.S.F. L. REV. 419, 499 (1987);
60. Dana Rae Landsdorf, Note, California's Detortification of Contract Law: Is the Seaman's Tort Dead?, 26 LOY. L.A. L. REV. 213, 238 (1992) ("Contracting parties who deny-in bad faidi-the existence of a contract should be liable for all damages proximately caused and resulting from such conduct. For example, the breaching party should not only be liable for compensatory damages but also for the injured party's attorney's fees because the nonbreaching party does not expect to incur attorney's fees from the transaction.").
61. It might be thought that no court would award litigation costs without proof of first-order breach, the idea being that such recovery would give promisees a perverse incentive to sue. That thought overlooks the fact that compensatory litigation-cost damages for breach of an anti-obstruction clause should be limited to costs attributable to the defendant's obstructive behavior. Litigation-cost recovery for breach of the recordkeeping clause would not give Developer a free suit on the first-order breach. It would, however, support her expenditure of extra resources to determine whether there was a first-order breach- expenses that would be unnecessary but for Contractor's failure to keep the required records. Developer should be permitted to recover these costs whether or not she sues for the underlying breach, and if she does sue on the underlying breach, whether or not she prevails in that suit.
62. See supra text accompanying note 29.
63. RESTATEMENT (SECOND) OF CONTRACTS § 356(1) (2006).
64. $1,000 = (.1)($10,000).
65. $5,000 = (.5)($10,000).
66. RESTATEMENT (SECOND) OF CONTRACTS § 356 cmt. b (2006);
67. see E. ALLAN FARNSWORTH, CONTRACTS § 12.18, at 814-15 (4th ed. 2004).
68. See RESTATEMENT (SECOND) OF CONTRACTS § 356 illus. 4 (2006);
69. see also id. § 356(1) ("Damages for breach by either party may be liquidated in the agreement but only at an amount that is reasonable in the light of the anticipated or actual loss caused by the breach and the difficulties of proof of loss." (emphasis added)).
70. 24 WILLISTON ON CONTRACTS § 65:33 (4th ed. 2006).
71. Specific performance also qualifies as extracompensatory under my definition, but timing issues prevent it from being effective against most sorts of obstruction. An injunction ordering subsequent performance cannot undo the damage caused by destroyed records, hidden or unreported first-order nonperformance, delay tactics, and most other forms of obstruction. One exception is contractual duties to permit audits. Thus 10 U.S.C. § 2313 (2000), which gives the Department of Defense the right to audit records of certain contractors, also gives it the power, enforceable by the district court, to subpoena those records. This is equivalent to a mandatory audit term supported by specific performance. California has recently legislated mandatory auditing rights in recording contracts, though without specifying the remedy for their breach. CAL. CIV. CODE § 2501 (West Supp. 2007). At some point the California courts will have to decide what the appropriate remedy is. My analysis suggests that it should be specific performance, an adverseiference, or some other extracompensatory measure.
72. Yet other remedial options are available where the promisor is a corporate entity and liability for first-order and obstructive breaches (or rewards for cooperation) can be assigned separately to the corporation and its agents. See Jennifer Arlen & Reinier Kraakman, Controlling Corporate Misconduct: An Analysis of Corporate Liability Regimes, 72 N.Y.U. L. REV. 687 (1997).
73. Such a solution is comparable to putting enforcement in the hands of a third party. See supra text accompanying note 14.
74. I will follow Farnsworth and use "terminate" (where one could also say "rescind" or "cancel") to refer to the nonbreaching party's right to end the contract. See FARNSWORTH, supra note 41, § 8.15 n.2.
75. According to California Senator Murray, a former entertainment lawyer, even though the obligation to accurately account for royalty earnings is a material part of the contract, most if not all recording artist contracts provide that a breach of the obligation to account for or pay royalties is not a material breach, leaving the artist with no real recourse except to setde the claim on perhaps a percentage of what is owed or else conduct protracted and expensive litigation at the possible expense of the artist's career. Cal. Assem. Comm. on Arts, Entertainment, Sports, Tourism, and Internet Media, Bill Analysis, S. 1034, 2002-2003 Leg., Reg. Sess., at 1-2 (Cal. 2003) (third reading) (paraphrasing Sen. Murray), available at http://info.sen.ca.gov/ pub/03-04/bilVsen/sb_1001-1050/sb_1034_cfa_20030514_100846_sen_floor.html.
76. For the power of labels to dictate terms, and how this plays out in terms of artists' ability to get accurate accountings or otherwise monitor label performance, see Wendy V. Bartholomew, Fiduciary Duty: Can It Help Calm the Fears of Underpaid Artists?, 6 VAND. J. ENT. L. & PRAC. 246 (2004);
77. and Corrina Cree Clover, Note, Accounting Accountability: Should Record Labels Have a Fiduciary Duty To Report Accurate Royalties to Recording Artists?, 23 LOY. LJL ENT. L. REV. 395 (2003).
78. FARNSWORTH, supra note 41, § 8.16.
79. Richard Craswell, Property Rules and Liability Rules in Unconscionability and Related Doctrines, 60 U. CHI. L. REV. 1, 7 (1993).
80. Id. at 7-8 (emphasis omitted).
81. For a description of how courts and prosecutors use adverse inferences to discourage obstruction in the aiminal context, see Sanchirico, supra note 17, at 1378-82.
82. Scott & Triantis, supra note 7, at 857-58 (footnote omitted).
83. See generally id. at 856-78 (describing decisions).
84. Thus Scott and Triantis identify only three ways by which the parties might clarify, reverse, or fine-tune the default allocation in their contract.... The first approach is by direct allocation of burden; the second is by predesignating whom the plaintiff will be in the event of a dispute; and the third is by framing the substantive provisions governing, for example, the right to assign or terminate a contract. Id. at 866. I am suggesting a fourth: rather than direct allocation of the burden, conditional allocation. Scott and Triantis do describe an instance in which the court determined that a prima facie showing of bad faith shifted the burden of proof-though not at the behest of the contract. Id. at 876-77 (discussing Int'l Harvester Co. v. Calvin, 353 So. 2d 144 (Fla. Dist. Ct. App. 1977)).
