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CONTRACTS AS TECHNOLOGY
K
EVIN
E. D
AVIS
*
If technology means “useful knowledge about how to produce things at low cost,”
then contracts should qualify. Just as mechanical technologies are embodied in
blueprints, technologies of contracting are embodied in contractual documents that
serve as “blueprints for collaboration.” This Article analyzes innovations in con-
tractual documents using the same kind of framework that is used to analyze other
kinds of technological innovation. The analysis begins by laying out an informal
model of the demand for and supply of innovative contractual documents. The
discussion of demand emphasizes the impact of innovations upon not only each
party’s incentives to collaborate efficiently, but also upon reading costs and litiga-
tion costs. The analysis of supply considers both the generation and dissemination
of innovations and emphasizes the importance of cumulative innovation, learning-
by-doing, economies of scale and scope, and trustworthiness. Recent literature has
raised concerns about the extent to which law firms produce contractual innova-
tions. In fact, a wide range of actors other than law firms supply contractual
documents, including end users of contracts, specialized providers of legal docu-
ments, legal database firms, trade associations, and academic institutions. This
Article discusses the incentives and capabilites of each of these potential sources of
innovation. It concludes by discussing potential interventions such as (1) enhancing
intellectual property rights, (2) relaxing rules concerning the unauthorized practice
of law, and (3) creating or expanding publicly sponsored clearinghouses for
contracts.
I
NTRODUCTION
................................................. 84
R
I. T
HE
V
ALUE OF
C
ONTRACTUAL
I
NNOVATION
........... 88
R
A. Overview ........................................... 88
R
B. Intrinsic Value ...................................... 90
R
C. Uncertainty and Methods of Resolving It ............ 98
R
II. T
HE
S
UPPLY OF
I
NNOVATION
........................... 104
R
A. Generating Innovations ............................. 104
R
1. For-Profit Innovation ........................... 104
R
2. Innovation Aimed at Capturing Indirect or Non-
pecuniary Benefits .............................. 107
R
3. Learning-by-Doing ............................. 108
R
B. The Importance of Cumulative Innovation .......... 108
R
* Copyright
2013 by Kevin E. Davis, Beller Family Professor of Business Law, New
York University School of Law. I am grateful to Lisa Bernstein and Marcel Kahan as well
as the participants in the Conference on Contractual Innovation, the Kauffman Foundation
Summer Legal Institute, and the NYU Law and Economics Colloquium for helpful com-
ments on earlier versions. I am also grateful to Barton Beebe, Rochelle Dreyfuss, Jeanne
Frommer, and Katherine Strandburg for extremely helpful conversations. Lorenzo Arditi,
Heather Mackintosh-Sims, and Kimberly Won provided excellent research assistance.
Financial support from the Kauffman Foundation and the Filomen D’Agostino and Max E.
Greenberg Research Fund is gratefully acknowledged.
83
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84 NEW YORK UNIVERSITY LAW REVIEW [Vol. 88:83
C. Dissemination ....................................... 109
R
III. T
HE
S
OURCES OF
I
NNOVATION
......................... 112
R
A. Users ............................................... 113
R
B. Law Firms .......................................... 116
R
C. For-Profit Producers ................................ 117
R
1. Trade Associations .............................. 119
R
2. Academics ...................................... 121
R
IV. I
MPLICATIONS FOR
P
UBLIC
P
OLICY
..................... 122
R
A. Intellectual Property Rights ......................... 123
R
B. Regulation of Unauthorized Practice of Law ........ 124
R
C. Dissemination by Public Actors ..................... 125
R
C
ONCLUSION
................................................... 127
R
I
NTRODUCTION
Most economists agree that the creation and dissemination of
technological innovations is one of the few definite sources of sus-
tained economic growth.
1
Take the case of the garment industry in
Bangladesh. In April 1980, a company named Desh Garments Ltd.
opened one of the first shirt factories in the country. Desh owed its
success in part to its collaboration with a major South Korean textile
producer, the Daewoo Corporation. In return for royalties and com-
missions amounting to eight percent of sales, Daewoo trained Desh
employees in how to make shirts and market them to the world. In
other words, Daewoo transferred technology to Desh. What were the
most critical kinds of technology that Daewoo transferred? The agree-
ment required Daewoo to sell Desh machinery and the technology
embodied in that machinery was presumably helpful. But Daewoo
provided two other technologies that were critical to Desh’s success:
bonded warehouses and back-to-back import letters of credit. The
warehouses allowed Desh to obtain imported fabrics duty-free, while
the letters of credit helped it to obtain relatively low-cost financing by,
1
See W
ILLIAM
E
ASTERLY
, T
HE
E
LUSIVE
Q
UEST FOR
G
ROWTH
: E
CONOMISTS
’
A
DVENTURES AND
M
ISADVENTURES IN THE
T
ROPICS
172 (2001) (“Technological change is
indeed a powerful force behind economic growth, which is all about creating new goods
and new technologies.”). For seminal works, see J
OSEPH
S
CHUMPETER
, T
HE
T
HEORY OF
E
CONOMIC
D
EVELOPMENT
: A
N
I
NQUIRY INTO
P
ROFITS
, C
APITAL
, C
REDIT
, I
NTEREST
,
AND
THE
B
USINESS
C
YCLE
(1934) (developing a theory in which innovation is central to eco-
nomic development), and Robert M. Solow, Technical Change and the Aggregate
Production Function, 39 R
EV
. E
CON
. & S
TAT
. 312, 320 (1957) (concluding that technical
change as opposed to capital accumulation was the principal source of change in labor
productivity in the United States from 1909–1949).
\\jciprod01\productn\N\NYU\88-1\NYU103.txt unknown Seq: 3 21-MAR-13 10:11
April 2013] CONTRACTS AS TECHNOLOGY 85
effectively, posting the payment obligations generated by their sales as
collateral.
2
To the extent it is about the letters of credit, this story should be
an inspiration to contract lawyers. The moral is that contractual inno-
vations are forms of technological progress that can generate eco-
nomic growth.
3
Purists probably would not recognize these kinds of
knowledge as forms of technology, preferring to reserve that term for
knowledge about how to manipulate the natural world.
4
But the term
“technology” can also be defined more broadly as “[u]seful knowl-
edge about how to produce things at low cost.”
5
Knowledge about
back-to-back letters of credit fits comfortably within this broader defi-
nition. And just as innovative mechanical technology can be
embodied in a blueprint, innovative contractual technology can be
embodied in a contractual document. The contract serves as a
“blueprint” for collaboration.
6
2
E
ASTERLY
, supra note 1, at 146–50 (citing Yung Whee Rhee & Therese Belot,
Export Catalysts in Low-Income Countries: Preliminary Findings from a Review of Export
Success Stories in Eleven Countries 10–11 (World Bank Indus. & Energy Dep’t Working
Paper Indus. Series, Working Paper No. 5, 1989) (attributing Desh Garment Ltd.’s eco-
nomic success to the technological training it received from Daewoo Corporation).
3
See Mark C. Suchman, The Contract as Social Artifact, 37 L
AW
& S
OC
’
Y
R
EV
. 91, 103
(2003) (discussing the merits of the “contract as technology” approach). The basic idea that
contracts and contractual innovation can be significant determinants of economic develop-
ment is consistent with the large body of literature supporting the general proposition that
“institutions matter” in economic development. In that literature, the term “institutions” is
typically defined expansively to mean the rules of the game that govern social interaction.
See Kevin E. Davis, Introduction , in I
NSTITUTIONS AND
E
CONOMIC
P
ERFORMANCE
, at ix, x
(Kevin E. Davis ed., 2010). There is a broad consensus that institutions are important
determinants of levels of economic development. There is also increasing recognition of
the corollary claim that—unless one takes the view that no worthwhile institutions remain
to be discovered—the rates at which innovative institutions are developed and diffused will
be important determinants of rates of economic development. See id. at xv (suggesting that
institutional variation can be studied over time to assess the influence on economic
growth).
4
See, e.g., J
OEL
M
OKYR
, T
HE
G
IFTS OF
A
THENA
: H
ISTORICAL
O
RIGINS OF THE
K
NOWLEDGE
E
CONOMY
2–3 (2002) (defining technology as “useful knowledge”of “natural
phenomena that exclude the human mind and social institutions”). The Oxford English
Dictionary defines technology as “[t]he branch of knowledge that deals with the mechan-
ical arts or applied sciences . . . .” 2 T
HE
N
EW
S
HORTER
O
XFORD
E
NGLISH
D
ICTIONARY
3235 (Lesley Brown ed., 1993).
5
E
ASTERLY
, supra note 1, at 150.
6
Suchman, supra note 3, at 109 (discussing depictions of contracts as “blueprints for
resolving common governance challenges”). The idea that contractual innovation might be
of economic significance is a subsidiary element of the broader claim that innovation in the
organization of economic activity is an important driver of economic growth. As Nelson
and Winter point out, Schumpeter appears to embrace this view by refusing to draw—
appropriately in their opinion—a sharp distinction between innovation in the mechanical
arts and organizational innovation. R
ICHARD
R. N
ELSON
& S
IDNEY
G. W
INTER
, A
N
E
VOLUTIONARY
T
HEORY OF
E
CONOMIC
C
HANGE
38, 277 (1982) (“Schumpeter’s treatment
of innovation pre-figures our own emphasis on the error of overdrawing the related
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86 NEW YORK UNIVERSITY LAW REVIEW [Vol. 88:83
Not all contractual innovations create as much value for society
as back-to-back letters of credit. In fact, some may destroy value.
Either way, given their potential economic impact it is worth studying
who creates them, why, and under what conditions.
Our understanding of the phenomenon of contractual innovation
lags behind our understanding of other kinds of technological innova-
tion. Existing literature—with some notable exceptions
7
—focuses
heavily on innovations in a single context: widely-used terms of finan-
cial contracts, typically bonds or corporate charters, drafted by large
U.S. law firms.
8
An especially prominent recent contribution argues
that there are significant obstacles to innovation in this context.
9
distinctions between technological and organizational considerations . . . .”). To illustrate,
the technology for constructing a building can be said to encompass both the blueprints
that explain the organization of its physical components and the contracts that explain the
organization of the actors who will participate in the construction.
7
See generally Charles J. Goetz & Robert E. Scott, The Limits of Expanded Choice:
An Analysis of the Interactions Between Express and Implied Contract Terms, 73 C
ALIF
. L.
R
EV
. 261 (1985) (focusing on the tensions between express and implied terms, and the
implications for contractual innovations); George G. Triantis, Collaborative Contract
Innovation (Apr. 30, 2010) (unpublished manuscript) (on file with the New York University
Law Review) (describing innovation in various types of organizations and suggesting that
peer production might be well suited to the production of innovative contracts).
8
Key contributions to the legal literature include: Stephen J. Choi & G. Mitu Gulati,
Innovation in Boilerplate Contracts: An Empirical Examination of Sovereign Bonds, 53
E
MORY
L.J. 929, 982–89 (2004) (analyzing innovation in sovereign bonds between 1995
and 2004); Henry T. Greely, Contracts as Commodities: The Influence of Secondary
Purchasers on the Form of Contracts, 42 V
AND
. L. R
EV
. 133, 160–66 (1989) (discussing the
obstacles to contract standardization); Marcel Kahan & Michael Klausner, Standardization
and Innovation in Corporate Contracting (Or “The Economics of Boilerplate”), 83 V
A
. L.
R
EV
. 713, 736–40 (1997) (considering the role of law firms and underwriters in relation to
corporate contracts); Michael Klausner, Corporations, Corporate Law, and Networks of
Contracts, 81 V
A
. L. R
EV
. 757, 759–67 (1995) (criticizing the conventional law and eco-
nomics analysis of corporate contracts); Michael J. Powell, Professional Innovation:
Corporate Lawyers and Private Lawmaking, 18 L
AW
& S
OC
. I
NQUIRY
423, 427–29 (1993)
(addressing the ways in which corporate lawyers take part in lawmaking when acting for
clients); M
ITU
G
ULATI
& R
OBERT
E. S
COTT
, T
HE
T
HREE AND A
H
ALF
M
INUTE
T
RANSACTION
: B
OILERPLATE AND THE
L
IMITS OF
C
ONTRACT
D
ESIGN
53–72 (2013) (con-
sidering sovereign bonds and pari passu clauses). There is also an extensive literature on
the economics of financial innovation. See, e.g., Peter Tufano, Financial Innovation, in 1A
H
ANDBOOK OF THE
E
CONOMICS OF
F
INANCE
307 (George M. Constantinides, Milton
Harris & Ren ´e M. Stulz eds., 2003) (surveying the literature); Josh Lerner & Peter Tufano,
The Consequences of Financial Innovation: A Counterfactual Research Agenda (Nat’l
Bureau of Econ. Research, Working Paper No. 16780, 2011) (same).
9
Gulati & Scott, supra note 8, at 180 (“[D]espite the many caveats there remains
substantial evidence that the institutional structure of the modern large law firm impedes
innovation in contract design.”). But see Goetz & Scott, supra note 7, at 304–05 (“The
feasibility of law firm innovation is illustrated by the widely held belief that bond cove-
nants, indentures, and many other standard features of corporate financial agreements
originated in a small group of New York law firms that had a dominant market position in
these transactions.”).
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April 2013] CONTRACTS AS TECHNOLOGY 87
The narrow focus of the contemporary literature is unfortunate.
There are good reasons to believe that significant amounts of contrac-
tual innovation occur outside of financial contracts produced by law
firms, and that we should learn more about those forms of innovation.
