Strategic contracting: Contract law as a source of competitive advantage

American Business Law Journal

Volumn 47, Issue 4, 2010, Pages 727-794

  DiMatteo, Larry A ^a  

^a UNIVERSITY OF FLORIDA   (United States)

Author keywords

[No Author keywords available]

Indexed keywords

EID: 78649377973     PISSN: 00027766     EISSN: 17441714     Source Type: Journal    
DOI: 10.1111/j.1744-1714.2010.01108.x     Document Type: Article

References (230)

1. Larry Downes, First, Empower All the Lawyers, Harv. Bus. Rev., Dec. 2004, at 19. This commentator states: "[L]awyers and corporate leaders who understand the law and the structures of power in the U.S.A. have a unique capacity to achieve business ends."Id.
2. Rachelle C. Sampson, The Role of Lawyers in Strategic Alliances, 53 Case W. Res. L. Rev. 909, 926 (2003) (quoting How to Make Mergers Work, Economist, Jan. 9, 1999, at 15, 16).
3. Ronald J. Gilson, Value Creation by Business Lawyers: Legal Skills and Asset Pricing, 94 Yale L.J. 239, 293 (1984).
4. See Robert C. Bird, Pathways of Legal Strategy, 14 Stan. J.L. Bus. & Fin. 1 (2008) ("Bagley's holistic approach perceives legal problems as business problems that require business solutions through the partnering of corporate counsel and management to achieve strategic goals." (citing Constance E. Bagley, Winning Legally: The Value of Legal Astuteness, 33 Acad. Mgmt. Rev. 378 (2008)).
5. Tom Hinthorne, Predatory Capitalism, Pragmatism, and Legal Positivism in the Airlines Industry, 17 Strat. Mgmt. J. 251, 251 (1996).
6. Professor Hinthorne has offered a stark description of the strategic use of the law in a litigation setting, stating, "A corporate leader can use the adversary system to destroy or weaken an opposing stakeholder or to protect the corporation from the predatory actions of an opposing stakeholder."Id. at 261.
7. In a way the "strategic use of contracting" or "strategic contract" are misnomers because contracts are inherently strategic. One commentator notes that?[c]ontracting is a potentially strategic process as well as a legal process aimed at forming a binding document. Contracting forces parties to think in advance about important questions which are likely to arise well into the future of the venture. This kind of thinking is strategic in nature, as both business strategy and contract formulation are concerned with long-range development of relations and expectations between parties.?Steven R. Salbu, Parental Coordination and Conflict in International Joint Ventures: The Use of Contract to Address Legal, Linguistic, and Cultural Concerns, 43 Case W. Res. L. Rev. 1221, 1252 (1993).
8. Competitive advantage will be used here in two dimensions. First, it will be used to describe the designation of resources that are rare or unique, valuable, and difficult to imitate. Second, it will denote the notion of sustainable competitive advantage, in which the resource is inherently sustainable or where continuous measures need to be undertaken to extend its sustainability. For the purpose of this article, the different dimensions will not be of great importance-it will focus on both the use of law to create a competitive advantage and its use in sustaining a competitive advantage.
9. This article focuses on transactional law, an area in which contracts provide the core mechanism for interaction. There is, of course, a major role for legal strategy in the area of dispute resolution. Others have argued that legal strategy often determines legal outcome in the area of litigation. SeeLynn M. LoPucki & Walter O. Weyrauch, A Theory of Legal Strategy, 49 Duke L.J. 1405, 1485 (noting legal strategies that directly impact legal outcomes, including "rampant forum shopping in major business bankruptcies, the nullification of securities class action reform by the simple expedient of moving the litigation to another set of courts, and the lack of relationship between formal circuit rules governing the rules for publication of opinions and actual publication practices").2000
10. Over the past few decades, there has been seismic change in the types of contracts used in carrying out a business. From a body of contract law that was developed to accommodate a purchase-dominated economy, the economy and contract law transitioned to a system supplemented with the leasing of goods or services. The increase in popularity in the leasing of goods resulted in the enactment of Article 2A of the Uniform Commercial Code. U.C.C. §§ 2A-101 to -532 (2005)
11. More recently, we have experienced the growth of licensing, which is now a core contract type. In response, a model law-Uniform Computer Information Transactions Act-was drafted. Unif Computer Info. Transactions Act§§ 101-904 (2002). Unfortunately, the model law has been a failure with its acceptance only in the states of Maryland and Virginia. Andrea M. Matwyshyn, Hidden Engines of Destruction: The Reasonable Expectation of Code Safety and the Duty to Warn in Digital Products, 62 Fla. L. Rev. 109, 126 n.84 (2010).
12. The birth of limited liability companies is one example of a contract-centered method of doing business. See infra Part VI.C for a discussion and critique of the law related to limited liability companies.
13. An example is the explosion in the creation, bundling, and pooling of intellectual property rights into licensing contracts in order to increase the value of such rights. See R. Justin Koscher, Seminar Article, A Patent Pool's White Knight: Individual Licensing Agreements and the Procompetitive Presumption, 20 DePaul J. Art Tech. & Intell. Prop. L. 53, 87 ("Technology industries now frequently use patent pool arrangements because they allow firms to pursue innovation while reducing high licensing costs ..."); Courtney C. Scala, Note, Making the Jump from Gene Pools to Patent Pools: How Patent Pools Can Facilitate the Development of Pharmacogenomics, 41 Conn. L. Rev. 1631, 1646 (2009) ("[P]atent pooling arrangements create substantial efficiencies by reducing the transaction costs of multiple licensing negotiations.").(2009)
14. See generally Jean Braucher, Contract Versus Contractarianism: The Regulatory Role of Contract Law, 47 Wash. & Lee L. Rev. (coining the term "contractarianism" in describing the dangers of using the contract construct to explain other areas of law that are essentially noncontractual in nature).697 (1990)
15. See Timothy L. Fort & James J. Noone, Banded Contracts, Mediating Institutions, and Corporate Governance: A Naturalist Analysis of Contractual Theories of the Firm, Law & Contemp. Probs., Summer 1999, at 165 (proposing that "ethical constructs are essentially arguments of metaphors").
16. Paradigms or constructs are never perfectly self-contained models. One commentator notes this in discussing contract as construct: "Contract law is a human construct that is neither perfect nor all-inclusive. It is and must be augmented in real life by other areas of law that serve values other than individualism because people and their problems extend beyond the individualist paradigm."William J. Woodward, Jr., Contractarians, Community, and the Tort of Interference with Contract, 80 Minn. L. Rev. 1103, 1182 (1996).
17. See infra Part VI.B for a discussion of the nexus of contracts.
18. See Victor Fleischer, Brand New Deal: The Branding Effect of Corporate Deal Structures, 104 Mich. L. Rev. 1581 (2006).
19. Id. at 1583 ("An innovative deal structure may cost the company something in short-term efficiency, but it may pay dividends in the form of increased demand from consumers in the long run.").
20. Professor Fleischer explains the phenomenon of creating a "branding effect" in this way by noting that "the legal infrastructure of the deal had a branding effect: the design of the deal altered the brand image of the company."Id. at 1582.
21. See George J. Siedel, Six Forces and the Legal Environment of Business: The Relative Value of Business Law Among Business School Core Courses, 37 Am. Bus. L.J. 717, 735-37 (2000).
22. Globalization and entrepreneurship are not exclusive phenomena; however, for purposes of this discussion, entrepreneurship refers to the grassroots development of business ideas that may or may not have immediate global implications.