85. See generally 29 AM. JUR. 2D Evidence § 244 (1944 & Supp. 2006). The evidentiary rule requires proof of scienter: "a conscious awareness of the existence of the dispute and that the act done will destroy evidence or access to evidence." Id. This is interesting in light of my argument in Sections III.B and IVA that scienter requirements add value to no-obstruct duties.
86. See, e.g., Keith N. Hylton, Punitive Damages and the Economic Theory of Penalties, 87 GEO. L.J. 421, 425-39 (1998).
87. ($10,000)(.5) = $5,000.
88. ($5,000)/(.2) = $25,000.
89. In many jurisdictions, punitive damages may only be awarded where there is proof of actual loss. See 25 C.J.S. Damages § 197 (2002) ("As a general rule, in order to recover exemplary or punitive damages, actual damages must be shown, or there must be a basis for the recovery of compensatory damages." (footnote omitted)); 1 JOHN J. KIRCHER & CHRISTINE M. WISEMAN, PUNITIVE DAMAGES: LAW AND PRACTICE § 5:21 (2d ed. Supp. 2003) ("Abundant authority exists to support the proposition that a finding must be entered entitling the plaintiff to actual damages before that plaintiff will be allowed to recover punitive damages."). This rule is open to criticism.
90. See RESTATEMENT (SECOND) OF TORTS § 908 cmt. c (1979) ("Although ... the extent of the harm may be considered in determining their amount, it is not essential to the recovery of punitive damages that the plaintiff should have suffered any harm, either pecuniary or physical.");
91. Jane Mallor & Barry Roberts, Punitive Damages: Toward a Principled Approach, 31 HASTINGS L.J. 639, 666-67 (1980) (arguing against the rule that punitive damages bear a reasonable relationship to actual harm). In jurisdictions that follow the first rule, the secondary harms of obstructive breach might satisfy the actual harm requirement. And the punitive damages in cases where there is proof of harm can be further increased to take account of the ex ante possibility that such proof was not going to be available.
92. RESTATEMENT (SECOND) OF CONTRACTS S 355 (1981). For developments in the law of punitive damages for breach of contract, see William S. Dodge, The Case for Punitive Damages in Contracts, 48 DUKE L.J. 629, 636-51 (1999).
93. RESTATEMENT (SECOND) OF CONTRACTS § 356(1) (1981). For descriptions of practical complexities and differences between jurisdictions, see Kenneth W. Clarkson, Roger LeRoy Miller & Timothy J. Muris, Liquidated Damages v. Penalties: Sense or Nonsense?, 1978 WIS. L. REV- 351) 352-57;
94. Ian R. Macneil, Power of Contract and Agreed Remedies, 47 CORNELL L-Q. 495, 501-13 (1962);
95. and Eric L. Talley, Note, Contract Renegotiation, Mechanism Design, and the Liquidated Damages Rule, 46 STAN. L. REV. 1195, 1200-05 (1994).
96. Not all states follow these rules. South Carolina, for example, permits punitive damages for breach of contract accompanied by "any act characterized by dishonesty in fact, unfair dealing, or the unlawful appropriation of another's property by design," a rule that might well cover many forms of obstructive behavior. Perry v. Green, 437 S.E.2d 150, 152 (S.C. Ct. App. 1993); see also Dodge, supra note 59, at 649-50 (describing similar rules in Idaho, Mississippi, and New Mexico). It is unclear whether the courts in these states treat such punitive damages as mandatory remedies or as defaults the parties could opt out of, much less whether courts would permit the parties to specify the bad acts that should trigger them.
97. See infra text accompanying notes 123-128.
98. The argument from freedom of contract is suggested by Daniel Friedmann in The Efficient Breach Fallacy, 18 J. LEGAL STUD. 1, 23 (1989). Samuel Rea describes the difficulty the choice metric poses for economic explanations of the rule against penalties: The perplexing aspea of the penalties-liquidated damages distinction is that there is a conflict between the apparent, but express, intention of the parties and the subsequent action of the courts. Economists are inclined to believe that courts are contributing to inefficiency when they upset the agreed upon terms of a contract.
99. Samuel A Rea, Jr., Efficiency Implications of Penalties and Liquidated Damages, 13 J. LEGAL STUD. 147, 148 (1984);
100. see also Lake River Corp. v. Carborundum Co., 769 F.2d 1284, 1289 (7th Cir. 1985) (Posner, J.) ("[T]he parties (always assuming they are fully competent) will, in deciding whether to include a penalty clause in their contract, weigh the gains against the costs... and will include the clause only if the benefits exceed those costs....");
101. Charles J. Goetz & Robert E. Scott, Liquidated Damages, Penalties and the Just Compensation Principle: Some Notes on an Enforcement Model and a Theory of Efficient Breach, 77 COLUM. L. REV. 554, 555 n.12 (1977) (describing how the penalty doctrine is "anomalous in terms of the theoretical underpinnings of modern contract law").
102. Thus Alan Schwartz argues : Courts do not have to prevent promisees from obtaining penalty clauses if promisees do not want penalty clauses. The ex ante rule is not merely unnecessary: judicial review produces mischief. Courts sometimes mistake compensatory damage measures for penalties, and so have found that particular liquidated damage clauses would inevitably overcompensate promisees when those clauses only protected the expectation. Thus, the ex ante branch of the liquidated damage rule should be abandoned.