For instance, it would be helpful to know more about innovation gen-
erated by users of contracts—that is, the parties bound by them—
rather than third-party providers such as law firms.
10
It would also be
helpful to know more about other kinds of third-party providers
because the distinctive regulatory treatment of law firms gives them
both advantages and disadvantages in the supply of innovation.
11
For
similar reasons, it would be helpful to know more about innovation
generated or disseminated for reasons other than direct pecuniary
gain, especially by actors such as trade associations and academics.
12
Most importantly, it would be helpful to know more about how con-
tractual innovations become widely used—that is, how and why they
are disseminated from the various categories of innovators to both
users and other innovators. Innovations in methods of dissemination
are particularly in need of attention.
These lines of inquiry all have parallels in the general literature
on technological innovation.
13
There is extensive literature on the
respective roles of for-profit research and development on the one
hand, and user innovation or academic or government research and
development on the other.
14
That general literature also highlights the
fact that the impact of innovations depends upon how widely and
10
A rare example of a study focused on user innovation is Florencia Marotta-Wurgler
& Robert Taylor, Set in Stone? Change and Innovation in Consumer Standard Form
Contracts, 88 N.Y.U. L. R
EV
. 240 (2013) (examining the innovation in consumer standard
form contracts over seven years).
11
The challenges alternative providers of legal services pose to law firms are discussed
in R
ICHARD
S
USSKIND
, T
HE
E
ND OF
L
AWYERS
?: R
ETHINKING THE
N
ATURE OF
L
EGAL
S
ERVICES
(2008). Susskind predicts that “[t]he market . . . will determine that the legal
world is inefficiently resourced . . . it will increasingly drive out excesses and unnecessary
friction and, in turn, we will indeed witness the end of outdated legal practice and the end
of outdated lawyers.” Id. at 3. See also Bruce H. Kobayashi & Larry E. Ribstein, Law’s
Information Revolution, 53 A
RIZ
. L. R
EV
. 1169, 1171 (2011) (describing the pressure put
on big law firms by technological change and global competition).
12
I have explored the role of trade associations in drafting contracts in earlier work.
See Kevin E. Davis, The Role of Nonprofits in the Production of Boilerplate, 104 M
ICH
. L.
R
EV
. 1075, 1078–81 (2006) (describing and explaining the roles that trade associations play
in drafting standard form contracts).
13
See Suchman, supra note 3, at 117–26 (describing literature on innovation and diffu-
sion, path dependence, and technology cycles and laying out a research agenda for research
on parallel aspects of contracts).
14
On user innovation, see E
RIC VON
H
IPPEL
, D
EMOCRATIZING
I
NNOVATION
2 (2005),
arguing that user innovation complements the traditional model of manufacturer innova-
tion. For an overview of the respective roles of for-profit firms, universities, and the gov-
ernment in funding and conducting research and development, see S
UZANNE
S
COTCHMER
,
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88 NEW YORK UNIVERSITY LAW REVIEW [Vol. 88:83
rapidly they are adopted.
15
This demonstrates the need to focus on
mechanisms that help people overcome skepticism and fear born of
uncertainty about the effects of adopting new products.
16
This Article provides a general model of the demand for and
supply of contractual innovations and then surveys the kinds of orga-
nizations likely to supply such innovations. Unlike some previous
work in this vein, the analysis emphasizes the importance of both the
generation and dissemination of innovations. Like previous analyses,
it reveals that law firms have limited incentives to generate innovative
contracts for use by others.
17
However, there are other potential gen-
erators of innovation, including users of contracts, trade associations,
and providers of legal databases such as Bloomberg, LexisNexis, and
Westlaw. The difficulty is that, except for the trade associations, it is
not clear that the potential innovators have appropriate incentives to
disseminate their innovations.
This Article proceeds as follows. Part I discusses the factors that
determine the value of contracts and, by extension, contractual inno-
vations. Part II shifts to focus on the supply of innovation. It describes
mechanisms for both generating innovations and facilitating their
adoption through dissemination. Part III uses this analysis as a basis
for generating hypotheses about the likely sources of contractual inno-
vation. Part IV briefly discusses implications for public policy,
including potential interventions such as enhancing intellectual prop-
erty rights, relaxing rules concerning the unauthorized practice of law,
and creating or expanding publicly sponsored clearinghouses for
contracts.
I
T
HE
V
ALUE OF
C
ONTRACTUAL
I
NNOVATION
A. Overview
Boiled down to its essence, a contract is a mapping which speci-
fies legal obligations that apply to each contracting party in any given
I
NNOVATION AND
I
NCENTIVES
227–58 (2006), who contends that the private sector is only
one of many drivers of growth.
15
M
OKYR
, supra note 4, at 7 (“Progress in exploiting the existing stock of knowledge
will depend first and foremost on the efficiency and cost of access to knowledge.”).
16
See id. at 218–83 (discussing resistance to new technologies based on uncertainty
about unintended consequences and other factors).
17
See Gulati & Scott, supra note 8, at 180 (“[T]here remains substantial evidence that
the institutional structure of the modern large law firm impedes innovation in contract
design.”).
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April 2013] CONTRACTS AS TECHNOLOGY 89
state of the world.
18
Each contract is a product of interaction between
documents that purport to record the parties’ agreements (“contrac-
tual documents” or “contracts” for short) and rules used to construe
and enforce those documents (“contract law”).
19
Innovations in con-
tracting can involve innovations in either contractual documents or
contract law.
The focus here is on innovation in contractual documents. Inno-
vation means any change that is both novel and likely to be adopted
by a group of prospective users.
20
Since innovation often involves
using familiar material in a new way, the idea of a “novel” document
includes a novel recombination of provisions that are individually
familiar. Because the intention here is to capture innovation as
opposed to customization, this definition excludes changes that result
in documents that are already familiar to the relevant users or which
are only of interest to a single set of contracting parties.
To understand the value of contractual innovation, we have to
understand the determinants of the value of contracts. In the model
set out below, these factors include the incentives created by the con-
tract and the expected enforcement costs. The level of uncertainty
about the effects of the contract is also relevant, taking into account
the extent to which that uncertainty can be resolved through the pas-
sage of time and accrual of precedent, as well as through affirmative
efforts to acquire information. Thus, the value of a contract to its par-
ties will reflect the net effect of the behavior it induces, taking into
account enforcement costs and the levels of reading costs, investiga-
tion costs, and residual uncertainty the parties have chosen to incur.
21
18
See Kevin E. Davis, Interpreting Boilerplate 5 (N.Y.U. Law & Econ. Research Paper
Series, Working Paper No. 10-21, 2010), available at http://papers.ssrn.com/sol3/papers.
cfm?abstract_id=1618925 (providing a formal model premised on this conception).
19
See Goetz & Scott, supra note 7, at 270 (“Parties implicitly incorporate the standard
rules of contract law into their agreement.”); Davis, supra note 18, at 5–6 (defining model);
Lewis A. Kornhauser & W. Bentley MacLeod, Contracts Between Legal Persons 7, 14–17
(Nat’l Bureau of Econ. Research, Working Paper No. 16049, 2010), available at http://www.
nber.org/papers/w16049 (defining “contractual instrument,” “contract law,” and the
“exchange environment”); see also Goetz & Scott, supra note 7, at 264 (“[T]he prevailing
judicial approach to ex post interpretation has far-reaching feedback effects on the opera-
tion of the ex ante contractual signalling system.”).
20
See Triantis, supra note 7, at 4 (“This essay uses the term innovation to describe
improvements to contracts that are more significant in degree than tailoring and that can
be redeployed in other transactions, and even standardized.”).
21
In some settings a user will convey information to third parties by adopting a partic-
ular contract, so the value of a contract to such an actor will also depend on the value of
sending this signal. The analysis below ignores this factor. See Suchman, supra note 3, at
100 (“Alongside their technical functions, contract artifacts share important characteristics
with certain forms of symbolic representation, as well. As cultural displays, contracts evoke
normative principles and illuminate social experiences—at times expressing identity,
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90 NEW YORK UNIVERSITY LAW REVIEW [Vol. 88:83
A rational actor should decide whether to adopt one contractual doc-
ument or another based on a rational assessment of these costs and
benefits. In practice, this calculation will require a fair amount of
guesswork.
B. Intrinsic Value
The principal determinant of the value of adopting a contract is
the value of the changes in behavior it induces, including enforcement
activity, net of the purely mechanical costs of creating the document.
22
For example, a contract for the sale of goods gives each party incen-
tives to perform their side of what is (typically) expected to be a mutu-
ally beneficial exchange. The incremental benefits of the incentives
the contract creates have to be discounted to reflect the expected costs
associated with enforcing the contract, taking into account not only
the likelihood of a dispute but also the possibilities of either litigation
or settlement. In theory, the costs of creating a contractual document
also have to be considered. In the days when producing a document
involved scriveners, or even typewriters and carbon paper, these costs
were substantial. In modern societies, the advent of mass literacy,
word processors, and scanners has significantly lowered these costs,
23
although in cases involving complex contracts the costs of recording
an agreement may not be trivial. For example, in large project finance
transactions, which can involve forty or more contracts, the transac-
tion costs can equal five to ten percent of the project’s total cost.
24
The value of any given contractual document will depend on the
environment in which it is used. Perhaps most importantly, the value
of a particular document will often depend on the ease with which it
can be legally enforced. In some cases, laws prohibit particular types
of contracts. For instance, in the United States innovations in con-
tracts for forward sales of onions are essentially valueless because
since 1958 such contracts have been rendered legally unenforceable by
solidarity, forbearance, and faith, and at times expressing differentiation, inequality, domi-
nation, and distrust.”); see also Anna Gelpern & Mitu Gulati, Feel-Good Formalism,35
Q
UEEN
’
S
L.J. 97, 98–100 (2009) (arguing that business parties intentionally include some
unworkable contractual terms because they provide “feel-good” value to the parties).
22
See Benjamin E. Hermalin, Avery W. Katz & Richard Craswell, Contract Law, in 1
T
HE
H
ANDBOOK OF
L
AW AND
E
CONOMICS
3, 7–12 (A. Mitchell Polinsky & Steven Shavell
eds., 2007) (explaining how contracts create valuable incentives to follow through on com-
mitments but specification costs and enforcement costs limit that value).
23
S
USSKIND
, supra note 11, at 100–05 (explaining how advances in information and
communication technology have enabled low-cost automated document assembly).
24
Benjamin C. Esty, Why Study Large Projects? An Introduction to Research on
Project Finance, 10 E
UR
. F
IN
. M
GMT
. 213, 216 (2004).
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April 2013] CONTRACTS AS TECHNOLOGY 91
the Onion Futures Act.
25
In many other countries, contracts are not
worth the paper they are written on because legal enforcement is pro-
hibitively costly or the outcomes of legal proceedings are radically
uncertain. For example, in 2012 the World Bank reported that in
Mozambique it would take 730 days to enforce a contract in a hypo-
thetical sale of goods dispute and that the enforcement costs would
total 142.5% of the amount claimed. By comparison, in the United
States enforcement would require 300 days at a cost of 14.4% of the
claim.
26
At the same time, in some countries there may be features of
the contracting environment which serve as substitutes for certain
contractual innovations. Most notably, rather than relying on rules set
out in contracts to allocate goods and services, a society might rely
upon the internal rules of organizations such as the family, the corpo-
ration, or the state to allocate goods and services.
27
Societies in which
significant amounts of goods and services are allocated within house-
holds, within vertically-integrated firms, or by the state will place rela-
tively little value upon contracts or contractual innovations. Vigorous
use of implied terms by courts can also serve as a substitute for inno-
vation in contractual documents.
28
Contractual innovations can enhance the intrinsic value of a con-
tract in several ways. Some involve specifying new combinations of
obligations and thereby opening up new forms of mutually beneficial
exchange. For example, Creative Commons licenses allow copyright
holders to place more limited sets of obligations on licensees than
other licenses.
29
The popularity of these licenses suggests that there
25
See Pub. L. No. 85-839, 72 Stat. 1013 (1958) (codified at 7 U.S.C. § 13-1 (2006))
(banning onion futures). More recently Congress has, in the same statutory provision, simi-
larly restricted innovation by prohibiting futures contracts for the sale of motion picture
box office receipts, or any index, measure, value, or data related to such receipts. Dodd-
Frank Wall Street Reform and Consumer Protection Act, Pub. L. No. 111-203,
§ 721(e)(10), 124 Stat. 1672 (codified at 7 U.S.C. § 13-1 (2006 & Supp. IV 2011)).
26
Enforcing Contracts, W
ORLD
B
ANK
, http://www.doingbusiness.org/data/explore
topics/enforcing-contracts (last visited Jan. 30, 2013).
27
See Oliver E. Williamson, M
ARKETS AND
H
IERARCHIES
: A
NALYSIS AND
A
NTITRUST
I
MPLICATIONS
(1975) (describing the use of hierarchical organizations as a response to the
costs of market transactions); see also Michael Trebilcock & Jing Leng, The Role of Formal
Contract Law and Enforcement in Economic Development, 92 V
A
. L. R
EV
. 1517, 1521,
1576–77 (2006) (discussing characteristics of contractual transactions in primitive societies
and small communities).
28
See Goetz & Scott, supra note 7, at 290 (noting that well-established processes for
implying standardized terms to contracts may lead to an imbalanced bias against innova-
tion); see also Ronald J. Gilson, Charles F. Sabel & Robert E. Scott, Contract and
Innovation, 88 N.Y.U. L. R
EV
. 170 (2013) (noting that generalist courts “are prone to
undermine an emergent innovation by inadvertently failing to extract the correct meaning
from the signals that the parties have given”).