23. See Siedel, supra note 31, at 736.
24. Siedel, supra note 31, at 737.
25. Cf. Ronald J. Gilson et al., Contracting for Innovation: Vertical Disintegration and Interfirm Collaboration, 109 Colum. L. Rev. 431, ("[I]ncreases in the complexity of the technology and in the rate of change have made it difficult for a single firm to sustain state-of-the-art capacity across all the technologies necessary for successful product development.").448 (2009)
26. Of course, the choice is not limited to vertical integration versus collaborative alliances. Nevertheless, the trend toward contracting for innovation has been toward increased collaborative alliances, especially when the goal is to expand into a new product line or to pursue noncore activities. The management literature has generally shown that the choice of market entry between internal development or acquisition is largely a product of the degree of relatedness between a firm's existing products and the new product. Professor Yip argues that, the greater the relatedness, the more efficient choice is internal development, because the firm's core competencies can be leveraged to overcome barriers to entry. SeeGeorge S. Yip, Diversification Entry: Internal Development Versus Acquisition, 3 Strat. Mgmt. J. 331 (1982)
27. In a recent study, Lee and Lieberman show, however, that relatedness has a number of dimensions and that, even where the products are closely aligned, acquisition may still be a rational mode of entry. SeeGwendolyn K. Lee & Marvin B. Lieberman, Acquisition vs. Internal Development as Modes of Market Entry, 31 Strat. Mgmt. J. 140, 156 (2010)
28. This is due to the fact that core competency acquisitions not only serve the purpose of expansion, but also are used for the purpose of exploitation. For example, "acquisitions [may be] used to fill persistent gaps in the firm's product portfolio."Id. at 156. Their study did not look at other market entry strategies, such as joint ventures, franchising, collaborative alliances, and licensing. They note that, in the area of entry into foreign markets, "[f]oreign entrants often bring technological or marketing skills, but lack key resources relating to the foreign market. This can make partnering options, such as joint ventures and licensing arrangements ... more attractive than the direct establishment of a fully owned subsidiary."Id. at 156. The subject of the current undertaking is the use of strategic contracting in joint ventures (Part V.B), licensing (Parts II.B, III.A.2, and III.B.2), franchising (Part II.C), and collaborative alliances (Parts III.B.1 and V.A) between competitors.
29. Gilson et al., supra note 35, at 448 ("This ongoing process of vertical disintegration has stimulated the development of networks of explicit contracts among collaborating firms.").
30. Flexibility does not mean simplicity. In theoretical terms, the "richness" or deep texture of contract law dooms to failure a uniform theory or single normative framework, such as "contract as promise."See generally Charles Fried, Contract as Promise (asserting that contract law is best explained by the morality of promise keeping)(1981)
31. Nonetheless, in that complexity lies contract law's flexibility and adaptability, and therein lies contract's source of strategic advantage. See Peter A. Alces, Unintelligent Design in Contract, 2008 U. Ill. L. Rev. 505, 552 (noting "the necessary plasticity of contract doctrine")
32. See generally Robert A. Hillman, The Richness of Contract Law: An Analysis and Critique of Contemporary Theories of Contract Law (1997) (asserting that contract law is too complex to be explained by a single or unified theory; however, noting that the many theories of contract law are helpful in explaining different parts of that law). Professor Alces explains the complexity of contract law as follows:?Contract is an amalgam; it defies simple reduction, heuristic reduction, into accessible theoretical terms. The reason for that is largely because of the nature of Contract doctrine and because theoretical analysis cannot yield the results we would have it yield. ... Contract has a rich texture, too rich a texture to reduce as extant theories would have it reduce.?Id. at 554-55 (emphasis omitted). A management scholar refers to the elasticity of law in general as a means to gaining strategic advantage: "In complex, high-stake situations, the law is potentially elastic." Hinthorne, supra note 5, at 262 (emphasis omitted). Hinthorne, however, pessimistically argues that the elasticity is highly dependent upon a "client's stature and ability to pay."Id.
33. Guar. Sec. Co. v. Equitable Trust Co., 110 A. 860, 861 (Md. 1920).
34. See Final Analysis Commc'n Servs. v. Gen. Dynamics Corp., 253 F. Appx. 307, 312 (4th Cir. 2007).
35. Rothman v. Silver, 226 A.2d 308, 310 (Md. 1967).
36. The use of prior dealings or course of performance evidence in the interpretation of contracts is expressly authorized in the Uniform Commercial Code and the Restatement (Second) of Contracts. See U.C.C. §§ 1-303(b) & § 2-208 (2005)
37. Restatement (Second) of Contracts§§ 203(b), 202(5) (1981). The Restatement (Second) of Contracts defines "course of dealing" as "a sequence of previous conduct between the parties to an agreement which is fairly to be regarded as establishing a common basis of understanding for interpreting their expression and conduct." Restatement (Second) of Contracts§ 223(1) (1981).
38. This idea of contract as the product itself is often traced to Arthur Leff. See generallyArthur Allen Leff, Contract as Thing, 19 Am. U. L. Rev. 131 (1970) (noting that, in the area of consumer contracts, the contract is the product or at least a part of the product and should be regulated just like the physical thing). Leff used a purchase of an automobile as an example. Just like the automobile should be regulated for safety purposes, so should the contract of purchase. Id. at 145-47
39. see alsoOren Bar-Gill & Elizabeth Warren, Making Credit Safer, 157 U. Pa. L. Rev. 1 (2008) (credit contracts as the product); cf. John J.A. Burke, Contract as Commodity: A Nonfiction Approach, 24 Seton Hall Legis. J. 285, (showing, by example, a purchase involving a license agreement).286 (2000)
40. The metaphor of commodification refers to things not previously thought of as saleable property. The term has been used in numerous areas, such as the sale of information, human organs, and the human genome. See, e.g., The Commodification of Information (Niva Elkin-Koren & Neil Weinstock Netanel eds., 2002) (reviewing the numerous issues dealing with the commodification of information); Guido Calabresi, An Introduction to Legal Thought: Four Approaches to Law and to the Allocation of Body Parts, 55 Stan. L. Rev. 2113, 2114 (2003) (predicting that "whether we own our bodies and their parts or whether, instead, they belong, at least in some instances, to those who need them" will become an increasingly pressing issue); Meghan M. Overgaard, Note, Balancing the Interests of Researchers and Donors in the Commercial Scientific Research Marketplace, 74 Brook. L. Rev. 1473 (2009) (discussing the commercialization of science and the issue of gene patents).
41. See Daniel D. Barnhizer, Propertization Metaphors for Bargaining Power and Control of the Self in the Information Age, 54 Clev. St. L. Rev. 69(discussing the "propertization of personal information")., 70-71 (2006)
42. See Leff, supra note 47. For a more detailed discussion of Leff's thesis, see infra notes 216-21; supra note 47 and accompanying text.
43. Kristen Osenga, Information May Want To Be Free, but Information Products Do Not: Protecting and Facilitating Transactions in Information Products, 30 Cardozo L. Rev. 2099 (2009). Osenga notes:?Because traditional intellectual property regimes, as well as schemes like trade secret and misappropriation ..., fail to provide sufficient protection for information products, creators of these works often turn to other legal means, like contract, to limit the use (or misuse) of the products. Databases and software in particular have often found protection via contract and have been subject to both negotiated and shrink-wrap licenses.?Id. at 2116.
44. This is aided by the fact that "the nature of online contracting permits producers to hide their boilerplate terms far more effectively than even the finest of fine print [written forms]." Barnhizer, supra note 49, at 72.
45. See Julie Manning Magid et al., Radio Frequency Identification and Privacy Law: An Integrative Approach, 46 Am. Bus. L.J. 1, 24-32 (2009)
46. see also Symposium, Cyberpersons, Propertization, and Contract in the Information Culture, 54 Clev. St. L. Rev. 1, 1 (2006) (stating the core question of the Symposium as: "[W]ho should be allowed to generate or possess access to information about people who never authorized its collection and use [?]").
47. Magid et al., supra note 55, at 51 ("[A] significant threat to personal privacy arises not from the initial disclosure of personal information but more problematically from the subsequent reuse, transfer to third parties, and aggregation of that information ... [F]irms engage in buying and selling on a vast secondary market with no regard for the personal privacy implications.").
48. See Ken D. Kumayama, Note, A Right to Pseudonymity, 51 Ariz. L. Rev. 427, 427 (2009).
49. Matthew C. Jennejohn, Collaboration, Innovation, and Contract Design, 14 Stan. J.L. Bus. & Fin. 83, 84 (2008).
50. See Jean Braucher, Contracting Out of Article 2 Using a "License" Label: A Strategy That Should Not Work for Software Products, 40 Loy. L.A. L. Rev. 261, (explaining that software product transactions should be treated as "sales" under Article 2 because doing so works "well enough").263-64 (2005)
51. Copyright Act of 1976, 17 U.S.C. §§ 101-810 (2006).
52. See Maureen O'Rourke, Drawing the Boundary Between Copyright and Contract: Copyright Preemption of Software License Terms, 45 Duke L.J. 479, 491-92 (1995).