103. Alan Schwartz, The Myth That Promisees Prefer Supercompensatory Remedies: An Analysis of Contracting for Damage Measures, 100 YALE L.J. 369, 370 (1990) ;
104. see also Goetz & Scott, supra note 63, at 578-93 (arguing that many penalty clauses are designed to compensate for damages or create efficient incentives that remain inscrutable to courts);
105. Schwartz, supra, at 383-87.
106. These developments are described in Edlin & Schwartz, supra note 4, at 43-52.
107. See Goetz & Scott, supra note 63, at 554.
108. See, e.g., Klinger v. Adams County Sch. Dist. No. 50, 130 P.3d 1027, 1034 (Colo. 2006) ("[A] contract provision for liquidated damages is invalid as a penalty if it is unreasonably large for the expected loss from a breach of contract.") ; Bragdon v. Twenty-Five Twelve Assoes. P'ship, 856 A.2d 1165, 1173 (D.C. 2004) ("Punitive damages will not lie for breach of contract, even if it is proven that the breach was willful, wanton, or malicious."); Dist. Cablevision P'ship v. Bassin, 828 A.2d 714, 724 (D.C. 2003) ("Agreements to pay fixed sums plainly without reasonable relation to any probable damage which may follow a breach will not be enforced."); TAL Fin. Corp. v. CSC Consulting, Inc., 844 N.E.2d 1085, 1093 (Mass. 2006) (" [L] iquidated damages will not be enforced if the sum is 'grossly disproportionate to a reasonable estimate of actual damages' made at the time of contract formation." (quoting Kelley v. Marx, 705 N.B. 2d 1114, 1116 (Mass. 1999)); Ins. Co. of the W. v. Gibson Tile Co., 134 P.3d 698, 703 (Nev. 2006) ("[T]he award of punitive damages cannot be based upon a cause of action sounding solely in contract."); Smith v. Grand Canyon Expeditions Co., 84 P.3d 1154, 1161 (Utah 2003) ("[P]unitive damages are recoverable only for torts, not for breach of contract.").
109. AYRES &KLASS, supra note 6.
110. See supra note 5.
111. The three techniques I discuss are not the only ones available. Recording artists have tried and generally failed to impose on recording companies a fiduciary duty to account for royalty payments. See S. 1034, 2002-2003 Leg., Reg. Sess. (Cal. 2003). Like fraud, breach of fiduciary duty can permit the recovery of punitive damages, effectively deterring obstructive behavior. A downside of fiduciary duties as compared to fraud liability is their lack of specificity. Rather than the relatively clear duty to be honest, there is a relatively amorphous duty of loyalty. See Deborah A. DeMott, Breach of Fiduciary Duty: On Justifiable Expectations of Loyalty and Their Consequences, 48 ARIZ. L. REV. 925, 934-40 (2006);
112. D. Gordon Smith, The Critical Resource Theory of Fiduciary Duty, 55 VAND. L. REV. 1399, 1406-11 (2002).
113. 686 P.2d 1158, 1167 (Cal. 1984).
114. Id.
115. For surveys of the variety of lower-court interpretations of Seaman's, see, for example, Freeman & Mills, Inc. v. Belcher Oil Co., 900 Pad 669 (Cal. 1995);
116. Landsdorf, supra note 35, at 222-35.
117. The furthest extension of Seaman's by the lower courts appears to have been in Koehrer v. Superior Court, 226 Cal. Rptr. 820 (Ct. App. 1986), which "extend[ed] Seaman's to bad faith attempt to deprive employee of contractual benefits." Freeman & Mills, 900 P.2d at 675.
118. Freeman & Mills, 900 P.2d at 676-77. Dodge argues that the real turning point was as early as 1988, when the California Supreme Court declined to extend Seaman's to employment contracts. Dodge, supra note 59, at 642 (discussing Foley v. Interactive Data Corp., 765 P.2d 373 (Cal. 1988)).
119. 686 P.2d at 1167; id. at 1174 (Bird, C.J., concurring in part and dissenting in part).
120. See, e.g., Dodge, supra note 59, at 638 n.33;
121. E. Allan Farnsworth, Developments in Contract Law During the 1980's: The Top Ten, 41 CASE W. RES. L. REV. 203, 205 (1990);
122. Friedmann, supra note 63, at 19 n.62;
123. Curtis Bridgeman, Note, Corrective Justice in Contract Law: Is There a Case for Punitive Damages?, 56 VAND. L. REV. 237, 270-71 (2003).
124. But see Shiffrin, supra note 10, at 723 n.27 (recognizing the limited scope of Seaman's).
125. See, e.g., John A. Sebert, Jr., Punitive and Nonpecuniary Damages in Actions Based upon Contract: Toward Achieving the Objective of Full Compensation, 33 UCLAL. REV. 1565, 1600-54 (1986).
126. Old Am., Inc. v. Microtech Int'l, Inc., 872 F.2d 312, 314-15 (9th Cir. 1989) (Kozinski, J., concurring).
127. 686 P.2d at 1167.
128. Michael Dorff is therefore wrong when, criticizing the application of punitive damages in Seaman's, he states that "the consequences of denying the contract's existence would be virtually identical to the consequences of any other complete contract breach, and the parties would be expected to negotiate about the risks of a complete breach." Michael Dorff, Attaching Tort Claims to Contract Actions: An Economic Analysu of Contort, 28 SETON HALL L. REV. 390, 423 (1997).
129. Oki Am., 872 F.2d at 315 (Kozinski, J., concurring).
130. See supra note 73. Kozinski correcdy diagnosed this problem : [Seaman's] created a cause of action so nebulous in oudine and so unpredictable in application that it more resembles a brick thrown from a third story window than a rule of law. Seaman's gives nary a hint as to how to distinguish a bad faith denial that a contract exists, from a dispute over contract terms, from a permissible attempt to rescind a contract, or from a loosely worded disclaimer of continued contractual responsibility.
131. Old Am., 872 F.2d at 315 (Kozinski, J., concurring) (internal quotation marks omitted).
132. See Oki Am., 872 F.2d at 315 (Kozinski, J., concurring) ("Seaman's throws kerosene on the litigation bonfire by holding out the allure of punitive damages, a golden carrot that entices into court parties who might otherwise be inclined to resolve their differences."); Lynch & Freytag v. Cooper, 267 Cal. Rptr. 189, 195-96 (Ct. App. 1990) (suggesting that minor contract action was litigated overzealously due to the "allure of punitive damages").
133. Cf. Samuel W. Buell, Novel Criminal Fraud, 81 N.Y.U. L. REV. 1971, 1988-92 (2006) (collecting examples of similar observations about the law of fraud).
134. 686 P.2d at 1167.