29
Creative Commons is a non-profit organization that has created a series of copyright
licenses that are an attempt to develop the copyright spectrum between the end points of
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92 NEW YORK UNIVERSITY LAW REVIEW [Vol. 88:83
are many cases in which the added flexibility is worth less to copyright
holders than it is to licensees, thus leading to more mutually beneficial
licensing arrangements.
30
It can also be useful to change the specifica-
tion of the states of the world that trigger certain kinds of obligations.
Take catastrophe bonds, for instance. These are financial instruments
whose payouts are conditioned on the non-occurrence of catastrophic
events such as hurricanes or earthquakes.
31
They are used primarily
by insurance and reinsurance companies to transfer the risks of catas-
trophe-related liabilities to the holders of the bonds.
32
It turns out that
not only do some debtors find it useful to have their repayment obli-
gations extinguished in the event of a catastrophe,
33
some creditors
are more than willing to accept the risk of non-payment in these con-
tingencies because these risks are easy to diversify. Finally, contractual
innovations can create value by reducing enforcement costs. Arbitra-
tion clauses arguably serve this purpose.
34
“public domain” and “all rights reserved.” See About, C
REATIVE
C
OMMONS
, http://
creativecommons.org/about (last visited Jan. 30, 2013) (describing Creative Commons and
its vision). The licenses range in degrees of restriction according to four different dimen-
sions: attribution, commercial use, derivative works, and “ShareAlike.” The first dimen-
sion, attribution, merely requires that the user give the author, artist, or creator credit. The
second dimension, commercial use, allows the author to stipulate that his or her work can
only be used in non-commercial enterprises. The third dimension, derivative works, refers
to whether the license permits or prohibits the creation of derivative works based on the
original work. So, for example, an “attribution non-commercial no-derivative” license
essentially boils down to “free advertising.” For instance, a musician could release a song
under this contract that would allow private individuals to share this work with friends as
long as they kept the artist’s name attached to the work and did not adapt it in any way.
The fourth dimension, “ShareAlike,” if applied, requires that any individual who does
create a derivative work only distribute that work under an identical Creative Commons
license. These licenses have been made available, free of cost, to the public. See About the
Licenses, C
REATIVE
C
OMMONS
, http://creativecommons.org/licenses/ (last visited Jan. 30,
2013) (describing license types).
30
For descriptions of users of Creative Commons licenses, including Al Jazeera,
Google, and the White House, see Who Uses CC?, C
REATIVE
C
OMMONS
, http://
creativecommons.org/who-uses-cc/ (last visited Jan. 30, 2013).
31
See J. D
AVID
C
UMMINS
& O
LIVIER
M
AHUL
, C
ATASTROPHE
R
ISK
F
INANCING IN
D
EVELOPING
C
OUNTRIES
: P
RINCIPLES FOR
P
UBLIC
I
NTERVENTION
211–18, 222–35 (2009)
(describing the structure of catastrophe bonds as well as the development of the market).
32
Id. at 211, 222, 225.
33
These potential benefits are believed to be particularly significant for inhabitants of
the developing world whose low incomes make them highly vulnerable to economic
shocks, especially as climate change increases the incidence of extreme weather conditions.
See id. at 13–25, 103–04 (discussing the benefits of catastrophic risk financing in developing
countries).
34
Christopher R. Drahozal, Arbitration Costs and Forum Accessibility: Empirical
Evidence, 41 U. M
ICH
. J.L. R
EFORM
813, 815–16, 826–32 (2008) (surveying data suggesting
that the relative costs of arbitration and judicial proceedings depend on context). But see
Theodore Eisenberg, Geoffrey P. Miller & Emily Sherwin, Arbitration’s Summer Soldiers:
An Empirical Study of Arbitration Clauses in Consumer and Nonconsumer Contracts, 41 U.
M
ICH
. J.L. R
EFORM
871, 890–93 (2008) (setting forth data questioning the assumption that
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April 2013] CONTRACTS AS TECHNOLOGY 93
Innovations which remove ambiguities or inconsistencies in the
specification of obligations may affect both incentives and enforce-
ment costs.
35
The more precisely the document specifies the actions to
be undertaken in any given contingency, the less room there is for
disagreement about how to proceed when that contingency arises.
36
For example, in the 2007 version of their standard-form General
Contract terms, the American Institute of Architects (AIA) included
provisions intended to address the unexpected discovery of human
remains, burial sites, other archaeological materials, and wetlands.
37
Under the terms of the contract, if the Contractor “encounters” or
“recognizes” any of these features, the Contractor is obligated to sus-
pend “any operations that would affect them,” as well as to notify
both the Owner and Architect.
38
The Owner is then obligated to take
prompt action in order to gain the necessary governmental authoriza-
tion for the resumption of work. In the meantime, the Contractor may
continue to work on unaffected operations. If these events should
affect the cost of completion or the time required, the Contractor may
request adjustments in contract time and price in accordance with
Article 15 of the agreement, which generally addresses claims and dis-
putes.
39
The previous iteration of this form merely contained clauses
addressing “concealed physical conditions” and the Owner’s obliga-
tions to obtain all necessary permits and approvals.
40
It arguably was
unclear how those provisions applied in cases of concealed conditions
businesses prefer arbitration to litigation); Theodore Eisenberg, Geoffrey P. Miller &
Emily Sherwin, Mandatory Arbitration for Customers but Not for Peers: A Study of
Arbitration Clauses in Consumer and Non-consumer Contracts, 92 J
UDICATURE
118,
119–22 (2008) (noting conflicting research in light of the same study of twenty-one large
companies’ contracts and concluding that companies’ use of arbitration clauses only in con-
sumer contracts but not in contracts with their peers suggests that lower cost is not the
dominant motive for use of arbitration clauses).
35
See Goetz & Scott, supra note 7, at 268–70 (“When unresolvable controversies arise
over the meaning of ‘ambiguous’ contractual language, the parties must resort to an
external dispute-resolution mechanism with its own criteria for interpretation. . . .
‘[I]ncompleteness error’ typically occurs when the parties inadvertently overlook a poten-
tially important, but low probability contingency.”).
36
Innovations in contract law (as opposed to contractual documents) can also reduce
incompleteness risks. See, e.g., Goetz & Scott, supra note 7, at 270 (“[M]any of the general
rules of contract, such as those of impossibility and excuse, impose constructive conditions
that reduce incompleteness risks.”).
37
A
M
. I
NST
.
OF
A
RCHITECTS
, AIA D
OCUMENT
A201-2007: G
ENERAL
C
ONDITIONS OF
THE
C
ONTRACT FOR
C
ONSTRUCTION
, § 3.7.5, available at http://www.admin.state.mn.us/
recs/cs/contracts/AIA%20201%20General%20Conditions%201997%20Edition.pdf.
38
Id.
39
Id.
40
See A
M
. I
NST
.
OF
A
RCHITECTS
, AIA D
OCUMENT
C
OMPARATIVE
: A201-2007
C
OMPARED TO
A201-1997, §§ 2.2.2, 3.7.4–5, 4.3.4, http://www.aia.org/aiaucmp/groups/aia/
documents/pdf/aias076821.pdf (last visited Jan. 30, 2013).
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94 NEW YORK UNIVERSITY LAW REVIEW [Vol. 88:83
that require the Owner to engage in distinctive interactions with gov-
ernment authorities. By addressing the matter explicitly, the revised
form may reduce the probability of costly disputes over the parties’
obligations when these contingencies arise.
41
Innovations can also respond to changes in the contracting envi-
ronment. The AIA’s revisions concerning archeological discoveries
and wetlands may fit this description, but the motivations behind
those revisions are unclear.
42
A more clear-cut example comes from
the Canadian real estate market. In recent years, the risk that a home
has been used as a “grow op”—a site for large-scale cultivation of
marijuana—has emerged as a material concern for Canadian
homebuyers.
43
The high temperatures and levels of humidity in grow
ops can cause structural damage and lead to the formation of dan-
gerous mold and fungus.
44
The combination of pesticide use and poor
ventilation can lead to the build-up of dangerous chemical residues.
45
41
But see Lynn R. Axelroth & W. Alexander Moseley, Owners’ and Contractors’
Commentaries on Problem Profusions, 28 C
ONSTRUCTION
L
AW
., no. 2, Spring 2008, at 26,
29 (arguing that the new provision, § 3.7.5, was unnecessary and introduces confusion). A
more commonplace example of a clause that reduces the probability of costly disputes is a
choice-of-forum clause. See Carnival Cruise Lines, Inc. v. Shute, 499 U.S. 585, 593–94
(1991) (“[A] clause establishing ex ante the forum for dispute resolution has the salutary
effect of dispelling any confusion about where suits arising from the contract must be
brought and defended, sparing litigants the time and expense of pretrial motions to deter-
mine the correct forum . . . .”).
42
Axelroth & Moseley, supra note 41, at 29 (“It is difficult to understand why the
drafting committee was compelled to add this new provision.”).
43
See O
NT
. A
SS
’
NOF
C
HIEFS OF
P
OLICE
, G
REEN
T
IDE
: I
NDOOR
M
ARIHUANA
C
ULTIVATION AND ITS
I
MPACT ON
O
NTARIO
2, 29 (2003), available at http://www.ontla.on.
ca/library/Repository/monoth/3000/10317711.pdf (describing the growth and social
problems associated with grow ops in Ontario); D
ARRYL
P
LECAS
, Y
VON
D
ANDURAND
,
V
IVIENNE
C
HIN
& T
IM
S
EGGER
, M
ARIHUANA
G
ROWING
O
PERATIONS IN
B
RITISH
C
OLUMBIA
: A
N
E
MPIRICAL
S
URVEY
(1997–2000), at 32–34 (2002), available at http://www.
icclr.law.ubc.ca/publications/reports/grow.pdf (describing an increasing number of grow
ops discovered by police in British Columbia and noting that most operations were
indoors, primarily in private houses); R
OYAL
C
AN
. M
OUNTED
P
OLICE
, R
EPORT ON THE
I
LLICIT
D
RUG
S
ITUATION IN
C
ANADA
—2009, at 16, 17 (2010), available at http://www.
rcmp-grc.gc.ca/drugs-drogues/2009/drug-drogue-2009-eng.pdf (reporting that the amount
of cannabis produced in Canada exceeds domestic demand and that indoor production
sites are more common than outdoor sites).
44
Luke I. Johnson & J. David Miller, Consequences of Large-Scale Production of
Marijuana in Residential Buildings, 21 I
NDOOR
& B
UILT
E
NV
’
T
595, 598–99 (2012) (dis-
cussing the potential structural damage and health risks from moisture, mold, chemical
residues, and illegal wiring); accord Allison Lampert, A Growing Problem; Indoor
Marijuana Farms Cause Untold Damage to Homes, but the Rules Are Unclear Whether
Sellers Must Disclose That Their Homes Were Once Used as Grow-Ops, T
HE
G
AZETTE
,
June 16, 2012, at C1; Megan O’Toole, Former Pot Houses Growing Problem for
Homebuyers; Reduces Price 20%; Criminal Element, Structural Damage Among Concerns,
N
AT
’
L
P
OST
, Jan. 10, 2011, at A9.
45
Johnson & Miller, supra note 44; Lampert, supra note 44.
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April 2013] CONTRACTS AS TECHNOLOGY 95
In addition, the heavy electricity consumption can lead to wiring
changes that present fire hazards.
46
In response to this change in the
contracting environment, lawyers and realtors have innovated by
developing clauses to be added to agreements of purchase and sale in
which the seller represents that the house has not been used as a grow
op.
47
Changes in legal aspects of the contracting environment can also
make contractual innovation valuable. As Professor David Horton has
shown, the recent history of arbitration clauses in consumer contracts
in the United States is one of a cycle of innovation, with each round
driven in large part by changes in the applicable law.
48
In the early
1980s, the Supreme Court of the United States began to demonstrate
increasing willingness to enforce arbitration clauses in consumer con-
tracts, even in the face of contradictory state law.
49
In response, many
companies rewrote their consumer contracts to include arbitration
clauses.
50
The next round in the cycle began with the Supreme Court’s
2001 decision in Green Tree Financial Corp. v. Bazzle, which tempo-
rarily diminished the appeal of arbitration by holding that class arbi-
tration was permitted if the arbitration agreement was silent on the
matter.
51
After the decision in Bazzle, many companies rewrote their
arbitration clauses to ban class actions.
52
However, between 2005 and
46
Johnson & Miller, supra note 44, at 598; Lampert, supra note 44; O’Toole, supra note
44.
47
Government Relations Issue Update: Marijuana Grow Houses, T
ORONTO
R
EAL
E
STATE
B
D
. (Jan. 2011), http://www.torontorealestateboard.com/about_treb/lobbying/
issues/pdf/grissues_grow-ops0111.pdf (describing realtors’ efforts to have grow house
clauses added to standard agreements of purchase and sale). In British Columbia, realtors
added a question about whether the property had been used as a grow op to the province’s
standard pre-contractual disclosure statement. Press Release, B.C. Real Estate Ass’n,
Grow-Ops Added to Property Disclosure (Feb. 20, 2004), available at http://www.bcrea.bc.
ca/docs/news-2004/2004-02-20-pds-release-final.pdf.