53. It should be noted that IT outsourcing here assumes that IT is not a core competency of the outsourcer. Outsourcing strategy theory suggests that a firm's best strategy is to develop and focus on core competencies where it has a competitive advantages; it then can benefit by outsourcing noncore activities. See James Brian Quinn, Strategic Outsourcing: Leveraging Knowledge Capabilities, MIT Sloan Mgmt. Rev., Summer 1999, at 9, 12.
54. This IT outsourcing scenario was inspired by Jérome Barthélemy, IT Outsourcing: The Goldilocks Strategy, Wall St. J., Dec. 15, 2008, at R3.
55. See Roger D. Blair & Franice Lafontaine, The Economics of Franchising 3-4 (2005) ("[A] franchise agreement is most often understood as a contractual arrangement between two legally independent firms in which one firm, the franchisee, pays the other firm, the franchisor, for the right to sell the franchisor's product and/or the right to use its trademarks and business format in a given location for a specified period of time.").
56. See Michele Lee, Note, Franchising in China: Legal Challenges When First Entering the Chinese Market, 19 Am. U. Int'l L. Rev. 949(citing David J. Kaufmann, Understanding Franchising, Business & Legal Issues 13 (2001))., 955 (2004)
57. See Int'l Franchise Ass'n, (last visited July 9, 2010).
58. See Dieter A. Schmitz & Alain Van Hamme, Franchising in Europe-The First Practical EEC Guidelines, 22 Int'l Law. 717, 717 (1988).
59. See infra Part V.B.
60. Gillian K. Hadfield, Problematic Relations: Franchising and the Law of Incomplete Contracts, 42 Stan. L. Rev. 927, 928 (1990).
61. For a discussion of the arguments for (quality control) and against (anticompetitive) such tying clauses, see Benjamin Klein & Lester F. Saft, The Law and Economics of Franchise Tying Contracts, 28 J.L. & Econ. 345 (1985).
62. "Disputes over territorial rights in the quick-service restaurant sector and in hotel chains have led many of the firms in these industries to include much more detailed territory definitions in their contracts."Francine Lafontaine & Roger D. Blair, The Evolution of Franchising and Franchise Contracts: Evidence from the United States, 3 Entrepreneurial Bus. L.J. 381, 433 (2009) (reviewing the common financial and nonfinancial terms found in most franchise contracts).
63. Lafontaine and Blair indicate that these terms do not appear to create many problems, because most franchise contracts are long term. See id. at 432. Specifically, they explain:?[T]he data show that franchise contracts usually are quite long term, with a very high tendency for the relationship to continue beyond the original term. When they do not continue beyond that point, it is often at the request of the franchisee that the relationship is terminated. Evidence suggests further that contract termination by franchisors serves a disciplining, or enforcement, role in these relationships, rather than being a manifestation of opportunistic behavior on the part of the franchisors.?Id.
64. See id. at 420 ("The desire to maintain flexibility in developing a franchised system is the main reason franchisors give for not granting exclusive territories to franchisees. ... [T]he main concern of franchisors that did not offer exclusive territories was that 'exclusivity would allow franchisees to hold them up through underdevelopment.'" (quoting Pierre Azoulay & Scott Shane, Entrepreneurs, Contracts, and the Failure of Young Firms, 47 Mgmt. Sci. 337, 353 (2001))).
65. Burger King Corp. v. Weaver, 798 F. Supp. 684, 689 (S.D. Fla. 1992).
66. Robert W. Emerson, Franchise Territories, A Community Standard, 45 Wake Forest L. Rev. (forthcoming 2010) (manuscript at 10) (on file with author) [hereinafter Emerson, Franchise Territories] ("Despite the loosening of antitrust restrictions, allocation of exclusive territories has declined."). Cf. Robert W. Emerson, Franchise Contracts and Territoriality: A French Comparison, 3 Entrepreneurial Bus. L.J. 315, 339 (2009) [hereinafter Emerson, French Comparison] ("In America, territory clauses are not nearly as prevalent [as in France].").
67. Emerson, Franchise Territories, supra note 82, manuscript at 8.
68. Emerson, French Comparison, supra note 82, at 340 (citing Camp Creek Hospitality Inns, Inc. v. Sheraton Franchise Corp., 139 F.3d 1396 (11th Cir. 1997) (finding that an implied covenant will not override express terms in a written franchise agreement)).
69. Emerson, French Comparison, supra note 82, at 339-40 (citing Scheck v. Burger King Corp., 798 F. Supp. 692 (S.D. Fla. 1992) and its progeny).
70. See Lafontaine & Blair, supra note 78, at 397 ("The chain's inability to deal with special circumstances, and the resulting lost franchise sales, was the main disadvantage of uniform financial contract terms cited by franchisors.").
71. See Arturs Kalnins, Overestimation and Venture Survival: An Empirical Analysis of Development Commitments in International Master Franchising Ventures, 14 J. Econ. & Mgmt. Strat. 933, 951 (2005) (attributing the frequency of failure of master franchise agreements in international markets to development schedules that are too aggressive).
72. See, e.g., George J. Siedel & Helena Haapio, Using Proactive Law for Competitive Advantage, 47 Am. Bus. L.J. 64 (2010) ("Legal scholars ... have explored aspects of legal strategy relating to competitive advantage and the role of law as a positive force within companies.").
73. The doctrine of promissory estoppel is rarely used in the area of precontract opportunism or bad faith negotiations.
74. See, e.g., U.C.C. § 1-304 (2005) (extending the obligation of good faith only to the performance or enforcement of a contract).
75. See G. Richard Shell, Opportunism and Trust in the Negotiation of Commercial Contracts: Toward a New Cause of Action, 44 Vand. L. Rev. 221, 235 (1991).
76. See id. at 231 (finding that many scholars believe market incentives are adequate to regulate this opportunistic behavior)
77. see also Daniel A. Graham & Ellen R. Peirce, Contract Modification: An Economic Analysis of the Hold-Up Game, 52 Law & Contemp. Probs. 9, 9 (1989) (arguing that contract modifications may not yield a pareto optimal result where one party is held hostage by the other; the weaker party-the party with large sunk costs-may agree to the one-sided modification "because of expected dire consequences should that party not agree to the modification.")
78. Subha Narasimhan, Of Expectations, Incomplete Contracting, and the Bargain Principle, 74 Cal. L. Rev. (noting that, because contracts are inherently incomplete, there is always a risk that one party may overreach in agreeing to modify the contract and that classical contract law's preexisting duty rule, which requires new bilateral consideration for modification, is an attempt to control completely one-sided modifications). 1123 (1986)
79. See Subha Narasimhan, Relationship or Boundary? Handling Successive Contracts, 77 Cal. L. Rev. 1077(arguing that classical contract law does not provide adequate protection against opportunistic behavior in "successive-contract relationships"), 1077-78 (1989)
80. This type of strategic advantage is seen in the area of output contracts where one company's business is entirely tied to the fortunes of the output buyer. A classic example is when a smaller company sells all of its output to a larger company. The larger company has multiple suppliers and can gain strategic advantage through the threat of reallocating its purchases to another supplier. The same can be said of requirement contracts where one party agrees to supply all the requirements of the other party. In the case of nonfungible goods, the threat of nonsupply may allow the supplier to gain strategic advantage.
81. See Scala, supra note 12 (describing the advantages of pooling patent rights).
82. See Jonathan M. Barnett, Property as Process: How Innovation Markets Select Innovation Regimes, 119 Yale L.J. 384(noting, in reference to patent pools, that "embedded cooperative arrangements that pool knowledge assets among various firms, thereby effectively lifting property rights protections among the participant group and preserving in part the low transaction cost structure of a sharing regime")., 429-30 (2009)
83. One source describes a patent troll as follows:?A patent troll is a person or entity who acquires ownership of a patent without the intention of actually using it to produce a product. Instead, the patent troll buys the patent and either licenses the technology to a person or entity that will incorporate the patent into a product, or it sues a person believed to already have incorporated the technology in a product without permission.?James F. McDonough III, Comment, The Myth of the Patent Troll: An Alternative View of the Function of Patent Dealers in an Idea Economy, 56 Emory L.J. 189, 189 (2006)
84. see also Robert E. Thomas, Vanquishing Copyright Pirates and Patent Trolls: The Divergent Evolution of Copyright and Patent Laws, 43 Am. Bus. L.J. 689, 692 (2006) ("Proposed patent reforms are designed to address the interests of large information technology (info-tech) companies seeking to reduce their exposure to patent trolls-nonproductive patent consolidators who acquire patents allegedly for the purpose of extorting a substantial settlement or judgment from productive companies.").