135. In fact, Seaman's recognized the parties' ability "to shape the contours of their agreement and to include provisions for attorney fees and liquidated damages in the event of breach___[T]hey are free, within reasonable limits at least, to agree upon the standards by which application of the covenant [of good faith] is to be measured." 686 P.2d at 1167. While allowing that the availability of party choice counseled caution in applying tort remedies in the contract setting, the court did not discuss whether parties might opt-out of or contractually modify the Seaman's tort.
136. W. PAGE KEETON ET AL., PROSSERAND KEETON ON TORTS § 105, at 728 (5th ed. 1984).
137. See, e.g., Morrill v. Becton, Dickinson & Co., 747 F.2d 1217, 1222 (8th Cir. 1984) (holding that evidence was insufficient to establish requisite scienter for some claimed misrepresentations as to sales figures connected to royalty payments).
138. Post-Judgment Order, supra note 22, at 1, 20-25, 62.
139. See, e.g., Morrill, 747 F.2d at 1220 (false royalty statements to inventor); Gregory v. Chem. Waste Mgmt., Inc., 38 F. Supp. 2d 598 (W.D. Tenn. 1996) (false waste-disposal facility royalty statements); Reis v. Peabody Coal Co., 997 S.W.2d 49, 68, 72 (Mo. Ct. App. 1999) (false royalty statements and misrepresentations as to compliance with most-favored-nation clause); Apple Records, Inc. v. Capitol Records, Inc., 137 A.D.2d 50, 56 (N.Y. App. Div. 1988) (false royalty statements in recording contract); Oestreicher v. Am. Nat'l Stores, Inc., 225 S.E.2d 797 (N.C. 1976) (false royalty sales statements) ; Grynberg v. Citation Oil & Gas Corp., 573 N.W.2d 493 (S.D. 1997) (false oil royalty statements). For another nonroyalty case, see Krantz v. Chateau Stores of Canada Ltd., 683 N.Y.S.2d 24 (App. Div. 1998) (false statement of annual profits used as basis for bonus).
140. Richmond Metro. Auth. v. McDevitt St. Bovis, Inc., 507 S.E.2d 344 (Va. 1998).
141. 646 Fad 224, 225-27 (5th Cir. Unit A May 1981).
142. 102 P.3d 268 (Cal. 2004).
143. Id. at 271.
144. See Robinson Helicopter Co. v. Dana Corp., 129 Cal. Rptr. 2d 682, 686 n.6
145. Robinson Helicopter, 102 P.3d at 274-75.
146. For an even better example, see the discussion of the RIO and RIO2 contracts in the Conclusion.
147. See RESTATEMENT (SECOND) OF TORTS § 550 (1997).
148. I have been able to locate only one case applying fraudulent suppression based on a contractual duty to disclose. Gregory v. Chemical Waste Management, Inc., 38 F. Supp. 2d 598 (WD. Tenn. 1996), held that there was a duty to disclose where the contract warranted that the defendant's representations "do not and will not include any untrue statement of material fact or fail to include any material fact, all to the end that such statements are not misleading." Id. at 612 (emphasis omitted). The court concluded that the defendant breached the resultant duty to disclose when it did not reveal a change in its manner of calculating royalty payments. Id. The fraud claim in that case, however, was also supported by affirmative misrepresentations in the royalty statements. Id at 611-12. The reason there are not more examples of fraudulent concealment based on contractual duties to disclose is not difficult to discern: the vast majority of cases and commentary on fraud by silence concern fraud in the inducement, before a contract exists.
149. See, e.g., 37 AM. JUR. 2D Fraud and Deceit § 204 (2006);
150. Christopher T. Wonnell, The Structure of a General Theory of Nondbclosure, 41 CASE W. RES. L. REV. 329 (1991).
151. See RESTATEMENT (THIRD) OF ECONOMIC TORTS AND RELATED WRONGS § 8 (Preliminary Draft No. 2, 2006).
152. Robinson Helicopter, 129 Cal. Rptr. 2d at 684.
153. As Justice Traynor explained in the seminal case, "[t]he history of the doctrine of strict liability in tort indicates that it was designed, not to undermine the warranty provisions of the sales act or of the Uniform Commercial Code but, rather, to govern the distinct problem of physical injuries." Seely v. White Motor Co., 403 P.2d 145, 149 (Cal. 1965) (Traynor, C.J.).
154. HTP, Ltd. v. Lineas Aereas Costarricenses, S.A, 685 So. 2d 1238, 1239 (Fla. 1996). The leading case adopting this approach is Huron Tool & Engineering Co. v. Precision Consulting Services, Inc., 532 N.W.2d 541, 544-45 (Mich. Ct. App. 1995). See also Dinsmore Instrument Co. v. Bombardier, Inc., 999 F. Supp. 968, 971-72 (E.D. Mich. 1998); Valleyside Dairy Farms, Inc. v. A.O. Smith Corp., 944 F. Supp. 612, 616-17 (WD. Mich. 1995); Kaloti Enters., Inc. v. Kellogg Sales Co., 699 N.W.2d 205, 219-21 (Wis. 2005).
155. For academic discussions, see Jean Braucher, Deception, Economic Loss and Mass-Market Consumers: Consumer Protection Statutes as Persuasive Authority in the Common Law of Fraud, 48 ARIZ. L. REV. 829 (2006);
156. Steven C. Tourek, Thomas H. Byrd & Charles J. Schoenwetter, Bucking the "Trend": The Uniform Commercial Code, the Economic Loss Doctrine, and Common Law Causes of Action for Fraud and Misrepresentation, 84 IOWA L. REV. 875 (1999);
157. R Joseph Barton, Note, Drowning in a Sea of Contract: Application of the Economic Loss Rule to Fraud and Negligent Mbrepresentation Claims, 41 WM. & MARY L. REV. 1789 (2000).
158. 129 Cal. Rptr. 2d at 695; see Tourek et al., supra note 103, at 895-912;
159. Barton, supra note 103, at 1802-12.
160. Some courts have taken the further step of applying the economic loss rule to "foreclose tort claims against the defendant who fraudulendy induces the contract by representations about the character and quality of the goods or services sold." Dan B. Dobbs, An Introduction to Non-Statutory Economic Loss Claims, 48 ARIZ. L. REV. 713, 729 (2006).