48
See David Horton, The Shadow Terms: Contract Procedure and Unilateral
Amendments, 57 UCLA L. R
EV
. 605, 619–45 (2010) (tracing the historical development of
contractual procedural terms).
49
See Southland Corp. v. Keating, 465 U.S. 1, 8 (1984) (holding that the U.S. Supreme
Court had jurisdiction to decide whether the Federal Arbitration Act preempted state law
voiding arbitration clauses); Moses H. Cone Mem’l Hosp. v. Mercury Constr. Corp., 460
U.S. 1, 24 (1983) (noting that the Federal Arbitration Act sets forth a policy in favor of
arbitration agreements, despite any state policies to the contrary).
50
Horton, supra note 48, at 622–23 (“Banks, credit card issuers, and telecommunica-
tions companies watched this jurisprudence closely. . . . [W]hen the Court glossed over
concerns that consumers did not knowingly assent to arbitration clauses, these groups saw
an opportunity.”).
51
539 U.S. 444, 451–53 (2003).
52
Horton, supra note 48, at 632 (“[A]fter Bazzle, ‘[e]very big company rewrote their
arbitration clauses to ban class actions.’” (second alteration in original) (quoting Nora
Lockwood Tooher, Plaintiffs Wrestle with Class Action Arbitration Bans, L
AW
. USA, Nov.
19, 2007, at 2, available at pubcit.typepad.com/clpblog/files/classarbarticle.pdf)).
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96 NEW YORK UNIVERSITY LAW REVIEW [Vol. 88:83
2010, four state supreme courts and five federal circuit courts held
that class arbitration waivers were substantively unconscionable in
cases involving low-value claims.
53
Their stated concern was that
without access to a class action it would be practically impossible for
consumers with low-value claims to bring meritorious claims against
vendors.
54
In response, some companies attempted to revise their
arbitration clauses to maintain the ban on class arbitration while
addressing courts’ concerns about deterrence of low-value claims.
55
Professor Horton has shown how this pattern of innovation is
reflected in the history of AT&T’s arbitration clauses:
In 2001, AT&T unilaterally inserted an arbitration clause that pro-
hibited class actions and included several other remedy-stripping
provisions, including one that eliminated any right the plaintiff
might have to recover attorney’s fees. In 2005, after several more
unilateral amendments to its procedural terms, AT&T unilaterally
removed the remedy-stripping terms, but did not delete the class
arbitration waiver. In December 2006 and again in January 2007,
AT&T unilaterally overhauled its class arbitration waiver, dis-
claiming its own right to recover attorney’s fees, allowing plaintiffs
to attend the arbitration in person, by phone, or to waive a hearing,
and providing a bounty of $5000 and double attorney’s fees for any
plaintiff who recovers more than AT&T’s last written settlement
offer.
56
AT&T’s revised arbitration clause was eventually upheld by the U.S.
Supreme Court in AT&T Mobility v. Concepcion.
57
53
See id. at 634 & n.202 (citing cases); see also Fensterstock v. Educ. Fin. Partners, 611
F.3d 124, 140 (2d Cir. 2010) (holding that a class action waiver and a class arbitration
waiver were unconscionable), vacated, Affiliated Computer Servs., Inc. v. Fensterstock,
131 S. Ct. 2989 (2011); Homa v. Am. Express Co., 558 F.3d 225, 230 (3d Cir. 2009) (striking
down a class arbitration waiver); Lowden v. T-Mobile USA, Inc., 512 F.3d 1213, 1218–19
(9th Cir. 2008) (same); Dale v. Comcast Corp., 498 F.3d 1216, 1224 (11th Cir. 2007) (same);
Kristian v. Comcast Corp., 446 F.3d 25, 61 (1st Cir. 2006) (holding that a prohibition
against class action in a contract between a cable television provider and customers was
invalid); Discover Bank v. Superior Court, 113 P.3d 1100, 1109–10 (Cal. 2005) (striking
down a class arbitration waiver); Kinkel v. Cingular Wireless LLC, 857 N.E.2d 250, 278 (Ill.
2006) (same); Muhammad v. Cnty. Bank, 912 A.2d 88, 99–100 (N.J. 2006) (same); Scott v.
Cingular Wireless, 161 P.3d 1000, 1009 (Wash. 2007) (same).
54
Dale, 498 F.3d at 1224 (“Without the benefit of a class action mechanism, the sub-
scribers would effectively be precluded from suing Comcast . . . .”); Horton, supra note 48,
at 634.
55
See, e.g., Firchow v. Citibank, No. B187081, 2007 WL 64763, at *1–2 (Cal. Ct. App.
Jan. 10, 2007) (describing Citibank’s modification of a cardholder agreement that inserted
a ban on class arbitration but gave its credit card customers twenty-five days to opt out by
rejecting the waiver and continuing to use the card pursuant to pre-modification terms
until the card expired).
56
Horton, supra note 48, at 654–55.
57
131 S. Ct. 1740, 1748–52 (2011) (holding that a state law doctrine used to invalidate a
class arbitration waiver was preempted by the Federal Arbitration Act).
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April 2013] CONTRACTS AS TECHNOLOGY 97
Innovations are not, however, necessarily beneficial to society.
This is as true for contracts as it is for other forms of technology.
58
Moreover, even when innovation is beneficial on balance, the benefits
and costs may not be equally distributed. In fact, contractual innova-
tions may not even be mutually beneficial to the parties who adopt
them. This is because contracts serve both to create and redistribute
value. In the presence of asymmetric information, better-informed
parties have an incentive to propose innovative terms that redistribute
value in their favor.
59
AT&T’s ban on class arbitration is a case in
point.
Contractual innovations can also generate negative externalities.
The classic example is that of financial contracts which magnify con-
tracting parties’ risk of insolvency and thereby jeopardize their credi-
tors’ solvency.
60
In extreme cases, these kinds of innovations can
throw entire economies into turmoil. These concerns prompted
renowned investor Warren Buffet to call innovative derivatives con-
tracts “financial weapons of mass destruction.”
61
Even if a particular contractual innovation is, on balance, benefi-
cial to society, it may benefit some members of society more than
others. For instance, some contractual innovations might increase the
relative earnings of people with legal training. Others might be biased
in favor, and thus increase the relative earnings of, people with
training in the law of a particular jurisdiction, such as New York or
England.
62
58
For an apocalyptic analysis of the implications of advances in nuclear technology,
biotechnology, and nanotechnology, see Bill Joy, Why the Future Doesn’t Need Us, W
IRED
,
Apr. 2000, at 238, available at http://www.wired.com/wired/archive/8.04/joy.html.
59
See Oren Bar-Gill & Kevin Davis, Empty Promises, 84 S. C
AL
. L. R
EV
. 1, 19 (2010)
(noting incentives for firms to propose modifications that reduce consumers’ welfare).
60
For literature on the social costs and benefits of financial innovations, see Peter H.
Huang, A Normative Analysis of New Financially Engineered Derivatives, 73 S. C
AL
. L.
R
EV
. 471, 491–503 (2000) (discussing the social costs and benefits of financial innovation);
Eric A. Posner & E. Glen Weyl, An FDA for Financial Innovation: Applying the Insurable
Interest Doctrine to 21st-Century Financial Markets, 107 N
W
. L. R
EV
. (forthcoming Mar.
2013) (manuscript at 6–16), available at http://ssrn.com/abstract=2010606 (same); see also
Lerner & Tufano, supra note 8, at 82–84 (proposing a method of measuring the impact of
financial innovations).
61
Letter from Warren E. Buffett, Chairman of the Board, Berkshire Hathaway Inc., to
Shareholders of Berkshire Hathaway Inc. 15 (Feb. 21, 2003), available at http://www.
berkshirehathaway.com/letters/2002pdf.pdf. Non-financial contracts can also generate neg-
ative externalities. See, e.g., Kevin E. Davis & Helen Hershkoff, Contracting for Procedure,
53 W
M
. & M
ARY
L. R
EV
. 507, 541–46 (2011) (arguing that procedural provisions such as
class waivers can generate negative externalities).
62
Here parallels might be drawn to the phenomenon of skill-biased technological inno-
vation. See generally Daron Acemoglu, I
NTRODUCTION TO
M
ODERN
E
CONOMIC
G
ROWTH
498–503 (2009). A technological innovation is said to be biased in favor of a particular
factor of production—such as workers with a particular skill—when the company increases
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98 NEW YORK UNIVERSITY LAW REVIEW [Vol. 88:83
C. Uncertainty and Methods of Resolving It
There are several ways in which the legal effects of a contract
may be uncertain. Sometimes the parties to a contract, including par-
ties who have supposedly negotiated or drafted a document, will be
uncertain about the legal obligations it creates. This may be because
they have not reviewed the applicable documents and laws with suffi-
cient care or because they find it difficult to predict how those docu-
ments or laws will be interpreted (perhaps because they are
ambiguous). The parties may also face uncertainty regarding salient
features of the contracting environment, and, as a result, they may be
uncertain about the consequences of assuming a particular set of legal
obligations. Take for example a homebuyer trying to ascertain the
effects of entering into an unconditional agreement of purchase and
sale in a region where there is a material risk that houses have been
used as grow ops.
63
The buyer may be uncertain of the effects of the
agreement because he or she does not know whether the express or
implied warranties cover this risk. Alternatively, he or she may be
uncertain—or even completely unaware—of the prevalence of grow
ops and the amount of damage they can cause.
These kinds of uncertainty can limit the value of a contract in
three main ways. First, for some parties uncertainty is inherently
undesirable. Second, uncertainty can dilute desirable incentives, or
even create perverse incentives, for one or both parties. Third, uncer-
tainty can lead to disagreements between the parties that lead to
costly litigation. Take for example a contract with a liquidated dam-
ages clause at risk of being deemed an unenforceable penalty. Assume
that if the clause is unenforceable, then only minimal damages will be
awarded. Some parties will reflexively wish to avoid this uncertain
state of affairs. As the likelihood that the clause will be found to be
unenforceable increases, the less effective it will be in motivating per-
formance. In addition, the more that the parties disagree about the
the relative (marginal) productivity of that factor of production which then increases its
relative earnings. Id. at 501. If the bias in favor of a particular factor is sufficiently strong,
an innovation may increase the relative earnings of a factor even as the supply of that
factor increases. Id. at 500. For example, since the late 1970s, technological change in the
United States appears to have been strongly biased in favor of skilled labor. Over that
period, the earnings of skilled workers relative to unskilled workers increased even as the
relative supply of skilled workers also increased. Id. at 498, 512. Acemoglu is careful to
distinguish the concepts of factor-biased and factor-augmenting technological change. He
suggests that factor-biased technological change increases the relative demand for the
factor in question. Meanwhile, factor-augmenting technological change makes that factor
more productive in physical terms but may not increase the relative demand for it. Id. at
500–03.
63
See supra notes 43–47 and accompanying text.
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April 2013] CONTRACTS AS TECHNOLOGY 99
likelihood of enforcement, the more likely they are to incur litigation
costs.
The value of a contract to the parties who adopt it may also
depend on the extent to which third parties are uncertain about its
effects. This is most likely to be the case if the parties to a contract
value the ability to transfer interests in it to the third parties in ques-
tion, either directly or indirectly.
64
For example, parties to intellectual
property licenses might value the ability to assign them to joint ven-
ture partners, bondholders might value the ability to sell their hold-
ings on the secondary market, and banks might value the ability to sell
participations in their loans to other banks. Similarly, firms effectively
sell indirect interests in their material contracts to investors when they
issue securities since the value of the contracts contributes to the value
of the securities. Consider, for example, a power company whose prin-
cipal asset is a contract to sell power to a utility company. If the power
company issues securities, the value of those securities will depend
heavily on the value of the contract. The easier it is for investors to
value the contract, the greater the proceeds the company will earn
from issuing securities.
To some extent uncertainty about the effects of a contract is
resolved automatically with the passage of time and during the course
of performance. This occurs as users of the contract become entangled
in disputes. The very existence of the dispute reveals information
about the likelihood and magnitude of previously unanticipated risks.
Moreover, in the course of resolving their disputes, the parties typi-
cally attempt to determine the effect of the contract. In addition, all of
this information is often revealed to interested observers. Disputes
that result in litigation and binding judicial interpretations of contrac-
tual documents are particularly informative.
65
For example, a litigated
dispute over whether a buyer is obligated to perform an agreement to
purchase a property that had been used as a grow op will resolve
uncertainty not only for the buyer and seller involved in the dispute,
but will be useful to many other potential home buyers as well.
66
There are three proactive ways in which people can resolve
uncertainty about the effects of a particular contractual document: (1)
64
Greely, supra note 8, at 135–42 (discussing how the prospect of secondary sales
encourages standardization).
65
See Goetz & Scott, supra note 7, at 276–79 (describing how the process of judicial
implication of terms reduces “formulation errors”); see also Klausner, supra note 8, at
775–79 (characterizing judicial interpretations as “network benefits”).
66
See, e.g., Lampert, supra note 44 (describing litigation in Laval, Quebec over
whether the seller had a duty to disclose information about prior use as a grow op pursuant
to general provisions of the Quebec Civil Code).
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100 NEW YORK UNIVERSITY LAW REVIEW [Vol. 88:83
by reading the document more carefully, (2) by investigating the
drafter of the document, and (3) through the lawmaking process.
The first method involves incurring what we might call “reading
costs.”
67
For instance, in some Canadian real estate markets a close
reading of recently drafted agreements of purchase and sale will
reveal a representation that the property has not been used as a grow
op.
68
Such a clause alerts naive buyers to the existence of this risk and
resolves uncertainty about how it will be dealt with by the courts.