85. Ben Klemens, The Rise of the Information Processing Patent, 14 B.U. J. Sci. & Tech. L. 1, 28 (2008)."Until an inventor finds an investor to provide capital, she remains a non-producing patent holder."Id. See generally Thomas, supra note 98 (analyzing possible reforms to deal with the issue of patent trolls). For a review of the problems with business-method patents and their strategic use, see generally Robert E. Thomas & Larry A. DiMatteo, Harmonizing the International Law of Business Method and Software Patents: Following Europe's Lead, 16 Tex. Intell. Prop. L.J. 1 (2007) (providing comparative analysis of the U.S., European, and Japanese intellectual property systems' responses to business-method patents).
86. See U.S. Dep' t of Justice & Fed. Trade Comm 'n, Antitrust Guidelines for the Licensing of Intellectual Property (1995)
87. See Ian Edmondson & Yukari Iwatani Kane, Nokia Accuses Apple of Patent Infringement, Wall St. J., Oct. 23, 2009, at B3; Saul Hansell & Kevin J. O'Brien, In Lawsuit, Nokia Says iPhone Infringes Its Patents, N.Y. Times, Oct. 22, 2009, at B7.
88. See Edmondson & Kane, supra note 103.
89. See Hansell & O'Brien, supra note 103.
90. See Edmondson & Kane, supra note 103.
91. See Gilson et al., supra note 35, at 433 ("Conventional industrial organization theory predicts that when parties in a supply chain have to make transaction-specific investments, the heightened risk of opportunistic behavior by their counterparties will drive them away from contractual relationships and toward vertical integration.").
92. Id. at 434-35. For a discussion of transaction cost theory, see generally Oliver E. Williamson, Transaction-Cost Economics: The Governance of Contractual Relations, 22 J.L. & Econ. 233 (1979).
93. Rachelle Sampson explains:?Firms have a myriad of forms to choose from in organizing their alliance activities, ranging from simple licensing arrangements to more complex forms, such as the equity joint venture, where firms incorporate a separate entity for their collaborative efforts. These forms can be loosely grouped into two categories: purely contractual and institutional (i.e., the equity joint venture).?Sampson, supra note 2, at 913.
94. Sampson notes that perceived benefits from collaborative alliances include allowing?[f]irms ... [to] transfer technologies, achieve economies of scale, in manufacturing, marketing, and R&D, and access capabilities that may be difficult to develop in-house. Firms may even ally with competitors to set standards in an industry or to meet difficult time goals for the development of new technologies.?Id. at 909. Strategic alliances have grown in importance as globalization and technology have accelerated. Id. ("Recently, the frequency of firms participating in inter-firm collaborations has increased dramatically."). See alsoRanjay Gulati & Harbir Singh, The Architecture of Cooperation: Managing Coordination Costs and Appropriation Concerns in Strategic Alliances, 43 Admin. Sci. Q. (providing a review of the alliance literature)781 (1998)
95. David C. Mowery et al., Strategic Alliances and Interfirm Knowledge Transfer, 17 Strat. Mgmt. J. (examining the effect international collaborative agreements have on the transfer of interfirm knowledge); Laura Poppo & Todd Zenger, Do Formal Contracts and Relational Governance Function as Substitutes or Complements?, 23 Strat. Mgmt. J. 707 (2002) (discussing how formal contracts and relational governance complement each other rather than work against each other).77 (1996)
96. See Sampson, supra note 2, at 909 ("Firms may transfer technologies, achieve economies of scale in manufacturing, marketing or R&D, and access capabilities that may be difficult to develop in-house.").
97. See id. at 910 ("Firms may even ally with competitors to set standards in an industry or to meet difficult time goals for development of new technologies.").
98. Steven R. Salbu & Richard Brahm, Strategic Considerations in Designing Joint Venture Contracts, 1992 Colum. Bus. L. Rev. 253, 303.
99. Gilson et al., supra note 35, at 463-67.
100. Alternatively, a patent pool may also be defined as "the aggregation of intellectual property rights which are the subject of cross-licensing, whether they are transferred directly by patentee to licensee or through some medium, such as a joint venture, set up specifically to administer the patent pool." U.S. Patent and Trademark Office, Patent Pools: A Solution to the Problem of Access in Biotechnology Patents? 4 (2000), (citation omitted).
101. See supra Part III.A.2.
102. Stuart J.H. Graham & Ted Sichelman, Why Do Start-Ups Patent?, 23 Berkeley Tech. L.J. 1063, 1066 (2008).
103. "Contract doctrine" as used here is to be broadly construed to include not only the rules of contract law, but also principles and standards enunciated in contract law.
104. One commentator has noted that strategic posturing may prevent the consummation of a deal. Scott R. Peppet, Contract Formation in Imperfect Markets: Should We Use Mediators in Deals?, 19 Ohio St. J. on Disp. Resol. 283, 286 (2004) ("[T]ransaction costs, information asymmetries, and strategic behavior may keep parties from consummating deals. ..."). Peppet wonders whether these failings require the addition of a neutral party to facilitate the deals. Id. ("Is there a role for a different kind of player in transactions-a player who could help parties, including business lawyers, to overcome these various market imperfections as they negotiate the terms and conditions of a deal?"). Ultimately, he recommends the use of nonlawyer, transactional mediators. Id. at 286, 367.
105. See, e.g., supra note 90 and accompanying text.
106. See Juliet P. Kostritsky, Bargaining with Uncertainty, Moral Hazard and Sunk Costs: A Default Rule for Precontractual Negotiations, 44 Hastings L.J. 621, (examining the risks of opportunism).642-63 (1993)
107. Formal or informal contract language always retains a certain amount of ambiguity. This is especially true when language, whether oral or in written form, is used strategically. This produces some costs and benefits. "The lack of certainty leaves certain content hanging in the air, as it were, leaving each party to the conversation with an option of understanding the full communicated content somewhat differently." Andrei Marmor, Can the Law Imply More Than It Says?-On Some Pragmatic Aspects of Strategic Speech 14 (S. Cal. Legal Studies Working Paper Series, Paper 55, 2009), available at. The benefits are that it may allow the deal to be made in the first place. It provides flexibility in the development of a long-term contractual relationship, which implies that strategic or ambiguous language may lead to greater cooperation. The cost or risk is that the parties settle on mutually exclusive interpretations, which can stifle cooperation and lead to dispute.
108. In the area of consumer contracts, a source of contractual incompleteness is the ambiguity of boilerplate terms. One commentator notes that "[m]uch of boilerplate is ambiguous or incomprehensible. This alienates consumers and is increasingly punished by the courts construing the language against the drafter." Michelle E. Boardman, Contra Proferentem: The Allure of Ambiguous Boilerplate, in Boilerplate: The Foundation of Market Contracts 176, 176 (Omri Ben-Shahar ed., 2007).
109. U.C.C. § 2-615 states in part that a party is not in breach of a contract "if performance as agreed has been made impracticable by the occurrence of a contingency the non-occurrence of which was a basic assumption on which the contract was made." U.C.C. § 2-615 (2005).
110. See United Nations Conference on Contracts for the International Sale of Goods, Mar. 10-Apr. 11, 1980, Final Act of the United Nations Conference on Contracts for the International Sale of Goods, Annex I, U.N. Doc A/CONF.97/18 (Apr. 10, 1980), reprinted in 19 Int'l Legal Materials 668, 689 (1980) [hereinafter CISG]. CISG Article 79(1) states: "A party is not liable for a failure to perform ... if he proves that the failure was due to an impediment beyond his control and that he could not reasonably be expected to have taken the impediment into account at the time of the conclusion of the contract or to have avoided or overcome it or its consequences."Id.
111. 2 E. Allan Farnsworth, Farnsworth on Contracts§ 9.6, at 646 (3d ed. 2004) ("[T]he foreseeability of the event will often be a factor that suggests the promisor assumed the risk of its occurrence." (emphasis added)).
112. Id. at 647 ("A court may deduce ... that parties should be responsible for risks that are within their control. ..." (emphasis added)).