161. See, e.g., Robinson Helicopter, 129 Cal. Rptr. 2d at 697.
162. Huron Tool, 532 N.W.2d at 545.
163. 129 Cal. Rptr. 2d at 697; see also Grynberg v. Citation Oil & Gas Corp., 573 N.W.2d 493, 510 (S.D. 1997) (Amundson, J., dissenting in part) (arguing that there is no fraud liability where the contract "impliedly create[d] the obligation to make true factual representations").
164. But see Grynberg, 573 N.W.2d at 501 (majority opinion) (holding that false royalty statements, though required by contract, violated a separate obligation to refrain from invading the property of others by fraud).
165. Robinson Helicopter, 102 P.3d at 274-75.
166. Id. at 276 (emphasis added). Other factors emphasized by the California Supreme Court likely to distinguish Robinson Helicopter from future cases include the impact of Dana's breach on public safety and the fact that the improper clutches put Robinson out of compliance with FAA regulations. See id. at 274 n.7.
167. Saratoga Fishing Co. v. J.M. Martinac & Co., 520 U.S. 875, 880 (1997); see also, e.g., Clark v. Rowe, 701 N.E.2d 624, 626 (Mass. 1998) ("When the economic loss rule has been applied, the parties usually were in a position to bargain freely concerning the allocation of risk ....); Spring Motors Distribs., Inc. v. Ford Motor Co., 489 A.2d 660, 672 (N.J. 1985) ("Contract principles... are generally more appropriate for determining claims for consequential damage that the parties have, or could have, addressed in their agreement."); Grynberg v. Questar Pipeline Co., 70 P.3d 1, 11 (Utah 2003) ("Whether the doctrine is asserted in terms of economic loss or independent duty, the underlying reasoning remains the same: tort law should govern the duties and liabilities imposed by legislatures and courts upon non-consenting members of society, and contract law should govern the bargained-for duties and liabilities of persons who exercise freedom of contract.");
168. RESTATEMENT (THIRD) OF ECONOMIC TORTS AND RELATED WRONGS § 8 cmt. b (Preliminary Draft No. 2, 2006) (noting that rationales for the economic loss rule include "[e]ncourag[ing] private ordering" and "preserving the priority of contract law").
169. The above analysis is significandy different from other arguments for excluding fraud from the economic loss rule. For instance, Tourek, Boyd, and Schoenwetter maintain that the rule should not apply to fraud because, among other things, "[a]s a practical matter, it is difficult to see how a party can effectively anticipate and therefore negotiate the allocation of risks for every type of misrepresentation and every form of deceit that may be perpetrated by the other party to an agreement." Tourek et al., supra note 103, at 916;
170. see also Stoughton Trailers, Inc. v. Henkel Corp., 965 F. Supp. 1227, 1236 (W.D. Wis. 1997) ("A party to a contract cannot rationally calculate the possibility that the other party will deliberately misrepresent terms critical to that contract.");
171. Dobbs, supra note 104, at 731 ("Where the parties have not agreed to subject a given risk or dispute to the contract's terms, to apply the economic loss rule is not to honor the contract but rather to impose a contract limitation where none was intended ...."). My argument is exactly the opposite: when it comes to contractually required representations, the parties might anticipate and prefer allocating the risk of misrepresentation in accordance with the law of fraud, but the expansive reading of the economic loss rule prevents them from doing so.
172. See HTP, Ltd. v. Lineas Aereas Costarricenses S.A, 685 So. 2d 1238 (Fla. 1996) ; Huron Tool & Eng'g Co. v. Precision Consulting Servs., Inc., 532 N.W.2d 541 (Mich. Ct. App. 1995); Kaloti Enters., Inc. v. Kellogg Sales Co., 699 N.W.2d 205 (Wis. 2005); see also AKA Distrib. Co. v. Whirlpool Corp., 137 F.3d 1083 (8th Cir. 1998) (applying Minnesota law); Cooper Power Sys., Inc. v. Union Carbide Chems. & Plastics Co., 123 F.3d 675 (7th Cir. 1997) (applying Wisconsin law).
173. For a summary overview, see Dorff, supra note 80, at 407-11.
174. For other examples of how these doctrines have been applied to concealment of breach cases, see Catherine Paskoff Chang, Note, Two Wrongs Can Make Two Rights: Why Courts Should Allow Tortious Recovery for Intentional Concealment of Contract Breach, 39 COLUM. J.L. & SOC. PROBS. 47, 66-72 (2005).
175. Not all courts exclude liability from the contract setting. See, e.g., Morrill v. Becton, Dickinson & Co., 747 F.2d 1217, 1222 (8th Cir. 1984) ("[U]nder Missouri law, liability in tort may co-exist with liability in contract arising out of the same events.") ; Life Ins. Co. v. Murray Inv. Co., 646 F.2d 224, 228 (5th Cir. Unit A May 1981) ("[U]nder Texas law, if the act complained of constitutes both a breach of contract and a willful tort, exemplary damages are recoverable."). And the tendency to exclude tort is of relatively recent origin. See WILLIAM LLOYD PROSSER, The Borderland of Tort and Contract, in SELECTED TOPICS ON THE LAW OF TORTS 380 (1954). Prosser himself was in favor of a broad overlap between tort and contract: "When the ghosts of case and assumpsit walk hand in hand at midnight, it is sometimes a convenient and comforting thing to have a borderland in which they may lose themselves." Id at 452.
176. 507 S.E.2d at 347; see also Americana Petroleum Corp. v. Northville Indus. Corp., 606 N.Y.S.2d 906, 908 (App. Div. 1994) ("[I]n order to state a cause of action sounding in fraud, the plaintiff must allege a breach of duty which is collateral or extraneous to the contract between the parties.").