The magnitude of reading costs—how “readable” the contract
is—will depend in part on the inherent complexity of the contract, the
number of distinct contingencies provided for, and the amount of
detail with which the parties’ obligations are specified in each contin-
gency.
69
Reading costs also depend on the clarity of the language in
the contractual document and in the applicable body of contract law.
Some documents are simply more readable than others. Here it is
important to take into account not just the contractual document itself
but also any available commentary, such as user’s guides or annota-
tions. Last but not least, the magnitude of reading costs also depends
on how much the document and the associated contract deviate—in
terms of both language and substance—from documents with which
the reader is already familiar.
70
This last point suggests that the reading costs associated with a
contractual document will decline as potential readers become
familiar with the document. Up to a point, it is easier to review an
agreement that contains only modest deviations from a familiar docu-
ment than it is to read a document of similar length from scratch—
hence the popularity of blacklining to compare different versions of
contracts. This in turn implies that the value of adopting a given con-
tractual document will increase to the extent that it either is already
familiar to potential readers or is expected to become familiar to such
67
The concept of reading costs and their significance are discussed in Eric Bennett
Rasmusen, Explaining Incomplete Contracts as the Result of Contract-Reading Costs, 1
A
DVANCES
E
CON
. A
NALYSIS
& P
OL
’
Y
, at art. 2 (2001). See also Abraham L. Wickelgren,
Standardization as a Solution to the Reading Costs of Form Contracts, 167 J. I
NST
. &
T
HEORETICAL
E
CON
. 30 (2011) (explaining how standard form documents reduced reading
costs).
68
See supra note 47 and accompanying text.
69
This might alternatively be described as the level of “completeness” of the contract.
See Davis, supra note 18, at 5–6 (discussing completeness as either limiting the range of
actions permitted in a given contingency or limiting the number of contingencies in which a
given action is permitted).
70
See, e.g., Goetz & Scott, supra note 7, at 286–87 (noting that the use of “preformu-
lated terms” may ease communication); Wickelgren, supra note 67, at 39
(“[S]tandardization facilitates the comparison of contracts from different firms without
having to read both contracts.”).
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readers while it is in use. In other words, the value of a document will
depend on how frequently it has been used in the past and how widely
it will be used while in force.
71
Kahan and Klausner call these two
effects “learning benefits” and “network benefits” respectively.
72
The
corollary of this insight is that relatively innovative contracts—that is
to say, contracts which are relatively unfamiliar—will not be particu-
larly valuable unless they are expected to be widely adopted.
73
This
argument has been cited as the reason sovereign bond markets appear
to be slow to embrace theoretically appealing innovations such as col-
lective action clauses.
74
A second way to resolve uncertainty about a contract is to investi-
gate the person who drafted the contractual document. In other
words, it may be possible to draw inferences about the contract from
the trustworthiness of the drafter.
75
In this context, “trustworthiness”
refers to the extent to which the drafter can be expected to act in the
interests of the prospective user. Trustworthiness might stem from the
personal values and predilections of the individuals involved or the
values embedded in an organizational culture.
76
For instance, when it
comes to adopting a contract used by other parties, it may be sensible
to trust people or organizations known to be obsessively farsighted
and thorough; copying a corporate acquisition agreement drafted by
an established Wall Street law firm makes more sense than copying
from a novice solo practitioner. Trustworthiness might also be a
71
See Goetz & Scott, supra note 7, at 286–88 (discussing the benefits that flow from
wide use of standardized terms, in particular, from the widespread understanding of pre-
cise terminology); Kahan & Klausner, supra note 8, at 719–27 (discussing multiple possible
benefits of employing widely used terms, including increased efficiency and familiarity,
reduced uncertainty, and lower costs); Klausner, supra note 8, at 782–88 (describing how
the wide use of contracting terms—including both contemporaneous use and past use—can
drive down the costs associated with those terms by, for example, reducing legal costs and
costs associated with uncertainty).
72
Kahan & Klausner, supra note 8, at 719, 725.
73
See id. at 734–35 (noting that “[e]arly adopters of a term” can expect to realize bene-
fits from the term commensurate with the number of other businesses that begin to make
use of the term and the speed with which they do so); Klausner, supra note 8, at 774–75
(comparing contract terms to technology—in particular, to a computer network—and
noting that the value of the development and explication of the terms will likely depend, at
least in part, on the size of the network).
74
See Choi & Gulati, supra note 8, at 939–49 (discussing bond market innovation
trends); cf. Stephen J. Choi, G. Mitu Gulati & Eric A. Posner, The Dynamics of Contract
Evolution, 88 N.Y.U. L. R
EV
. 1 (2013) (citing evidence that innovation in sovereign bond
agreements is more common than models based on network effects would predict).
75
See Rasmusen, supra note 67, at 9–10 (discussing how an honest reputation might
reduce reading costs).
76
See Oliver E. Williamson, Calculativeness, Trust, and Economic Organization, 36 J.L.
& E
CON
. 453, 475–79 (1993) (discussing how cultural factors may induce trust).
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102 NEW YORK UNIVERSITY LAW REVIEW [Vol. 88:83
reflection of the incentives facing the drafter.
77
Take the case of
whether to adopt a standard form proposed by a counterparty. A firm
that is likely to lose a significant amount of business if it gains a repu-
tation for drafting one-sided contracts has an incentive to be trust-
worthy. This may explain evidence that firms that withhold
contractual terms from consumers do not systematically adopt biased
terms.
78
A third proactive way of resolving uncertainty—and shaping the
manner in which that uncertainty is resolved—is through the law-
making process.
79
Drafters could initiate litigation or lobby for legisla-
tion designed principally to clarify the legal effect of their documents.
For example, the International Swaps and Derivatives Association
(ISDA) has launched a worldwide campaign to lobby for the enact-
ment of legislation that ensures that the “netting” provisions of their
agreements will be enforced in the event of insolvency.
80
Similarly,
Canadian realtors have lobbied for governments to establish registries
listing homes that have been used as grow ops.
81
Rational parties should only incur reading costs and investigation
costs to the point at which the benefit of resolving any remaining
uncertainty equals the incremental reading, investigation, litigation, or
lobbying costs.
82
In some situations, it will be optimal to choose one
strategy over the other. For instance, in highly adversarial situations,
the optimal strategy might be to read carefully. If the drafter is consid-
ered to be highly trustworthy, on the other hand, it might be rational
to forgo reading altogether. Of course, in some situations a
77
See id. at 463–75 (discussing situations in which trust is based on rational
calculation).
78
See Florencia Marotta-Wurgler, Are “Pay Now, Terms Later” Contracts Worse for
Buyers? Evidence from Software License Agreements, 38 J. L
EGAL
S
TUD
. 309, 312 (2009)
(finding that less accessible end-user license agreements are not systematically biased for
or against consumers).
79
See, e.g., Goetz & Scott, supra note 7, at 274 (discussing the UCC as a response to
mounting “[p]ressure . . . to imply informal understandings and usages into contracts”).
80
For a discussion of ISDA’s lobbying campaign, see Memorandum from the
Int’l Swaps and Derivatives Assoc., Inc. on the Implementation of Netting Legislation
(Mar. 2006), available at http://www2.isda.org/attachment/MjM4NQ==/Memo-Model-
Netting-Act.pdf. For a list of the jurisdictions which had adopted ISDA’s Model Netting
Act as of July 2011, see Netting Legislation—Status, I
NT
’
L
S
WAPS AND
D
ERIVATIVES
A
SSOC
., I
NC
.
(Jul. 26, 2011), http://www2.isda.org/attachment/MzQwMQ==/
NETTING%20LEGISLATION%20072611.pdf.
81
See Government Relations Issue Update: Marijuana Grow Houses, supra note 47
(noting the realtors’ lobbying of municipal, provincial, and federal governments for
changes including the creation of a registry of grow houses).
82
See Avery Katz, Your Terms or Mine? The Duty to Read the Fine Print in Contracts,
21 R
AND
J. E
CON
. 518, 522–30 (1990) (providing a formal model of this choice that also
takes into account the possibility that the drafter of the contract will anticipate the choice
made by the potential reader).
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combination of reading, investigation, litigation, and lobbying might
be optimal.
Innovations can also influence the magnitude of reading costs. By
definition, an innovative document represents a departure from an
existing document. If the existing document is familiar to readers,
then the innovation will tend to increase reading costs. The less com-
parable the innovative contract is to familiar alternatives, the greater
the incremental reading costs.
83
Increasing the number of potential
readers has the same effect. If the innovative contract will cause many
people in an organization to incur additional reading costs, then it will
be relatively unattractive.
84
The same consideration limits the value of
innovation in settings where the ability to transfer a contract is very
valuable. This implies, for example, that we should see relatively little
innovation in the contracts embodied in securities that are intended to
be widely traded.
85
Similar reasoning suggests that innovation is rela-
tively unlikely to be valuable in contracts that are likely to be material
to investors in the organizations bound by the contract.
Some innovations are designed to enhance readability or compa-
rability. This is the main purpose of redrafting contracts in plain lan-
guage.
86
Innovations in materials that supplement contractual
documents, such as annotations or training manuals, can also serve to
reduce reading costs. Meanwhile, labeling documents in accordance
with a standardized scheme can facilitate both comparison and access
to supplementary materials. This is especially true if the labels are
machine readable. For example, embedding XML codes in contractual
83
Davis, supra note 12, at 1084 n.37 (“[S]tandardization makes it easy for consumers to
shop around.”); see also Wickelgren, supra note 67, at 39 (“[S]tandardization facilitates the
comparison of contracts from different firms without having to read both contracts.”).
84
See Todd D. Rakoff, Contracts of Adhesion: An Essay in Reconstruction, 96 H
ARV
.
L. R
EV
. 1173, 1222–23 (1983) (explaining the use of standard forms as a way of reducing
the costs of communication within complex organizations); see also R
ESTATEMENT
(S
ECOND
)
OF
C
ONTRACTS
§ 211 cmt. a (“[Standardized] [f]orms can be tailored to office
routines, the training of personnel, and the requirements of mechanical equipment. Sales
personnel and customers are freed from attention to numberless variations and can focus
on meaningful choice among a limited number of significant features . . . . Operations are
simplified and costs reduced.”).
85
See Greely, supra note 8, at 167 (noting that, where standardization is common,
“some innovations that would have been adopted in the absence of standardization will not
be adopted” because the firm would “lose[ ] the premium in the secondary market for
standardization”).
86
See Bernard Black, Note, A Model Plain Language Law, 33 S
TAN
. L. R
EV
. 255,
261–62 (1981) (arguing that drafting contracts in plain language ensures that consumers
“can read and understand” them and empowers consumers to “shop more wisely”). For a
discussion of readability formulas, see id. at 278–80, where the author highlights New
York’s “vague standard for plain language” and the Flesch-Kincaid readability test, among
others). But see Goetz & Scott, supra note 7, at 300 (“For [practitioners], plain and simple
language has long conjured up the specter of negligence liability.”).
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104 NEW YORK UNIVERSITY LAW REVIEW [Vol. 88:83
documents can make it easy for individual terms to be searched for
and linked to texts that explain their import, even as they are cut and
pasted from one document to another.
87
II
T
HE
S
UPPLY OF
I
NNOVATION
Supplying innovations involves both generating innovations and
disseminating them to prospective users. The analysis in this Part is
premised on the idea that the two types of processes are interrelated
to the extent that contractual innovation is cumulative—in other
words, to the extent to which it involves changing only selected terms
of an existing document (as opposed to drafting from scratch). When
innovation is cumulative, the results of investments in innovation will
generally depend on the nature and quality of the documents the
innovator had to work with.
A. Generating Innovations
1. For-Profit Innovation
Prominent commentators have suggested that contractual innova-
tion is undersupplied, meaning that the social benefits of additional
innovation would exceed the costs.
88
This view appears to be based on
analysis of one particular form of innovation: innovation that flows
from deliberate investments in research and development aimed at
capturing the pecuniary benefits of either using or selling the resulting
contractual documents.
What kinds of investments are required to create an innovative
contract? Facts revealed in the course of a copyright dispute between
two insurance companies provide hints about the kinds and amount of
effort required to produce valuable contractual innovations. In
American Family Life Insurance Co. of Columbus v. Assurant, Inc.,
89
the plaintiff American Family Life Insurance Co. (AFLAC) com-
plained that the defendants had infringed its copyrights in four insur-
ance policies.
90
AFLAC’s witnesses testified that each policy took
between eight and nine months to create, with drafting requiring
87
See Lawrence A. Cunningham, Language, Deals and Standards: The Future of XML
Contracts, 84 W
ASH
. U. L. R
EV
. 313, 314–23 (2006) (discussing the application of XML to
commercial contracts).
88
See Goetz & Scott, supra note 7, at 290–94 (discussing different barriers to contrac-
tual innovation); Gulati & Scott, supra note 8, at 12 (describing the innovation-chilling
effects of law firms’ organization).
89
No. 1:05-CV-1462, 2006 WL 4017651 (N.D. Ga. Jan. 11, 2006).
90
Id. at *3.
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between three to six months.
91
Numerous individuals were involved in
the process.
92
Before they could start drafting, “AFLAC had to decide
which new conditions and treatments to cover; which new benefits to
provide and on what terms; which existing benefits, if any, to change;
which definitions and/or other provisions to add or change; and which
order was best.”