113. Id. at 636 (noting that courts generally focus on "the increased burden on the party that is to perform").
114. See generally Int'l Chamber of Commerce, ICC Force Majeure Clause and ICC Hardship Clause, ICC Publication No. 650 (2003), (providing examples and language for tailoring customized clauses).
115. 2 Farnsworth, supra note 140, § 9.1, at 585; § 9.6, at 633; § 9.9a ("Drafting Clauses to Deal with Changed Circumstances").
116. Boilerplate force majeure clauses generally do not excuse a nonperforming party due to mere hardship, such as making less profit than anticipated. A hardship clause is a type of expanded force majeure clause that could be utilized when there is a lack of an undue burden to perform. For example, it may provide for a right to terminate if an unexpected increase in cost of production occurs even though it is not of such a magnitude to make the contract unprofitable to the party claiming a hardship. See Int'l Chamber of Commerce, supra note 143.
117. See U.C.C. § 2-718(1) (2005) ("A term fixing unreasonably large liquidated damages is void as a penalty.").
118. See Council of Europe, Comm. of Ministers, Resolution 78(3), Relating to Penal Clauses in the Civil Law (Jan. 20, 1978) [hereinafter Comm. of Ministers]. The civil law still is the law of sales in Louisiana; therefore, courts do not inquire as to whether the liquidated damages amount approximates actual damages. See, e.g., Pembroke v. Gulf Oil Corp., 454 F.2d 606, 611-12 (5th Cir. 1971).
119. See Comm. of Ministers, supra note 147, art. 7.
120. See generally Larry A. DiMatteo, Penalties as Rational Response to Bargaining Irrationality, 2006 Mich. St. L. Rev. 883 (arguing that penalty clauses serve many rational purposes, including incentivizing performance, providing performance insurance, compensating for the undercompensatory nature of common law damages, reducing transaction costs in the negotiation stage, and reducing dispute resolution costs)
121. Larry A. DiMatteo, A Theory of Efficient Penalty: Eliminating the Law of Liquidated Damages, 38 Am. Bus. L.J. 633 (2001) [hereinafter DiMatteo, Theory] (advancing a theory of efficient penalty, promoting the elimination of the no-penalty rule, and advocating the use of the doctrine of unconscionability and the remedy of reformation to police penalty clauses).
122. One commentator gives an example of signaling in the area of franchise contract law, asserting that signaling may explain franchisors' choice of royalty rates, as well as their tendency to operate outlets directly. Francine Lafontaine, Contractual Arrangements as Signaling Devices: Evidence from Franchising, 9 J.L. Econ. & Org. 256, 257 (1993).
123. See Jonathan S. Solórzano, An Uncertain Penalty: A Look at the International Community's Inability to Harmonize the Law of Liquidated Damage and Penalty Clauses, 15 Law & Bus. Rev. Am. 779 (2009)
124. Solórzano notes:?In common law countries it is ... safe to make the generalization that a court will not enforce an agreement for one party to pay a prearranged sum in the event of breach if that sum was not meant to be a bona fide pre-estimate of the likely amount of damages.?Id. at 780. He contrasts the common law approach to the approach in civil law countries. Id. at 782 ("[C]ivil [law] systems view penalty clauses as an efficient way to encourage performance, which leads to more commercial certainty and reduces the costliness of litigation to determine damages after the fact.").
125. See 2 Farnsworth, supra note 140, § 5.3, at 24-25 ("[P]ost-employment restraints are sustained only if the employer stands to lose its investment in confidential information.").
126. See Larry A. DiMatteo, Contracts and Precedents, 2009 Transactions: Tenn. J. Bus. L. 262, 268.
127. One exception would be California law, which voids all covenants not to compete. Cal. Bus. & Prof. Code§ 16600 (West 2008).
128. See Lee Burgunder, Legal Aspects of Managing Technology 240 (4th ed. 2007) ("[C]ourts view the clauses with skepticism and will enforce them only to the extent deemed reasonable under the circumstances.").
129. Some states, such as California, prohibit covenants not to compete. See Cal. Bus. & Prof. Code§ 16600. In states where covenants not to compete are not favored by the courts, the strategic use of confidentiality agreements and nonsolicitation agreements become especially important.
130. 1 Farnsworth, supra note 140, § 4.28, at 585 ("Most cases of unconscionability involve a combination of procedural and substantive unconscionability, and it is generally agreed that if more of one is present, then less of the other is required.").
131. See Larry A. DiMatteo & Bruce Louis Rich, A Consent Theory of Unconscionability: An Empirical Study of Law in Action, 33 Fla. St. U. L. Rev. 1067, 1100 (2006).
132. For a chart showing the major differences between the UCC and CISG, see Larry A. DiMatteo & Lucien J. Dhooge, International Business Law: A Transactional Approach 260 (2d ed. 2006).
133. See CISG, supra note 139, arts. 47, 48.
134. See, e.g., Nathan Isaacs, The Standardizing of Contracts, 27 Yale L.J. 34 (1917) (first to use the term "standard form contracts" and to question classical contract law's ability to explain them as consensual instruments); Karl N. Llewellyn, The Common Law Tradition 370 (1960) (attempting to solve the problem of consent and standard terms through the concept of "blanket assent" to all reasonable standard terms); Symposium, 'Boilerplate': Foundations of Market Contracts, 104 Mich. L. Rev. 821 (2006) (recent attempt to address "the challenge that standard-form contracts pose for contract law doctrine").
135. Cf. Lucian A. Bebchuk & Richard A. Posner, One-Sided Contracts in Competitive Consumer Markets, 104 Mich. L. Rev. 827, (noting that a company's "expectation of doing business with other consumers in the future may dissuade it from enforcing a one-sided contract to the hilt")828 (2006)
136. Jason Scott Johnston, The Return of Bargain: An Economic Theory of How Standard-Form Contracts Enable Cooperative Negotiation Between Businesses and Consumers, 104 Mich. L. Rev. 857, ("[F]irms ... have given their managerial employees the discretion to grant exceptions from the standard-form terms on a case-by-case basis.").858 (2006)
137. Robert B. Ahdieh, The Strategy of Boilerplate, 104 Mich. L. Rev. 1033, 1036 (2006). See also Marcel Kahan & Michael Klausner, Standardization and Innovation in Corporate Contracting (Or "The Economics of Boilerplate"), 83 Va. L. Rev. 713 (1997) (examining event risk clauses in bond offerings; concluding that the use of standard terms taken from past transactions leads to suboptimal standard terms partially due to the switching costs of changing or customizing terms internally used in contracting).
138. See Ahdieh, supra note 165, at 1038-39.
139. Adhieh notes that, even if the term is more favorable to the other party, it still may send a negative signal. Id. at 1045 ("[E]ven a favorable deviation from boilerplate could constitute an adverse signal. This may simply be an issue of raising suspicions regarding the reason for the deviation.").
140. See Russell Korobkin, The Status Quo Bias and Contract Default Rules, 83 Cornell L. Rev. 608(framing a term as the norm influences a party's preferences)., 625-33 (1998)
141. Korobkin states that "in an industry with a default rule requiring mandatory arbitration of commercial disputes, a proposal to contract around the default and provide access to courts might signal that the proposing party would have an advantage in court relative to the receiving party or be at a disadvantage in arbitration. This information about the proposing party could strengthen the receiving party's preference for arbitration."Id. at 650.
142. Standby letters of credit and performance bonds guarantee the performance of a contract obligation, such as timely construction of a building. The difference is that standby letters of credit are issued by commercial banks and performance bonds by insurance companies. See Int'l Chamber of Commerce, International Standby Practices, ICC Publication No. 590 (1998). An example of the creative use of performance bonds is a District of Columbia ordinance that requires someone applying for incentives to build "green" to guarantee the building will conform to required standards by requiring a performance bond. 54 D.C. Reg. 3019 (Apr. 6, 2007).
143. Amanda Harmon Cooley et al., Morality and Money: Contractual Morals Clauses as Fiscal and Reputational Safeguards, 14 J. Legal Stud. Bus. 1, 29 (2008).
144. James E. Holloway, The Practical Entry and Utility of a Legal-Managerial Framework Without the Economic Analysis of Law, 24 Campbell L. Rev. 131, 133 (2002).
145. Professor Holloway explains that "[t]he framework relies on pre-decisional evaluation of laws and policies, utilizing business theories and principles to ascertain the effects of these laws and policies on business methodology and thinking."Id.