177. Cimino v. FirsTier Bank, 530 N.W.2d 606, 613 (Neb. 1995).
178. Textron Fin. Corp. v. Nationwide Mut. Ins. Co., 684 N.E.2d 1261, 1271 (Ohio Ct. App. 1996) (emphasis omitted); see also Chachere v. Drake, 941 S.W.2d 193, 197 (Tex. App. 1996) ("The mere availability of a tort-based theory of recovery is not sufficient; actual damages sustained from an independent tort must be proven before punitive damages are available.").
179. AYRES & KLASS, supra note 6, at 59-82.
180. Sony Music Entm't Inc. v. Robison, No. 01 Civ. 6415, 2002 WL 272406, at *2 (S.D.N.Y. Feb. 26, 2002). Representatives of the Beatles have recently made similar allegations against Capitol Records. See Apple Corps Ltd. v. Capitol Records, Inc., No. 05-604385, slip op. at 4-5 (N.Y. Sup. Ct., Aug. 23, 2006).
181. Sony Music, 2002 WL 272406, at *2. The district court dismissed the claim based on a line of cases of dubious authority that suggest promissory fraud is not actionable in New York. See Ian Ayres & Gregory Klass, Prombsory Fraud, N.Y. ST. B. ASS'N J., May 2006, at 26,27.
182. 901 So. 2d 1 6-9 (Ala. 2004).
183. 891 A.d 1032, 1036 (Del. Ch. 2006); see also id. at 1056-62 (discussing authorities);
184. RESTATEMENT (SECOND) OF CONTRACTS § 195(1) (2006) ("A term exempting a party from tort liability for harm caused intentionally or recklessly is unenforceable on grounds of public policy.") ;
185. Davis, supra note 5, at 488-92, 513-20 (summarizing relevant holdings).
186. "With each royalty payment it sent to the State, Exxon effectively represented that (i) it was paying royalty from gross when it in fact was not, (ii) its gross was less than it in fact was, (iii) it was paying the State for all gas produced when it in fact was not and/or (iv) it owed the State less than it in fact did." Post-Judgment Order, supra note 22, at 26. The trial court's theory of fraud was unfortunately expansive in several other directions as well. For one thing, the court permitted a finding of fraudulent suppression based on the fact that Exxon withheld or provided only partial royalty reports.
187. Id. at 27;
188. see also Grynberg v. Citation Oil & Gas Corp., 573 N.W.2d 493, 498-99 (S.D. 1997) (royalty reports not itemized and withheld were contrary to contract). Unlike the case where a breaching promisor is contractually required to report breach and remains silent, here the absence of required reports or information should have put Alabama on notice that there might be a first-order breach. Elsewhere the trial court appears to endorse a broader action for bad faith breach: "Alabama law surely does not permit a business party such as Exxon to breach a contract as it sees fit without fear of punitive damages."
189. Post-Judgment Order, supra note 22, at 23.
190. See, e.g., Rea, supra note 63, at 159 ("[T]he parties to a contract are unlikely to agree ex ante to damages that exceed the expected loss.");
191. Schwartz, supra note 64, at 370 ("[P]romisees do not want contractual damage measures that would grant more than their lost expectation.").
192. For more detailed versions, see Richard Craswell, Contract Remedies, Renegotiation, and the Theory of Efficient Breach, 61 S. CAL. L. REV. 629 (1988);
193. Rea, supra note 63, at 151-63;
194. Schwartz, supra note 64, at 372-83;
195. and Talley, supra note 60, at 1212-18.
196. The core argument presented here omits some considerations, such as the use of penalties as signals, their employment as strategic barriers to entry, and their effect on price and selection, as well as economic arguments that, in special circumstances, extracompensatory remedies can promote efficient investment. For a detailed overview of the literature, see Edlin & Schwartz, supra note 4.
197. See RICHARD A. POSNER, ECONOMIC ANALYSIS OF LAW 117-18 (6th ed. 2003);
198. Talley, supra note 60, at 1218-41.
199. But see Clarkson et al., supra note 60, at 360-62;
200. Dodge, supra note 59, at 632-33, 666-76 (arguing that renegotiation is possible) ;
201. Goetz & Scott, supra note 63, at 587.
202. This moral hazard problem is emphasized by Clarkson et al., supra note 60, at 368-72.
203. See also Craswell, supra note 124, at 646-53, 656-61;
204. Rea, supra note 63, at 155.
205. See Craswell, supra note 124, at 642-45;
206. Richard Craswell, Deterrence and Damages: The Multiplier Principle and Its Alternatives, 97 MICH. L. REV. 2185, 2230 (1999);
207. Rea, supra note 63, at 152-54;
208. Schwartz, supra note 64, at 392.
209. Samuel Rea summarizes the arguments as follows: "Penalty clauses are costly because they (1) induce excessive precautions by the promisor, (2) induce deficient precautions by the promisee, (3) overinsure the promisee, and (4) expose the promisor to additional risk." Rea, supra note 63, at 156.
210. See Sanchirico, supra note 17, at 1352-60.
211. For a detailed analysis of the concept of opportunistic breach, see Timothy J. Muris, Opportunbtic Behavior and the Law of Contracts, 65 MINN. L. REV. 521, 521-26 (1981).
212. See also Charles J. Goetz & Robert E. Scott, Principles of Relational Contracts, 67 VA. L. REV. 1089, 1139 n.118 (1981) ("[Opportunistic behavior only redistributes portions of an already allocated contractual pie.");
213. Barry Perlstein, Crossing the Contract-Tort Boundary: An Economic Argument for the Imposition of Extracompensatory Damages for Opportunistic Breach of Contract, 58 BROOK. L. REV. 877, 880 (1992) ("The opportunistic actor creates more value for himself, but only by taking an equivalent amount or more from others.").
214. Mutis, supra note 130, at 524.
215. POSNER, supra note 125, at 118;
216. see also Dodge, supra note 59, at 654-62 (arguing that punitive damages for opportunistic breach result in greater efficiency);
217. Richard A Posner, CommonLaw Economic Torts: An Economic and Legal Analysb, 48 ARIZ. L. REV. 735, 745-47 (2006) (discussing when punitive damages for breach are appropriate).