93
Drafts of the policies were “reviewed and revised
‘repeat[edly]’” to determine “whether the proposed language appro-
priately described the specific benefits to be provided . . . ; whether
the overall language was consistent with the actuarial department’s
understanding of the anticipated coverage; what effect the new policy
language would have on claims; [and] whether claims administrators
had clear guidelines for making benefit determinations . . . .”
94
AFLAC also evaluated whether “its ‘narrative’ language style—as
compared to the ‘terse, nondescriptive’ style employed by some of its
competitors—would be ‘readily understood by consumers.’ ”
95
Mean-
while the defendants—who were found to have infringed copyright by
copying two of the plaintiff’s policies virtually word for word—
claimed to have paid an outside law firm over $540,000 to draft their
policies.
96
Inability to appropriate the benefits of innovation, in contracting
as well as other fields, is often seen as one of the leading obstacles to
profit-oriented innovation.
97
The benefits that flow to a person who
invests in research and development will depend upon both the total
benefits generated by any resulting innovation and the extent to which
the person is able to appropriate those benefits. Documents are easy
to copy and their original producers typically do not share in the bene-
fits derived by copiers. Consequently, producers of innovative docu-
ments can typically capture only a fraction of the social benefits
created by their innovations. This in turn implies that producers will
have sub-optimal incentives to invest in innovation—it will not be in
their interest to invest in innovation to the point where the costs of
their investment would equal the full social benefits of innovation.
98
91
Id. at *1.
92
See id. at *2 (noting that the drafting process included “representatives from the
company’s actuarial, claims, marketing, compliance, and underwriting departments”).
93
Id.
94
Id. (first alteration in original).
95
Id. (citations omitted).
96
Id. at *2 n.12.
97
For a summary of the general incentive problem, see S
COTCHMER
, supra note 14, at
31–41. In relation to contracts, see Goetz & Scott, supra note 7, at 292 (“So long as indi-
vidual contractors are incapable of capturing the full benefits of their innovative expres-
sions, new formulations will be underproduced.”).
98
See Goetz & Scott, supra note 7, at 264 (explaining that barriers to innovation
impose costs on the development of new contractual formulations).
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106 NEW YORK UNIVERSITY LAW REVIEW [Vol. 88:83
The situation would be different if intellectual property laws pro-
vided greater protection for producers of contractual documents. Con-
tracts are protected by copyright as “original works of authorship,”
but only the most blatant and literal forms of copying violate that cop-
yright.
99
Copyright in a document is not infringed by using similar lan-
guage embodying the same idea, much less by different language.
100
It
has also been held that the specific language of a contract or a busi-
ness form cannot be copyrighted where the use of that language is
essential to expressing a particular underlying idea.
101
Similarly,
although it is not clear whether anyone has ever sought to patent a
contractual document, the requirement that patentable inventions
must utilize or harness a “law of nature” is likely to make it difficult to
obtain such a patent.
102
On the other hand, so long as they are not
disseminated too widely, innovative contractual documents might be
protected as trade secrets.
103
99
See generally id. at 292 n.78 (considering contractual innovations in light of the fed-
eral copyright law); Paul G. Reiter, Annotation, Copyright, Under Federal Copyright Laws,
of Forms, or Form Books, 8 A.L.R. F
ED
. 869 (1971) (describing the circumstances under
which forms and form books receive copyright protection under federal law).
100
AFLAC, 2006 WL 4017651, at *8 (“Necessarily, where the same contractual provi-
sion is to be expressed there will be similarity of language. To constitute infringement in
such cases a showing of appropriation in the exact form or substantially so of the copy-
righted material should be required.” (quoting Dorsey v. Old Sur. Life Ins. Co., 98 F.2d
872, 874 (10th Cir. 1938)).
101
See, e.g., Herbert Rosenthal Jewelry Corp. v. Kalpakian, 446 F.2d 738, 742 (9th Cir.
1971) (“When the ‘idea’ and its ‘expression’ are thus inseparable, copying the ‘expression’
will not be barred, since protecting the ‘expression’ in such circumstances would confer a
monopoly of the ‘idea’ upon the copyright owner free of the conditions and limitations
imposed by the patent law.”).
102
Under the Patent Act, only inventions or discoveries may be patented. 35 U.S.C.
§ 101 (2006). The Supreme Court has construed the term “inventions” to include things
“made by man” that utilize or harness a “law of nature” (e.g., gravity) for human benefit.
See, e.g., Diamond v. Diehr, 450 U.S. 175, 182–88 & n.11 (1981) (explaining that a mathe-
matical formula was not patentable because abstract ideas did not enjoy patent protection
but that a process for curing synthetic rubber, which incorporated a mathematical formula,
was patentable); see also Andrew A. Schwartz, The Patent Office Meets the Poison Pill:
Why Legal Methods Cannot Be Patented, 20 H
ARV
. J.L. & T
ECH
. 333, 335 (2007) (criti-
cizing the Patent Office’s decision to patent legal methods). On the other hand, business
methods are “inventions” that are patentable. See Bilski v. Kappos, 130 S. Ct. 3218, 3228
(2010) (explaining that the Patent Act also covers some business methods). Schwartz
claims that this is because they either save time or harness a law of nature (e.g., mathe-
matics) for human benefit. Schwartz, supra, at 371–72 (citing State St. Bank & Trust Co. v.
Signature Fin. Grp., Inc., 149 F.3d 1368 (Fed. Cir. 1998), cert. denied, 525 U.S. 1093 (1999)).
103
The single most important requirement of the trade secret law is that the trade secret
must in fact be secret. R
ESTATEMENT
(F
IRST
)
OF
T
ORTS
§ 757 cmt. b (1939). Although
disclosure to employees, licensees, or others on a need-to-know basis is permissible, In re
Innovative Const. Sys., Inc., 793 F.2d 875, 883 (7th Cir. 1986), the secrecy requirement
generally discourages wide dissemination of innovations. Moreover, information disclosed
about a publicly available product cannot be a trade secret. See, e.g., Nora Beverages, Inc.
v. Perrier Grp. of Am., 164 F.3d 736, 750 (2d Cir. 1998) (finding that the shape of water
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Third parties who generate innovations for use by others face
another obstacle to appropriating the value of their innovations: Pro-
spective users may find the value of the innovation uncertain. The
benefits of a good contract are often invisible: Accidents are avoided
because parties responded to incentives to take precautions and dis-
putes are forestalled because obligations are clear. Users will not pay
for what they cannot see, and unsophisticated users may not be able to
see the benefits of adopting an innovative contract. At the same time,
the ill effects of a poorly drafted contract are often highly visible:
unpleasant surprises, confusion, and litigation. A drafter who provides
a poor quality document may or may not be legally liable for these
costs, but its reputation may suffer. Consequently, third parties who
provide contracts for use by others may bear the downside risk of
innovation but little of the upside.
104
2. Innovation Aimed at Capturing Indirect or Non-pecuniary
Benefits
There is no question that inability to capture pecuniary benefits
presents a significant obstacle to profit-oriented innovation. However,
the significance of this obstacle is unclear because the prospect of
receiving indirect or non-pecuniary benefits can bolster incentives to
invest in innovation. There are situations in which it is valuable for a
firm to develop a reputation for creating innovative contracts, typi-
cally as a way of attracting prospective clients. For instance, a law firm
or investment bank may be happy to let other people in on its latest
great idea in order to attract clients who want to benefit from the next
idea.
105
In addition, actors who are not motivated by the prospect of
profit produce many technological innovations. These actors include,
for example, weekend hobbyists and scientists employed by not-for-
profit academic institutions.
106
In this situation, the pace of innovation
bottles in the market cannot be a trade secret). These authorities suggest that innovative
contractual language plainly written on the face of a contract will likely constitute such
disclosure “in the normal process of exploitation” if the contract is disseminated widely.
Aronson v. Quick Point Pencil Co., 440 U.S. 257, 266 (1979).
104
See Claire A. Hill, Why Contracts Are Written in “Legalese,” 77 C
HI
.-K
ENT
L. R
EV
.
59, 71–72 (2001) (noting that “for the lawyers’ firms, following the standard makes
avoiding a bad outcome . . . easier and less costly”).
105
This is how some scholars explain Wachtell, Lipton, Rosen & Katz’s investment in
creating the poison pill. See Powell, supra note 8, at 434–38; see also Peter Tufano,
Financial Innovation and First-Mover Advantages, 25 J. F
IN
. E
CON
. 213, 215–35 (1989)
(providing evidence that producers of financial innovations have advantages over competi-
tors that might arise because innovation is a signal of intangible and unique abilities).
106
For a survey of the literature, see Jeanne C. Fromer, Expressive Incentives in
Intellectual Property, 98 V
A
. L. R
EV
. 1764–81 (2012) (discussing non-pecuniary motivations
of authors and inventors).
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108 NEW YORK UNIVERSITY LAW REVIEW [Vol. 88:83
depends on the supply of appropriately motivated actors as well as
their access to funding (for example, from the state or charitable insti-
tutions) and prior innovations. Similarly, academics or well-
intentioned bureaucrats who review and suggest improvements to
existing contractual documents may drive contractual innovation.
3. Learning-by-Doing
Technological innovations are not necessarily the products of
deliberate and costly research or development. Instead, some innova-
tions are by-products of the use of previous generations of technolo-
gies. In other words, innovation might result from learning-by-doing,
or more appropriately, learning-by-trading.
107
In this case, the nature
of innovation in a given field, starting from a given technological base,
will be an increasing function of activity levels.
108
It seems intuitive
that this kind of process will play a role in contractual innovation. For
example, the revisions to the AIA document to address archeological
materials on construction sites may have been an organic product of
experience rather than the result of a deliberate search for ways to
improve the contract. Similarly, a cell-phone company that finds itself
a defendant in a class arbitration may add a class action waiver to its
standard form arbitration agreement without needing to commission
an empirical study on the prevalence of class actions.
B. The Importance of Cumulative Innovation
Technological innovation is generally cumulative; for the most
part it involves applying existing knowledge in new contexts or com-
bining existing technologies in new ways.
109
There is no reason to
believe that contractual innovation is any different. Most innovations
are likely to result from incremental changes such as small tweaks to
existing documents, often using language lifted from other documents,
rather than from drafting entirely new contractual language from
scratch.
110
For example, notwithstanding the substantial investment
107
See Kenneth J. Arrow, The Economic Implications of Learning by Doing, 29 R
EV
.
E
CON
. S
TUD
. 155 (1962) (developing a model in which technical change occurs through
experience).
108
Id. at 157 (using cumulative production of capital goods as an index of experience).
109
See Mark A. Lemley, The Economics of Improvement in Intellectual Property Law,
75 T
EX
. L. R
EV
. 989, 997 (1997) (“[K]nowledge is cumulative—authors and inventors must
necessarily build on what came before them.”).
110
See Hill, supra note 104, at 70–75 (describing incentives to draft contracts by
changing existing documents).
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April 2013] CONTRACTS AS TECHNOLOGY 109
AFLAC made in revising its insurance policies, the final products still
involved additions to and revisions of earlier versions.
111
If contractual innovation is generally cumulative, then access to
contractual documents will be a crucial determinant of the quality of
innovation.
112
The more widely an innovative contract is dissemi-
nated—meaning the easier it is to find and review—the easier it will
be for other actors to use it as a basis for innovation and the better the
results of their investments in innovation will be. For instance,
AFLAC’s drafting process would undoubtedly have been much less
productive if it had been forced to draft a new policy from scratch or if
the policy it used as a starting point had been of poorer quality.
An important implication of the phenomenon of cumulative
innovation is that the benefits of creating and disseminating an inno-
vative contract go beyond the benefits to its users. The benefits of
innovation and dissemination also include benefits reaped by people
who use innovations enabled by the initial innovation.
113
C. Dissemination
Dissemination involves the transmission of innovations from
innovators to potential users. Transmission involves both sending and
receiving information, and so it encompasses not only publishing
information but also searching for and assimilating that information.
Sometimes this process is virtually automatic, as when a person who
has drafted an innovative contract presents it to a counterparty who
then turns around and reuses it in dealings with other parties. Other-
wise, dissemination involves costly efforts both to publish and search
for documents.
The costs of dissemination have several components. The costs of
publication are now almost trivial, consisting mainly of the costs of
uploading, storing, and downloading documents. If, however, contrac-
tual documents contain information about users’ business methods,
111
Am. Family Life Ins. Co. of Columbus v. Assurant, Inc., No. 1:05-CV-1462-BBM,
2006 WL 4017651, at *6 (N.D. Ga. Jan. 11, 2006) (describing revisions).
112
On the general importance of access to technology as a determinant of innovation,
see M
OKYR
, supra note 4, at 7 (“Progress in exploiting the existing stock of knowledge will
depend first and foremost on the efficiency and cost of access to knowledge.”).
113
See Lemley, supra note 109, at 997–98 (discussing the potential for and constraints
on improvements of old works). In copyright law it is well recognized that permitting the
creation of new works derived from existing texts is a way of advancing the progress of
science and art and is used to justify limits on copyright protection. For instance, in Feist
Publications, Inc. v. Rural Telephone Service Co., 499 U.S. 340, 349–50 (1991), Justice
O’Connor noted that “[i]t may seem unfair that much of the fruit of the compiler’s labor
may be used by others without compensation” but concluded, “[t]his result is neither unfair
nor unfortunate. It is the means by which copyright advances the progress of science and
art.”
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110 NEW YORK UNIVERSITY LAW REVIEW [Vol. 88:83
then dissemination risks revealing confidential information. In this
case, the costs of publication include the costs of redacting documents
and any residual costs associated with disclosure of confidential
information.