146. Professor Siedel argues that six forces-"regulation, litigation, globalization, entrepreneurship, technology, and compliance"-have made the strategic use of the law a business imperative. Siedel, supra note 31, at 738. He states that "the legal environment plays an increasingly important role in the success of the firm..."Id.
147. See Martin E. Segal, Preventative Law for Business Professionals (2005) (noting that most legal problems, and many business problems, could be prevented if the parties had used an "anticipatory thinking approach" at the onset of the enterprise or transaction).
148. See Thomas D. Barton, Preventive Law and Problem Solving: Lawyering for the Future (2009).
149. Gilson et al., supra note 35, at 434 ("Despite conventional industrial organization theory, however, contemporary practice is moving away from vertical integration.").
150. See David Orozco, Rational Design Rights Ignorance, 46 Am. Bus. L.J. 573, 573 (2009) ("[V]arious departments routinely forfeit the ability to exploit coordinated design-related intellectual property rights."). Failing to recognize existing intracompany innovations results in the generation of "suboptimal legal rights, particularly product design rights."Id. at 574. See alsoConstance E. Bagley, Winning Legally: The Value of Legal Astuteness, 33 Acad. Mgmt. Rev. 378 (2008) (discussing the importance of firm decision makers having or obtaining legal knowledge in order to coordinate their firm's various innovation-creating activities).
151. Companies fail to recognize and obtain trademarks that have been "found to positively impact shareholder value." Orozco, supra note 178, at 574.
152. See Gilson et al., supra note 35, at 435.
153. Id. at 451-52 ("Explicit contracts can protect, and thereby encourage, specific investments, which are often critical to transactions that contemplate more than a single simultaneous exchange.").
154. Id. at 453 (noting that the parties may "draft a formal contract with vague standards, i.e., 'soft' terms that invite subsequent adjustment").
155. Id. at 453 ("Because the hard terms of such an intentionally incomplete contract do not change based on what actually happens, they may be inefficient ex post ...."). Jennejohn notes another reason to avoid hard and explicit terms: "The reason that parties do not rely exclusively on explicit terms ... is that contract terms provide a corresponding opportunity for a party to hold-up the relationship through litigation." Jennejohn, supra note 58, at 99.
156. Cf. Gilson et al., supra note 35, at 457-58.
157. See Jennejohn, supra note 58, at 87-88.
158. See Gilson et al., supra note 35, at 435 ("The inability of the parties to specify ex ante the nature of the product to be produced or its performance characteristics means that the terms of performance will be determined by the very governance process the contract creates.").
159. See Bird, supra note 4, at 12.
160. See Bryan Borys & David B. Jemison, Hybrid Arrangements as Strategic Alliances: Theoretical Issues in Organizational Combinations, 14 Acad. Mgmt. Rev. 234, 235 (1989).
161. Gilson, Sabel, and Scott state:?In [such an uncertain and fluid] environment, we observe contracts in which parties create elaborate governance mechanisms in lieu of the more familiar risk-allocation provisions of conventional contracts. The contracts can be arrayed along a continuum, ranging from contractual relationships that impose no formally enforceable obligations on the parties but that contemplate ongoing relationships of unlimited duration, to collaborative research agreements that look to the development of a particular product and a consequent end game. In each case, there is an iterated process of continuous collaboration and innovation that functionally substitutes for ex ante specification of the desired product.?Gilson et al., supra note 35, at 449.
162. Sampson, supra note 2, at 910.
163. See generally Allan W. Vestal, "Ask Me No Questions and I'll Tell You No Lies": Statutory and Common-Law Disclosure Requirements Within High-Tech Joint Ventures, 65 Tul. L. Rev. 705 (1991) (discussing problems of high-technology international joint ventures regarding the exchange and use of proprietary information).
164. There are costs of using the equity joint venture as a means of coordination through internal governance structures:?[T]he equity joint ventures permit firms to adapt to unforeseen contingencies that arise over the course of the alliance in a more coordinated fashion, ... [but] the mechanisms that facilitate greater coordination and control in an alliance also introduce bureaucratic costs. ... Given these costs, firms should use equity joint ventures only where alliance activities require more substantial coordination and control.?Sampson, supra note 2, at 917. See alsoRachelle C. Sampson, The Cost of Misaligned Governance in R&D Alliances, 20 J.L. Econ. & Org. 484 (2004) (examining the cost of misaligned governance in the context of research and development alliances).
165. Salbu & Brahm, supra note 119, at 255; see alsoSteven R. Salbu, Joint Venture Contracts as Strategic Tools, 25 Ind. L. Rev. 397 (1991) (arguing that the joint venture agreement must provide a mechanism for future change and asserting that relational contract theory best explains joint ventures which means joint venture agreements should provide "reasonable levels of uncertainty, ambiguity, and risk" in order to "enhance relational development").
166. Salbu & Brahm, supra note 119, at 258-61.
167. See supra notes 152-57 and accompanying text for a discussion of how this strategy to "terrorize" parties from targeted misconduct plays out in the employment context though overly restrictive covenants not to compete.
168. See DiMatteo, Theory, supra note 149 (arguing that penalty clauses serve appropriate purposes and are efficient in some contexts); cf. Ann Morales Olazábal, Formal and Operative Rules in Overliquidation Per Se Cases, 41 Am. Bus. L.J. 503 (2004) (recommending judges avoid using actual damages arising from a contract breach as an indicator of whether the parties' pre-breach estimate was reasonable and instead adopt a prospective-only view of the reasonableness of damage stipulations).
169. Michael A. Rabkin, Tactical Interdependence and Institutionalized Trust: The Unrecognized Risks of Joint Ventures Among Competitors, 7 DePaul Bus. & Com. L.J. 63, 84(2008).
170. See George S. Geis, An Embedded Options Theory of Indefinite Contracts, 90 Minn. L. Rev. 1664, 1680-82 (2006)
171. see alsoB. Douglas Bernheim & Michael D. Whinston, Incomplete Contracts and Strategic Ambiguity, 88 Am. Econ. Rev. 902 (1998) (asserting that incompleteness or ambiguity in contracts is strategically necessary, especially for matters that are not verifiable).
172. Salbu, supra note 7, at 1228; see alsoD. Gordon Smith, The Exit Structure of Venture Capital, 53 UCLA L. Rev. 315 (2005) (arguing that exit provisions in venture capital contracts serve to keep the venture capitalist invested in the enterprise in the early stages, but over time the ability of the capitalist to exit is liberalized through the capitalist acquiring additional seats on the board of directors).
173. See D. Gordon Smith, The Exit Structure of Strategic Alliances, 2005 U. Ill. L. Rev. 303, 317 (concluding that contractual boards are "an important vehicle for discovering and disseminating information about the activities of the alliance" and additionally asserting that "contractual boards also play a somewhat surprising role in the exit structure of many alliances: They serve as a means of exit without breach").
174. See Salbu & Brahm, supra note 119, at 306.
175. For a review of contract drafting techniques, see generally Symposium, Teaching Drafting and Transactional Skills-The Basics and Beyond, 2009 Transactions: Tenn. J. Bus. L. 3.
176. See William J. Woodward, Jr., Clearing the Underbrush for Real-Life Contracting, 24 Law & Soc. Inquiry 99, 101 (1999) ("The 1980s and 1990s have witnessed perhaps an unprecedented growth of legal, political, and economic analysis based on a ...'contractarian' model, which in turn, is built on an individualist, largely objectivist model." (internal citation omitted))
177. The problem with scholars' attempts to apply contractarian models to areas outside of contract, especially by those with limited knowledge of contract law or contract theory, is that they may have a simplified view of contract law, which rationalizes the institution of contract law as representing a single purpose or theory or a cluster of related purposes or theories. A common cluster of the purpose of contract law is to advance personal freedom or private autonomy. Thereby, it is purely characterized as a privately controlled, individualistic domain. See Alces, supra note 38. Professor Alces states that any theory of contract is at best a heuristic and heuristics are "necessarily over- and under-inclusive, much like all rules."Id. at 551.
178. Braucher, supra note 13, at 697.
179. Id. ("Legal theorists in recent years have developed 'contract' as a central concept to explain more and more topics.").