218. Several academics have suggested permitting penalty clauses for opportunistic breach only, though they have proposed different tests for distinguishing opportunistic from efficient breach. See Dodge, supra note 59, at 633 n.14 (listing authors who support punitive damages for opportunistic breach). To the extent that obstructive breaches are very likely to be opportunistic, my suggestion is consonant with these recommendations.
219. Efforts to avoid obstruction are wasted when they cost the promisor more than they benefit the promisee (by providing her needed assurance that she will recover for a first-order breach). At the time of formation, neither party wants a term that will result in such inefficient behavior, which decreases the total value of the transaction that the parties have to divide between themselves. In other words, the promisor is likely to pass some or all of the costs of wasted effort on to the promisee in the form of a higher price.
220. See Dodge, supra note 59, at 651-98 (recommending punitive damages for willful, as opposed to involuntary, breach).
221. This is another way of putting the familiar observation that extracompensatory remedies can be a cost-effective means of communicating a high probability of performance. See POSNER, supra note 125, at 128;
222. Rea, supra note 63, at 156-57.
223. Sanchirico, supra note 17, at 1352-82. One difference between my category of obstruction of recovery and Sanchirico's detection avoidance is that Sanchirico is mainly interested in criminal and regulatory sanctions. As a result, he focuses on how to prevent attempts to avoid punitive first-order sanctions, a problem with a slightly different structure than trying to prevent attempts to avoid compensatory damages.
224. Id. at 1337;
225. see also id. at 1352-60 (describing costs of detection avoidance).
226. The "and so on" leads Sanchirico to make another, more ambitious claim: Sanctioning activity X encourages another activity X+i in the form of effort exerted to avoid detection of Xby those who still choose to engage in X. Stating the principle in these general terms makes clear that it is recursive. Because the formula applies to any activity X, we are free to substitute "detection avoidance" itself for X, whereby it begets an X+1 equal to effort exerted to avoid detection of detection avoidance. Indeed, nothing stops us from returning to the formula with "detection avoidance of detection avoidance," substituting this for X, and generating, as X+1, effort exerted to avoid detection of detection avoidance of detection avoidance. And we may continue like this ad infinitum, repeatedly inputting the last application's output. Id. at 1368.
227. I do not think the recursivity claim is essential to Sanchirico's argument as a whole. In any case, it appears overstated. One typically says that a series is "recursive" only if its definition applies the same function to each member of the series to arrive at the next. But as Sanchirico recognizes, the incentives to engage in detection avoidance vary from one level to the next. Id. at 1369. A wrongdoer's reasons to engage in Z+1-level detection avoidance depend not only on the penalty for X-level detection avoidance, but also on the out-of-pocket cost of X+1-level detection avoidance, its chances of success, and its probability of detection. The latter factors vary stochastically from one level to the next, depending on the context. There is no a priori reason to think that there will not be some level of detection avoidance where the next higher level will, as a factual matter, be so difficult that it will not be worth the cost (perhaps even without a higher-order penalty), putting an end to the regress.
228. On the potential economic utility of damage multipliers, see Robert D. Cooter, Punitive Damages for Deterrence: When and How Much?, 40 ALA. L. REV. 1143 (1989) ;
229. and A. Mitchell Polinsky & Steven Shavell, Punitive Damages: An Economic Analysu, 111 HARV. L. REV. 869 (1998).
230. For some of the complications in establishing the proper multiplier and alternative approaches, see Craswell, supra note 127;
231. and Keith N. Hylton & Thomas J. Miceli, Should Tort Damages Be Multiplied?, 21 J.L. ECON. & ORG. 388 (2005).
232. The statement that multiplied compensatory damages give the promisor the right incentive to perform glosses over a number of complexities in the attempt to use a single remedy to induce both sides to behave efficiently throughout the entire transaction. See generally Craswell, supra note 124;
233. Richard Craswell, In That Case, What Is the Question? Economics and the Demands of Contract Theory, 112 YALE L.J. 903, 907-10 (2003).
234. In practice, most multipliers are not simply dynamic or static, but somewhere in between, depending on how fine-grained or fact-dependent they are. The idea of a "perfectly" dynamic multiplier is a theoretical fiction, useful in my analysis, but not to be mistaken as a description of how any multiplier actually works. Richard Craswell reports: "[M]ost legal systems do not use multipliers that are calculated case by case. Instead, they use multipliers set at the same level for all defendants, or fines set at the same level for all defendants, or compensatory damages with no multipliers at all." Craswell, supra note 127, at 2198.
235. Craswell's article provides the most comprehensive examination of the relative merits of static and dynamic multipliers. Other proponents of multipliers often ignore the issue. Polinsky and Shavell, who are relatively optimistic about the ability of factfinders to calculate the probability of enforcement, still recognize the danger of error and recommend that "the legislature ... set damages multipliers for separate categories of wrongful conduct, based on rough assessments of the different chances of escaping liability in the various settings." Polinsky & Shavell, supra note 139, at 893.
236. This point is a variation on Robert Cooter's observation that when "lawmakers can identify socially desirable behavior, but are prone to error in assessing the cost of deviations from it, then sanctions are preferable to prices." Robert Cooter, Prices and Sanctions, 84 COLUM. L. REV. 1523, 1524 (1984). The multiplier option shows that the relevant difficulty can include not only "assessing the costs of deviation," but also assessing the probability of enforcement.
237. Craswell, supra note 127, at 2193-94.
238. Alan Schwartz has identified a related problem with static multipliers: because the probability that the promisee will sue is endogenous, a function of the damage measure itself, the parties will find it difficult to agree on the right multiplier. Schwartz, supra note 64, at 399-401.
239. And Ian Weiner notices a similar effect in criminal law: "Raising the sanction for the original crime may be counterproductive because it will increase the incentives for criminals to avoid arrest." Ian C. Wiener, Running Rampant: The Imposition of Sanctions and the Use of Force Against Fleeing Criminal Suspects, 80 GEO. L.J. 2175, 2182 (1992).