The other components of dissemination costs are the costs of
searching for and assimilating contractual documents. To some extent,
the magnitude of these costs will depend on the manner in which the
document was published. Publishers can make contractual documents
readable, comparable, and searchable by developing explanatory
materials and tools for searching for documents that meet the needs of
specific users. The costs of developing these kinds of materials and
tools, as well as the costs of making them familiar to potential users,
should not vary with the size of the database being searched. Simi-
larly, the costs of identifying the database in which a particular docu-
ment is stored decline as databases become more comprehensive. For
both of these reasons, there may be economies of scale and scope in
the publication of contractual documents. In other words, firms that
are already in the business of publishing large numbers of documents,
both contractual and otherwise, should tend to have lower average
costs than other firms.
For users, the potential costs of dissemination also include loss of
competitive advantage, assuming that the contract finds its way into a
competitor’s hands. It is valuable to have exclusive access to a con-
tract that has greater intrinsic value or is more readable than the con-
tracts of competitors. Losing that advantage should be counted as a
cost of dissemination. So, for example, an insurance company like
AFLAC might suffer a real economic cost if competing insurance
companies begin to use its policies.
So what motivates actors to incur dissemination costs? It is rea-
sonably clear why prospective users will search for innovative con-
tracts—they hope that the value of the innovations they discover will
exceed the costs of searching. But why do drafters of innovative con-
tracts incur the costs of publishing them? Drafters who are users ben-
efit from disseminating innovative documents to potential
counterparties, transferees, and their agents. In cases where the con-
tractual document is regarded as an integral part of the user’s product
offerings, as is the case for firms such as insurance companies and
credit card issuers, dissemination is likely to be part and parcel of a
broader marketing campaign. Reducing reading costs for these actors
makes it more likely that they will trade with the drafter. As for
drafters who produce documents for use by others, dissemination can
provide direct pecuniary benefits in the form of fees received for
selling access to the documents. There may also be indirect benefits in
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April 2013] CONTRACTS AS TECHNOLOGY 111
the form of revenues from selling complementary products, such as
explanatory materials, training programs, dispute resolution services,
or legal advice.
Drafters may also benefit from disseminating contracts because
they anticipate reciprocity. Scholars of innovation have identified
many contexts in which communities of user-innovators share their
innovations with one another.
114
They may do this because they
expect to benefit from similar behavior on the part of other drafters in
the not-too-distant future. This interpretation is particularly plausible
when the costs of dissemination, including both the direct costs and
other costs stemming from loss of exclusive access to an innovation,
are low.
115
So, for example, the owner of a garment factory in
Bangladesh might share copies of his novel letter-of-credit documen-
tation with the owner of a soccer ball manufacturer, as opposed to a
competing garment manufacturer, on a “you scratch my back, and I’ll
scratch yours” basis.
In principle, users might also share contracts without expecting to
receive direct economic benefits in return. Some scholars have specu-
lated that these kinds of sharing norms arise among user-innovators
when there are significant but indirect net economic benefits for the
group as a whole.
116
This is likely when sharing generates indirect ben-
efits for the innovator, the direct costs of sharing are low, and the
costs of enforcing norms that require sharing are also low.
117
Wiki
technology
118
can now be used to facilitate sharing of innovative con-
tractual provisions and may help to sustain sharing norms by making it
114
See
VON
H
IPPEL
, supra note 14, at 77–91 (arguing that users often disseminate their
innovations voluntarily, and that this is the best way to benefit from what they have devel-
oped); see also Katherine J. Strandburg, User Innovator Community Norms: At the
Boundary Between Academic and Industry Research, 77 F
ORDHAM
L. R
EV
. 2237, 2240–41
(2009) (citing examples of user-innovator communities).
115
See Strandburg, supra note 114, at 2244 (including the costs and rewards of sharing
innovations in a decisionmaking model).
116
Id. at 2241–42.
117
See
VON
H
IPPEL
, supra note 14, at 90–91; see also Strandburg, supra note 114, at
2245 (“Such a norm [of sharing] is viable as long as the group can detect failure to share
and impose a sufficient penalty (or equivalently increase the reward for sharing) at a rela-
tively low cost.”); id. at 2246 (“[N]orms of sharing are more tenable when the costs of
sharing an innovation are relatively low.”).
118
“The term wiki reflects both a software platform and a website format. The salient
features for the typical wiki website are pages that can be easily edited using a web
browser, updated—often in real time—and collectively edited by its readers/participants.”
Jon M. Garon, Wiki Authorship, Social Media, and the Curatorial Audience, 1 H
ARV
. J.
S
PORTS
& E
NT
. L. 95, 97–98 (2010) (citation omitted).
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112 NEW YORK UNIVERSITY LAW REVIEW [Vol. 88:83
possible for those who share to be rewarded through public recogni-
tion of their contributions.
119
III
T
HE
S
OURCES OF
I
NNOVATION
What kinds of organizations are likely to produce contractual
innovations and to disseminate them in the ways discussed in the pre-
ceding Parts? Much of the recent literature has focused on the role of
law firms, but they are only one of several distinct sources. First, there
are users, who play fundamentally different roles than third parties
who provide documents for use by others. Among those third parties,
law firms have to be treated separately because they are subject to
distinctive regulatory privileges and requirements. Then it is impor-
tant to distinguish between third parties who are motivated to inno-
vate by the prospect of direct pecuniary gains, and third parties such
as trade associations or academics that are motivated by other factors.
Although these different sources of innovation should be treated sep-
arately for analytical purposes, in practice the distinctions may
become blurred as different types of actors combine and
collaborate.
120
The following sections of this Part will show that these potential
sources of innovation differ along several dimensions. First, they vary
in terms of their ability to appropriate the pecuniary benefits from
innovation and dissemination and in their responsiveness to pecuniary
incentives. Second, they vary in terms of their ability to tap into the
benefits of learning-by-doing. Third, they vary in terms of their access
to previously drafted agreements that might serve as a basis for later
innovations. Fourth, they differ in terms of their ability to exploit
economies of scale and scope in disseminating documents. Finally, the
potential sources of contractual innovation are also likely to vary sys-
tematically in terms of their trustworthiness—that is, their inherent
119
Compare Triantis, supra note 7, at 34 (“The transparency of contributions to the
[wiki] allows a participant to take credit for her postings, edits or comments.”), and Davis,
supra note 12, at 1095 (“[M]any people volunteer in order to socialize or . . . to obtain
status in the eyes of their peers.”), with Yochai Benkler, Coase’s Penguin, or, Linux and
The Nature of the Firm, 112 Y
ALE
L.J. 369, 425–26 & n.96 (2002) (pointing out that the
commonly cited “reputation gains” motivation cannot be reconciled with the practices
of two of the most successful free software projects, Apache and the Free Software
Foundation, neither of which recognizes personal contributions).
120
As this article went to press, a law firm announced an alliance—apparently in the
form of a licensing agreement—with a provider of legal forms. Jennifer Smith, Look Out,
LegalZoom! Jacoby & Meyers Gets into Legal Forms, W
ALL
S
T
. J. L. B
LOG
(Oct. 3, 2012,
8:34 AM), http://blogs.wsj.com/law/2012/10/03/look-out-legalzoom-jacoby-meyers-gets-
into-legal-forms/.
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April 2013] CONTRACTS AS TECHNOLOGY 113
ability to help prospective users overcome uncertainty about the
effects of adopting novel documents.
121
This last point merits some elaboration because the determinants
of trustworthiness will vary depending on the relationship between the
drafter and users. When the drafter is a user who presents a novel
document to a prospective counterparty, trustworthiness involves the
ability to overcome the counterparty’s fear that the drafter has
responded to the incentive to prepare biased terms that redistribute
value in its favor. For instance, it is not unreasonable for consumers to
be concerned that modifications proposed by credit card issuers will
be prejudicial.
122
By contrast, if the drafter is a third party, trustwor-
thiness will involve the ability to overcome the users’ fear that it has
responded to the incentive to minimize drafting effort—who would
trust a prenuptial agreement drafted by the paralegals at “Fly-by-
Night Docs”? If the user values transferability, then the drafter of a
novel contract faces the additional challenge of inspiring confidence
that the contract will become widely used. Generally speaking, third
parties who already deal with large numbers of users and who can
make credible commitments to continue doing so are best positioned
to make the case that their documents will become widely used. So for
instance, Kahan and Klausner speculate that large underwriters can
induce adoption of innovative terms in bond indentures by commit-
ting to advise their clients to make a coordinated switch.
123
A. Users
The most obvious potential sources of contractual innovation are
the users of contracts—the parties to the agreement that the contrac-
tual document is intended to record. User innovation can be produced
either by one party, as in the case when a firm proposes a new stan-
dard form, or by the parties acting jointly, as when the process of
negotiation leads to a novel solution to a joint contracting problem.
Users, or at least experienced users, are uniquely suited to pro-
ducing innovations that enhance incentives because they typically will
be most familiar with the scenarios in which the contract will be used,
the likely contingencies, and the consequences associated with each
121
For the definition of “trustworthiness,” see supra Part I.C.
122
See Bar-Gill & Davis, supra note 59, at 19–22 (discussing reasons why contract modi-
fications in consumer transactions will tend to be prejudicial to consumers).
123
Kahan & Klausner, supra note 8, at 738 (“The underwriter’s commitment to a term
may provide the assurance of future use that early-adopting firms need when network
externalities are present.”).
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114 NEW YORK UNIVERSITY LAW REVIEW [Vol. 88:83
contingency.
124
In other words, users of contracts are able to learn-by-
doing in a way that third parties are not. On the other hand, users may
not have the best access to prior documents that might provide a basis
for innovation.
Users’ incentives to innovate are not necessarily optimal from a
social perspective. Users have weak incentives to invest in innovations
that produce small benefits for themselves, even if benefits to other
users would be large.
125
Innovations that reduce litigation costs might,
for example, fit this description if the odds of any given user exper-
iencing litigation are small.
126
Users whose documents govern high
stakes transactions, or who plan to use the documents repeatedly,
stand to gain more from innovation and thus have stronger incentives
to innovate.
127
Users often have incentives to produce innovations that reduce
the reading costs borne by members of their organizations, potential
counterparties, and transferees. For instance, a large insurance com-
pany has an incentive to produce a training manual that explains its
policies to its own employees. Similarly, an insurance company, or any
other firm that offers standardized contracts of adhesion to large num-
bers of unsophisticated parties, will have incentives to invest in docu-
ments and supplementary materials that are readable and comparable,
especially if the counterparties have reason to worry about costly sur-
prises buried in the details of the contractual document. This explains
why an insurance company like AFLAC would invest in redrafting its
documents in plain language. Sometimes though, no special effort is
required to reduce counterparties’ reading costs. For instance, both
parties may have read the document thoroughly in the course of nego-
tiating its terms.
124
On the other hand, an intervening actor, such as the State or a trade organization,
may be necessary to overcome coordination problems. See Goetz & Scott, supra note 7, at
288 (“[B]y generalizing its implication of terms for particular parties, the state renders
more accessible to individual contractors the lessons derived from the pooled experiences
of others similarly situated.”); id. at 303 (noting that a trade organization representing a big
chunk of the potential users “can supply the coordination necessary to overcome the free-
rider problems”).
125
See id. at 292 (“So long as individual contractors are incapable of capturing the full
benefits of their innovative expressions, new formulations will be underproduced.”).
126
See id. at 278–79 (“Accumulated experiences are . . . very important in shaping cus-
tomary contractual prototypes. . . . As Frigaliment illustrates, the production of well-vali-
dated, mature formulations is a costly, error-prone process.” (citing Frigaliment Importing
Co. v. B.N.S. Int’l Sales Corp., 190 F. Supp. 116 (S.D.N.Y. 1960))).
127
Id. at 293 (“Certain private organizations—such as trade organizations and law
firms—can partially overcome the property rights problem that discourages attempts at
contractual innovation.”); Choi & Gulati, supra note 8, at 935–36 (noting the hypothesis
that actors with a significant market share drive innovation because they are most likely to
overcome the public goods problems associated with unpatentable contract innovations).
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April 2013] CONTRACTS AS TECHNOLOGY 115
Users do not necessarily have optimal incentives to disseminate
their innovations. In some cases they do—for instance, bond issuers
have incentives to distribute their indentures broadly, both to attract
purchasers in the primary market and to make them familiar to poten-
tial purchasers in the secondary market. Similarly, firms whose con-
tracts govern mass-marketed products such as credit cards
128
or
software
129
sometimes publish the contracts as part of their marketing
efforts. Situations also exist in which innovative contracts will be dis-
seminated automatically as they are shared with and then reused by
counterparties who engage in large volumes of transactions. For
example, a dealer who is a party to an innovative derivatives contract
might disseminate the innovation by replicating it in his agreements
with other counterparties. The research conducted for this Article has
not turned up any economically significant examples of users sharing
contracts without expecting to receive direct economic benefits in
return. But, this situation may change with advances in information
and communications technology and greater use of mechanisms such
as the Harvard Contracts Wiki.
130
There are also cases in which users’ incentives to disseminate
innovative contracts are absent. To begin with, users typically will not
have any incentive to disseminate contracts beyond current and
potential counterparties, even when broader dissemination might help
firms facing similar contracting problems in other industries or other
countries. Some users will even conceal contracts from potential
counterparties for fear of scaring them off.