180. Because of this, Braucher asserts that "[c]ontract [law] ... is not contractarian."Id. at 699.
181. See T.M. Scanlon, Contractualism and Utilitarianism, in Utilitarianism and Beyond 110-15 (Amartya Sen & Bernard Williams eds., 1982); Donald R. Korobkin, Contractarianism and the Normative Foundations of Bankruptcy Law, 71 Tex. L. Rev. 541, 566-67 (1993)
182. Kim Lane Scheppele & Jeremy Waldron, Contractarian Methods in Political and Legal Evaluation, 3 Yale J.L. & Human. 195 (1991) (applying contractarianism to democratic decision making).
183. See, e.g., Neil Conway & Rob B. Briner, Understanding Psychological Contracts at Work: A Critical Evaluation of Theory and Research (2005)
184. The Employment Relationship: Examining Psychological and Contextual Perspectives (Jacqueline A.-M. Coyle-Shapiro et al. eds., 2004)
185. Katherine V.W. Stone, The New Psychological Contract: Implications of the Changing Workplace for Labor and Employment Law, 48 UCLA L. Rev. 519 (2001).
186. See generally Denise M. Rousseau, New Hire Perceptions of Their Own and Their Employer's Obligations: A Study of Psychological Contracts, 11 J. Org. Behav. 389 (1990) (reporting findings of a study of 224 graduating MBAs who had accepted job offers). Professor Rousseau's study indicated that "recruits do appear to think contractually about their relationship with a new employer and believe themselves party to obligations."Id. at 399. She additionally states that "psychological contract is a construct relevant to employment," even though it is not legally enforceable. Id. at 398 (emphasis added).
187. See Richard A. Mann & Barry S. Roberts, Essentials of Business Law and the Legal Environment 921-22 (10th ed. 2010) (explaining the common law rule that employment without an expressly stated duration is terminable at will).
188. See, e.g., Robert C. Bird, Employment as a Relational Contract, 8 U. Pa. J. Lab. & Emp. L. 149, (arguing for the adoption of an implied covenant of the employment relation).200-08 (2005)
189. Daniel J. Libenson, Leasing Human Capital: Toward a New Foundation for Employment Termination Law, 27 Berkeley J. Emp. & Lab L. 111, 127 (2006). A majority of states recognize a public policy exception to employment at will. Elleta Sangrey Callahan & Terry Morehead Dworkin, The State of State Whistleblower Protection, 38 Am. Bus. L.J. 99, 105 n.40 (2000). The public policy exception seeks to advance a public policy recognized by the courts. See, e.g., Glenn v. Clearman's Golden Cock Inn, Inc., 13 Cal. Rptr. 769 (Cal. Ct. App. 1961) (public policy against inhibiting union activity); Chavez v. Manville Prods. Corp., 777 P.2d 371 (N.M. 1989) (public policy against restricting free speech rights).
190. See Steven M. Farmer & Donald B. Fedor, Volunteer Participation and Withdrawal: A Psychological Contract Perspective on the Role of Expectations and Organizational Support, 9 Nonprofit Mgmt. & Leadership 349 (1999) (applying the psychological contract approach to nonprofit organizations and their volunteers). Farmer and Fedor summarize psychological contracts as involving "beliefs, [which] exist 'in the eye of the beholder.' What is important is that the individual believes an agreement exists (even if implicit), that some sort of promise (even if implicit) has been made, and that considerations have been offered in exchange."Id. at 350.
191. See generally, Denise M. Rousseau, Psychological and Implied Contracts in Organizations, 2 Emp. Resps. & Rts. J. (describing the development, maintenance, and violation of psychological and implied contracts).121 (1989)
192. The traditional view of the corporation is that, because it is state chartered, the primary means of regulation is state law. Under this view, the state provides mandatory rules that may not be derogated from by corporations. Examples of such mandatory rules include the fiduciary duties of care and loyalty. The contractarian view of corporate law stresses that the source of rules is the corporation itself. The corporation creates its own rules through a nexus of contracts. The nexus-of-contract view of the corporation sees the state as merely providing "enabling rules"; however, once established, the corporation should be free to change the rules by contract, such as eliminating fiduciary duties. SeeRobert C. Clark, Contracts, Elites, and Traditions in the Making of Corporate Law, 89 Colum. L. Rev. 1703, 1704 (1989)
193. Fort and Noone review contemporary theory of the corporation and conclude that "[t]he nexus-of-contracts theory is the predominant theory of today's modern corporation." Fort & Noone, supra note 14, at 179.
194. Mann & Roberts, supra note 228, at 690 ("A corporation is a creature of the state: it may be formed only by substantial compliance with a state incorporation statute.").
195. Professor Bebchuk states:?Corporate law has always included a substantial body of mandatory rules. To be sure, as state corporate law has increasingly taken an "enabling" approach, the set of issues with respect to which opting out is possible has expanded. Both state and federal corporate law, however, still include many significant mandatory rules; indeed, such rules govern most of the important corporate arrangements.?Lucian Arye Bebchuk, The Debate on Contractual Freedom in Corporate Law, 89 Colum L. Rev. 1395, 1396 (1989).
196. Compare John R. Boatright, Fiduciary Duties and the Shareholder-Management Relation: Or, What's So Special About Shareholders?, 4 Bus. Ethics Q. 393 (1994), withJonathan R. Macey, An Economic Analysis of the Various Rationales for Making Shareholders the Exclusive Beneficiaries of Corporate Fiduciary Duties, 21 Stetson L. Rev. 23 (1991).
197. Fort and Noone note that "a monotonist view of corporate responsibility is too narrow because stakeholders, to whom a corporation must pay attention, have interests beyond that of shareholder wealth maximization." Fort & Noone, supra note 14, at 212.
198. Henry N. Butler, The Contractual Theory of the Corporation, 11 Geo. Mason L. Rev. 99, 100 (1989). See also William W. Bratton, Jr., The 'Nexus of Contracts' Corporation: A Critical Appraisal, 74 Cornell L. Rev. 407 (1989) (reviewing the different conceptions of nexus of contract theory of the corporation); Michael Klausner, Corporations, Corporate Law, and Networks of Contracts, 81 Va. L. Rev. 757 (1995) (asserting that the nexus of contracts or contractarian model of the corporation provides an incomplete view of the role of corporate law and arguing that a system of standards to be provided under state statutes would lead to optimal contracting in the corporate setting).
199. See Fort & Noone, supra note 14, at 164 (noting that "the notion of contracts within corporate legal theory" is ambiguous because "contracts are used as a model both by those who advocate minimalist, agency business duties and by others who propound a broad business ethic.").
200. Id. at 178 ("The corporation is more complex than the description given by methodological individualism and the nexus-of-contracts theory. The corporation is also comprised of social beings who value many things besides the bottom line."). At the upper management level, Fort and Noone state that "[c]orporate executives do serve multiple masters, including shareholders, creditors, and a variety of political officials."Id. at 180.
201. My use of contract here is akin to stakeholder theory. Stakeholders include shareholders, employees, suppliers, and customers as well as the community. Stakeholder analysis requires directors and officers to balance the impact of a decision on the different stakeholders. See R. Edward Freeman, Stakeholder Theory of the Modem Corporation, in Ethical Challenges to Business as Usual 258, 263 (Shari Collins-Chobanian ed., 2004). An example of an implicit contract between a corporation and a community would be that, by obtaining tax abatements, the corporation is entering into an implied contract that creates a corporate obligation to give back to the community.
202. The picture gets a little more complicated when one considers that there are multiple nexus-of-contract approaches. The two main schools of nexus-of-contracts theory are the agency theory of contracts and the social contract theory. The former view is premised on a limited view of human nature. Under agency theory, human interaction and contracting is solely characterized as adversarial and opportunistic in nature. See generally Oliver E. Williamson, Markets and Hierarchies: Analysis and Antitrust Implications (1975) (discussing agency theory). Social contract theory takes a broader communitarian view of human relationships. See generallyThomas Donaldson & Thomas W. Dunfee, Toward a Unified Conception of Business Ethics: Integrative Social Contracts Theory, 19 Acad. Mgmt. Rev. 252 (1994) (discussing social contract theory).