240. Jennifer Arlen has observed that variable fines for corporate wrongdoing could, in theory, achieve similar benefits in the criminal context. Jennifer Arlen, The Potentially Perverse Effects of Corporate Criminal Liability, 23 J. LEGAL STUD. 833, 849 (1994). Like me, Alen thinks the costs of case-by-case calculations of the probability of enforcement "place this solution beyond the realm of realistic alternatives." Id.
241. A society of econometric superheroes could address imperfect verification of obstruction by adding to the generic first-order multiplier a generic obstruction multiplier. Damages for first-order breach would men be multiplied twice. The first multiplier would take account of the probability of enforcement of the first-order breach, given all that is known about the situation, while proof of obstruction would trigger a second multiplier, designed to account for the possibility that those obstructive tactics might have gone undetected or unproven. Mere mortals will find this a difficult solution. First, calculating the appropriate multiplier would be more complex than simply multiplying by the reciprocal of the probability that the obstructive behavior in question would go unverified. Such simple multipliers work only where nonverification results in no damage award. In a dynamic multiplier regime, no proof of obstructive behavior does not result in no award, but in an award that is too low. Second, the problem of quantification is even more intractable in the case of obstruction multipliers, which require the factfinder to evaluate the likelihood that bad behavior that is designed to be hidden but has been discovered and proven might not have been.
242. See Keith N. Hylton & Thomas J. Miceli, Should Tort Damages Be Multiplied?, 21 J.L. ECON. &ORG. 388, 403-11 (2005) (deriving generic multipliers from empirical studies of different categories of tort litigation).
243. See generally Daniel Kahneman et al, Shared Outrage and Erratic Awards: The Psychology of Punitive Damages, 16 J. RISK & UNCERTAINTY 49 (1998);
244. Cass R Sunstein et al., Assessing Punitive Damages (with Notes on Cognition and Valuation in Law), 107 YALE L.J. 2071, 2111-12 (1998);
245. W. Kip Viscusi, The Social Costs of Punitive Damages Against Corporations in Environmental and Safety Torts, 87 GEO. L.J. 285, 327-32 (1998).
246. But see David Luban, A Flawed Case Against Punitive Damages, 87 GEO. L.J. 359, 369-70 (1998) (questioning Viscusi's analysis of juror biases).
247. See Polinsky & Shavell, supra note 139, at 892.
248. See Craswell, supra note 124, 664-65 (discussing risk aversion and the effect of multipliers on precaution decisions);
249. Polinsky & Shavell, supra note 139, at 886-87 (noting effect of riskaversion on optimal multipliers).
250. See generally MINORITY STAFF OF THE SPEC. INVESTIGATIONS DIV. OF THE H. COMM. ON GOV'T REFORM, HALLIBURTON'S PERFORMANCE UNDER THE RESTORE IRAQ. OIL 2 CONTRACT (2006).
251. Id. at 13.
252. James Glanz, Rebuilding of Iraqi Oil Pipeline as Disaster Waiting To Happen, N.Y. TIMES, Apr. 25, 2006, at Ai. The Times quotes a senior Oil Ministry official, who "said he began hearing rumors from Iraqis in the ministry in Baghdad that something had gone terribly wrong, but the company itself seemed determined not to clarify what had happened. 'We couldn't get a good status report,' Mr. Vogler said. 'We kept asking for it____We couldn't get one.'" Id. The Army Corps of Engineers colonel in charge of the project told the Times that "KBR provided him with optimistic assessments neariy to the end of the line ... and he was convinced that the project would be a success." Id.
253. 10 U.S.C. § 2313(a)-(c) (2007).
254. Section 2313 stipulates that it is not to be read to require government contractors to keep any records other than those they would otherwise maintain in the normal course of business. Id. § 2313(c)(3).
255. MINN. STAT. § 604.10(e) (2000);
256. see also Tourek et al., supra note 103, at 927-38 (describing history of Minnesota statute).
257. See generally Ian Ayres & Robert Gertner, Majoritarian vs. Minoritarian Defaults, 51 STAN. L. REV. 1591 (1999).
258. See, e.g., KIMEL, supra note 13, at 100-109 (arguing against specific performance remedy based on Mill's harm principle) ;
259. Ian R Macneil, supra note 60 (applying reliance theory to justify rule against penalty clauses);
260. Ernest J. Weinrib, Punishment and Disgorgement as Contract Remedies, 78 CHI.-KENT L. REV. 55, 84-102 (2003) (maintaining that principles of corrective justice argue against punitive damages for breach of contract).
261. But see Curtis Bridgeman, Note, Corrective Justice in Contract Law: Is There a Case for Punitive Damages?, 56 VAND. L. REV. 237 (2003) (applying corrective justice considerations to argue for punitive damages in contract).
262. Special mention should be made of Daniel Markovits's suggestion that punitive damages might be appropriate whenever a promisor "refuses to pay the compensatory expectation damages that vindicating contractual collaboration requires." Daniel Markovits, Contract and Collaboration, 113 YALE L.J. 1417, 1510 (2004). What Markovits is describing here seems to be, in my terminology, a duty not to obstruct, perhaps akin to that created by Seaman's. But I believe that Markovits's argument entails that both the obligation and the remedy are mandatory, since both derive from the promisor's moral duty to treat the promisee as an end in herself. Cf. id. at 1505-08 (arguing that the parties should not be allowed to contract for reliance or other sub-expectation damage measures).
263. I borrow this way of posing the question from Alan Klevorick: [T]he critical observation is that the explication of why some acts are crimes while others are not requires an inquiry into the legitimation of the transaction structure. It forces one to confront questions like: Why does the collectivity have the right to decide the terms on which particular transactions will take place under different circumstances? Why do some rights reside in the individual while others rest with the state? Alan Klevorick, The Economics of Crime, in 27 CRIMINAL JUSTICE: NOMOS 288, 303 (J. Roland Pennock & John W. Chapman eds., 1985);
264. see also Jules Coleman, Crimes and Transactions, 88 CAL. L. REV. 921, 924 (2000) ("[S]omeone who violates the transaction structure has asserted an authority that he does not possess. The power to set the terms of legitimate transfer resides in the political sovereignty and not in ordinary folk. ").