203. Fort & Noone, supra note 14, at 190-202. See alsoTimothy L. Fort, The Corporation as Mediating Institution: An Efficacious Synthesis of Stakeholder Theory and Corporate Constituency Statutes, 73 Notre Dame L. Rev. 173 (1997) (applying a social contract model-based on the notion of mediating institutions-to stakeholder theory)
204. Janet McCracken & Bill Shaw, Virtue Ethics and Contractarianism: Towards a Reconciliation, 5 Bus. Ethics Q. (attempting to reconcile contractarian theories of the corporation and of business ethics with an approach based on virtue ethics).297 (1995)
205. Fort & Noone, supra note 14, at 186 ("From a sociological perspective, human beings develop categories of thought, choice, and meaning within a social, not autonomous, context.").
206. Fort and Noone describe mediating institution as smaller groups of individuals that "stand between the individual and the large superstructures of contemporary society."Id. at 193. In the corporate context they note that "[e]ven in large corporations ... relatively small communities could be created to provide the sense of moral identity necessary for business ethics. These bands-small communities within a chiefdom or multinational corporation-are mediating institutions."Id. at 196.
207. For example, the corporation is a mix of private and public governance. The corporation is a creature of state statute and must conform to the dictates of the given state statute. This includes a number of shareholder protections required to be incorporated into the foundational documents, such as the certificate of incorporation. In addition, corporations are regulated by common law-based fiduciary obligations, such as the duty of loyalty and the duty of care. However, corporations are also a product of private contract. Through the bylaws, for example, the incorporators may customize the rules and regulations of the new corporation.
208. See, e.g., Myron T. Steele, Freedom of Contract and Default Contractual Duties in Delaware Limited Partnerships and Limited Liability Companies, 46 Am. Bus. L.J. 221 (2009) (arguing the stronger conclusion that not only can founding members provide terms to protect their interest, but under the freedom of contract paradigm the courts should also not imply default fiduciary duties).
209. Cf. Woodward, supra note 215, at 101 (stating that "[i]n scholarship, [some have] deploy[ed] economic analysis to assert that businesses should be able to 'choose' their law by contract and thereby transport themselves to a different (and presumably less regulatory) legal regime").
210. Professor Miller argues for mandatory core duties in the governance of LLCs. Sandra K. Miller, Fiduciary Duties in the LLC: Mandatory Core Duties to Protect the Interests of Others Beyond the Contracting Parties, 46 Am. Bus. L.J. 243 (2009). She challenges the view of the LLC as a "singularly private contract."Id. at 243. Instead, Miller asserts that "mandatory fiduciary duties are an important element to deter opportunistic conduct."Id. at 277.
211. Del. Code Ann. tit. 6, §§ 17-1101(d) & 18-1101(c) (2005). CompareMyron T. Steele, Freedom of Contract and Default Contractual Duties in Delaware Limited Partnerships and Limited Liability Companies, 46 Am. Bus. L.J. 221 (2009) (arguing that an operating agreement that eliminates fiduciary duties should be honored and that no default fiduciary duties should be implied), withLarry A. DiMatteo, Policing Limited Liability Companies Under Contract Law, 46 Am. Bus. L.J. 243 (2009) (supporting Professor Miller's mandatory core approach, but arguing that there are numerous contract law doctrines that can be used to police LLC governance).
212. The mandatory core approach is advocated and discussed in Miller, supra note 249.
213. One scholar describes Kant's belief that moral imperatives command conformity to the law as follows: "A moral imperative is unconditional, i.e., categorical. ... A moral imperative commands unconditional conformity of our maxims to law. ... [It] must, in effect, be capable of being itself a universal law." Lewis White Beck, Introduction to Immanuel Kant, Foundations of the Metaphysics of Morals, at xii-xiii (Lewis White Beck trans., 2d ed. 1997)
214. Kant states that "[d]uty is the necessity to do an action from respect for law."Id. at 16. For an analysis of the application of Kantian ethics to contract law, see Larry A. DiMatteo, Equitable Law of Contracts: Standards and Principles 38-41, 233-37 (2001).
215. For a modern application of natural law theory, and the inherent morality of disobedience to manmade laws in conflict with the higher law, see Blake D. Morant, The Teachings of Dr. Martin Luther King, Jr. and Contract Theory: An Intriguing Comparison, 50 Ala L. Rev. 63 (1998).
216. The duty not to harm is related to Kant's maxim that a human being can never be a means to an end: "[E]very rational being exists as an end in himself and not merely as a means to be arbitrarily used by this or that will." Kant, supra note 254, at 45.
217. See Bird, supra note 4, at 15.
218. See George J. Siedel, Using the Law for Competitive Advantage (2002) (explaining that due to the explosion of laws and regulations pertaining to businesses, companies need high-quality legal counsel to obtain competitive advantages within such a dense regulatory network)
219. Daniel T. Ostas, Legal Loopholes and Underenforced Laws: Examining the Ethical Dimensions of Corporate Legal Strategy, 46 Am. Bus. L.J. 487 (2009) [hereinafter Ostas, Legal Loopholes] (discussing the issues of breach and pay, strategic contracting, concealment, and compliance)
220. Daniel T. Ostas, Cooperate, Comply, or Evade? A Corporate Executive's Social Responsibilities with Regard to Law, 41 Am. Bus. L.J. 559, 594 (arguing that a business's or corporation's duty to obey the law is not absolute, but is dependent on the content and purpose of a given law, because "[m]orally just laws deserve cooperation, morally neutral laws require compliance, and, in limited situations, morally unjust laws should be evaded.").(2004)
221. An example is the recognition in the Federal Sentencing Guidelines of mitigating factors, such as due diligence (compliance programs), self-reporting, and cooperation with the investigation. U.S. Sentencing Comm'n, Guidelines Manual (2009). See also 18 U.S.C. § 3553(b)(1) (2006).
222. Ostas, Legal Loopholes, supra note 258, at 487 ("Managing the legal process efficiently provides firms with a competitive advantage. It is not surprising ... that firms routinely bring law and lawyers into the strategic planning mix."). Ostas notes that what may be good corporate legal strategy may present the attorney with an ethical dilemma. Id. at 495 ("The lawyer has an ethical duty to provide information about the law to the client, but the lawyer also has a societal duty to help support respect for substantive law." (citing Stephen L. Pepper, Counseling at the Limits of the Law: An Exercise in Jurisprudence and the Ethics of Lawyering, 104 Yale L.J. 1545, 1547 (1995))).
223. Hinthorne, supra note 5, at 252 (citing Anthony Giddens, The Constitution of Society: Outline of the Theory of Structuration (1984)).
224. See, e.g., Uri Benoliel, The Expectation of Continuity Effect and Franchise Termination Laws: A Behavioral Perspective, 46 Am. Bus. L.J. 139 (2009) (noting that fifteen states have general franchise termination laws that require just cause for termination of a franchise; many states provide termination protection for specific industries, such as automobile dealerships)
225. Frank J. Cavico, The Covenant of Good Faith and Fair Dealing in the Franchise Business Relationship, 6 Barry L. Rev. 61 (2006) (examining the application of the doctrine of good faith and fair dealing to franchise relationships).
226. A "feedback loop" is essentially the use of past results or mistakes for the purpose of "correction and remediation."Gerald Caplan, Legal Autopsies: Assessing the Performance of Judges and Lawyers Through the Window of Leading Contract Cases, 73 Alb. L. Rev. 1, 1 (2009). In the case of contract law, it is the learning from novel developments in the world or novel uses of contract rules to reform the law in response to such novelty.
227. Ian R. Macneil, Contracts: Adjustment of Long-Term Economic Relations Under Classical, Neoclassical, and Relational Contract Law, 72 Nw. U. L. Rev. 854 (1978) (discussing the evolution of contract law from the fixed rule regime of classical contract law to a more flexible and partly standard-based regime required to manage relational contracting).
228. Cf. id. (discussing the need for greater flexibility in contract law and recognizing that new contractual norms, such as solidarity and trust, are a response to contracts moving from the provision of fixed rules to govern discrete transactions to governing long-term relationships, such as collaborative alliances); Ian R. Macneil, A Primer of Contract Planning, 48 S. Cal. L. Rev. 627 (1975)
229. Salbu & Brahm, supra note 119, at 255-56 (using Ian Macneil's taxonomy).
230. The strategic use of contracting has less power for those that argue that formal contracts serve a minimal level of importance in most business relationships. See generallyStewart Macaulay, Non-Contractual Relations in Business: A Preliminary Study, 28 Am. Soc. Rev. 55 (1963) (noting that, in the business world, planning of exchange relations and use of legal sanctions to settle disputes are seen as unnecessary and undesirable).