131
In other cases, there is
nothing meaningful to disclose to prospective counterparties because
key contractual terms are typically negotiated individually. In addi-
tion, there is the natural incentive to restrict dissemination in order to
discourage copying by competitors. Finally, the pace of dissemination
through re-use will be slow in cases of contracts that the parties use
only infrequently with new counterparties—for most firms, corporate
128
For examples of credit card agreements, see Find Sample Credit Card Agreements,
B
ANK OF
A
MERICA
, https://www.bankofamerica.com/credit-cards/displayPdfListingForAll
Cards.action (last visited Jan. 30, 2013), where the bank offers a variety of sample credit
card agreements for prospective customers to peruse.
129
See, e.g., Marotta-Wurgler, supra note 78, at 321 (finding that forty-eight percent of a
sample of End-User License Agreements collected from firms that sell software online
were available online prior to purchase).
130
See T
HE
H
ARVARD
L
AW
S
CHOOL
C
ONTRACTS
W
IKI
, http://hub.law.harvard.edu/
contracts_wiki (last visited Jan. 30, 2013) (permitting users of the website to suggest con-
tractual provisions designed to respond to specified contingencies and comment on other
users’ suggestions).
131
See Marotta-Wurgler, supra note 78, at 321 (finding that fifty-two percent of End-
User License Agreements were only available after purchase but rejecting the claim that
this statistic reflected sellers’ efforts to hide one-sided terms from consumers).
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116 NEW YORK UNIVERSITY LAW REVIEW [Vol. 88:83
acquisition agreements would be cases in point. In all of these situa-
tions, there is a considerable risk that innovative contracts will simply
remain in the drawers of the users who have developed them.
B. Law Firms
In most states, lawyers and their law firms have legally sanctioned
monopolies on dispensing individualized legal advice, which is fre-
quently defined to include (a) drafting documents with legal effects
and (b) representing people in judicial dispute resolution.
132
Both of
these types of work encourage lawyers to maintain up-to-date knowl-
edge of the law and give them privileged access to a stock of contrac-
tual documents. That knowledge is also valuable in the production of
contracts. In theory, the resulting synergies should give lawyers advan-
tages over other producers of contractual documents, and these
advantages should carry over to the production of contractual innova-
tions. Lawyers should be especially well-placed to generate innova-
tions that respond to changes in the applicable law or information
revealed by disputes in which they are involved. Even in-house law-
yers who represent a single user enjoy these advantages to some
extent. Therefore, to the extent contractual innovation occurs within
organizational users, it is likely to be produced by their in-house law-
yers. The advantages listed above are particularly significant, how-
ever, for lawyers in law firms who can draw on experiences earned
while representing many different users.
Despite these considerations, the theoretical framework devel-
oped in this Article provides ambiguous predictions about whether
law firms will be significant sources of contractual innovation. Like
other non-users, law firms will find it difficult to appropriate the gains
from producing contractual innovations. It is also important to keep in
mind that many law firms are large organizations that specialize in
producing financial contracts and material contracts for companies
with many outside investors. On the one hand, the high stakes in these
contracts suggest that the benefits of innovation will be large relative
to the costs. On the other hand, the need to make the contracts
familiar to third parties limits the benefits of innovation.
133
Finally,
law firms have limited incentives to distribute innovative contracts
beyond their fee-paying clients. This kind of dissemination may help
132
A
M
. B
AR
A
SSOC
., R
EPORT OF THE
T
ASK
F
ORCE ON THE
M
ODEL
D
EFINITION OF THE
P
RACTICE OF
L
AW
4, n.9–10 (2003) (describing state laws restricting unauthorized practice
of law).
133
See supra Part I.B (analyzing factors that contribute to the value of contractual
innovation).
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April 2013] CONTRACTS AS TECHNOLOGY 117
to attract new clients, but it may result in some loss of competitive
advantage for the firm.
C. For-Profit Producers
Law firms are not the only types of firms that produce contractual
documents for use by others. Some of their competitors focus exclu-
sively on producing legal documents. In addition to contractual docu-
ments, many of these businesses sell documents such as wills, powers
of attorney, or articles of incorporation.
134
Many others offer contrac-
tual documents alongside or bundled together with related goods or
services. Firms such as Bloomberg, LexisNexis, and Westlaw provide
access to contractual documents along with access to databases con-
taining a wide variety of legal and non-legal information.
135
Some
firms provide legal documents along with services such as incorpora-
tions, patent applications, and searches.
136
Another strategy is to
supply customers with a document together with a referral to an
attorney who can advise them on its effects and suitability for their
purposes.
137
Other businesses supply documents together with
software that helps users store and modify the documents.
138
Still
others offer documents together with opportunities to purchase adver-
tising space on the webpages that host them.
139
Some vendors use
computer software to draft customized contracts based on customers’
responses to detailed questions about their objectives and
circumstances.
140
134
An example of this is U.S. Legal Forms, Inc., an online store for legal forms and
documents providing over 36,000 forms. About U.S. Legal Forms, Inc., U.S. L
EGAL
F
ORMS
, http://www.uslegalforms.com/about/ (last visited Jan. 30, 2013). See generally
S
USSKIND
, supra note 11, at 100–05 (discussing the ever-expanding use of automated legal
document assembly and its adverse effects on the legal profession); Kobayashi & Ribstein,
supra note 11, at 1171 (“[L]egal software and other new technologies are squeezing small
law firms and sole practitioners.”).
135
See, e.g., LexisNexis Precedent Search, L
EXIS
N
EXIS
, http://law.lexisnexis.com/com-
munityportal/articles/articles.aspx?g=QFsTyLJ1USs=&c=S61RDZGNKnw=&a=PcrQFe
XKXis= (last visited Jan. 30, 2013) (“Turn to new LexisNexis Precedent Search to . . . [g]et
access to more than a half million current model agreements—that’s millions of precedent
clauses and defined terms—including those drafted by the nation’s top law firms.”).
136
See, e.g., L
EGAL
Z
OOM
, http://www.legalzoom.com (last visited Jan. 30, 2013)
(offering a variety of legal documents for both business and personal purposes).
137
See, e.g., R
OCKET
L
AWYER
, http://www.rocketlawyer.com (last visited Jan. 30, 2013)
(featuring a user interface that offers simultaneous equal access to both document creation
and lawyer referrals).
138
See, e.g., About Us, B
IZTREE
, http://www.biztree.com (last visited Jan. 30, 2013)
(describing Business-in-a-Box product which includes legal document template software).
139
See, e.g., O
NECLE
, http://www.onecle.com (last visited Jan. 30, 2013) (featuring adver-
tisements that link to legal document providers next to example documents).
140
See, e.g., R
OCKET
L
AWYER
, http://www.rocketlawyer.com (last visited Jan. 30, 2013);
Westlaw Form Builder, W
ESTLAW
, http://store.westlaw.com/westlaw-form-builder-business-
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118 NEW YORK UNIVERSITY LAW REVIEW [Vol. 88:83
All third-party providers of contractual documents have incen-
tives to disseminate their documents by publishing them and making
them searchable. By providing access to many kinds of documents
through the same channels, these providers can exploit economies of
scale and scope in the development of dissemination mechanisms. To
the extent they deal with novice users, third-party providers probably
also have incentives to make their documents readable. Some users
may feel more comfortable with documents written in incomprehen-
sible legalese, but it seems reasonable to presume that more people
will be comfortable with documents that are at least superficially
comprehensible.
It is less clear that non–law firm third-party providers have incen-
tives to innovate in ways that enhance the intrinsic value of contracts,
such as by ensuring that their documents create the desired incentive
effects and are adapted to changes in the legal environment. This situ-
ation arises mainly because the unsophisticated casual users targeted
by many of these firms are likely to be uncertain of the value of inno-
vations and have no particular reason to trust most third-party prov-
iders. These firms expressly disclaim any intention to provide
documents that are tailored to the needs of specific users, presumably
because to do otherwise would violate prohibitions on the unautho-
rized practice of law.
141
Providers of legal databases may be exceptions. These firms are
in the business of accumulating comprehensive information about
changes in the law, disputes litigated in public fora, and increasingly,
executed contracts filed with government agencies. It should not be
difficult for them to track the subset of that information relevant to
particular contractual documents. For example, it should not be diffi-
cult for a firm that is compiling a database of judicial decisions to run
a daily search for decisions quoting the language from specific docu-
ments.
142
Such a firm should also have the expertise to search the
database of contracts filed with the Securities and Exchange
transactions-solution-westlawnext-pro/182455/41172130/productdetail (last visited Jan. 30,
2013).
141
For example, fine print at the bottom of LegalZoom’s website states: “Disclaimer:
Communications between you and LegalZoom are . . . not [protected] by the attorney-
client privilege or as work product. LegalZoom provides access to independent attorneys
and self-help services at your specific direction. We are not a law firm or a substitute for an
attorney or law firm.” L
EGAL
Z
OOM
, http://www.legalzoom.com/ (last visited Jan. 30, 2013).
142
Some law firms may, however, have superior access to information about unreported
disputes such as commercial arbitrations. Arbitral awards often are not published but law
firms that represent parties in arbitrated disputes will automatically have access to the
resulting awards and can use the knowledge they extract from those awards in drafting
contracts for other clients.
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Commission (SEC) for language capturing a concept it would like to
add to an existing document. As a result, legal database providers
ought to have the capacity to generate contractual innovations
designed to respond to changes in the legal environment.
143
This seg-
ment of the legal database industry is also highly concentrated, pre-
sumably because the high fixed costs of creating these databases pose
prohibitive barriers to entry.
144
Consequently, each of these legal
database firms tends to have access to large numbers of potential
users. This should enhance their ability to convince users that innova-
tive documents will be widely used. For all these reasons, legal
database firms should be able to give law firms a run for their money
in generating and marketing innovative contracts, especially if they
offer to customize contracts to fit customers’ needs. Their incentives
to innovate are, however, still muted by the difficulty of communi-
cating the value of their innovations to prospective users.
1. Trade Associations
Trade associations are organizations with mandates to promote
the welfare of their member firms, and in some cases, the industry as a
whole. Many trade associations produce standard form contracts
designed for the use of industry participants. Some distribute them
free of charge to the public, some limit access to fee-paying members,
and some charge substantial amounts for access to the documents.
There are several reasons why trade associations are likely to be
sources of innovation. First, trade associations have strong incentives
to innovate because they are particularly well-positioned to
143
Consider the following offerings from one major legal database provider: “Save sig-
nificant time drafting Business forms and documents with Westlaw Forms Complete
Business Transactions Solution. This collection provides you access to 600 buildable
Business forms, with no charge linking to related content, including state and federal
codes, primary law and related analytical materials, on WestlawNext.” Westlaw Form
Builder, W
ESTLAW
, http://store.westlaw.com/westlaw-form-builder-business-transactions-
solution-westlawnext-pro/182455/41172130/productdetail (last visited Jan. 30, 2013).
“Sample Agreements gives you access to millions of legal documents with language,
clauses, and provisions written by leading law firms. You’ll have the help you need when
drafting your own transactional documents, and you can gain a competitive advantage by
seeing how other attorneys address circumstances similar to yours.” Sample Agreements,
W
ESTLAW
, http://store.westlaw.com/westlaw/transactional/sample-agreements/default.aspx
(last visited Jan. 30, 2013).
144
Until recently, the three largest global players—Thomson Reuters’s Westlaw,
Wolters Kluwer, and Reed Elsevier’s LexisNexis—together held over seventy percent of
the global market share in the legal, tax, and regulatory information industry. Bloomberg
recently acquired the Bureau of National Affairs (BNA), previously the seventh largest
global provider. David Curle, The Big Four Legal, Tax & Regulatory Players: Strategic
Analysis, O
UTSELL
I
NC
., available at http://www.outsellinc.com/store/products/1089-the-
big-four-legal-tax-regulatory-players-strategic-analysis (promotional summary).
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120 NEW YORK UNIVERSITY LAW REVIEW [Vol. 88:83
appropriate the resulting benefits. To the extent that the benefits flow
to its members, the association can recoup those benefits through
membership fees.
145
Second, trade associations may have privileged
access to documents, information, and ideas from their members.
Users may be willing to contribute to a trade association–led drafting
project on a voluntary basis when they would not be willing to do so
for another user or an entity like a law firm or a legal database pro-
vider.
146
Third, as nonprofits, trade associations benefit from more
favorable tax treatment than for-profits.
147
Fourth, trade associations
may be relatively trustworthy. In the absence of a profit motive, and
with an appropriate governance structure, a trade association has
incentives to abide by commitments to produce fair and balanced con-
tracts.
148
Fifth, a trade association with broad membership may have
the ability to induce a large proportion of its members to adopt a new
contract.
149
The most sophisticated trade associations invest in both innova-
tion and dissemination.
150
A good example is the AIA. It regularly
updates its contracts to take account of new developments, including
changes in construction practices and recent judicial decisions.
151
The
AIA also invests in making its documents easy to adopt. For example,
all of the AIA’s documents are available in both paper and electronic
formats. The electronic versions are embedded in a software package
that contains blank documents and allows users to save completed
documents together with data about the changes that have been made
145
Davis, supra note 12, at 1088 (“[T]rade associations may find it relatively easy to
translate benefits and costs that accrue to their members into financial returns because
they may be able to recover the net benefits that accrue to their members by imposing
some sort of levy.”). In her comment on this Article Lisa Bernstein expands on this point
by describing benefits that trade associations provide to their members and which make it
worthwhile for firms to incur the costs of membership. See Lisa Bernstein, Copying and
Context: Tying as a Solution to Lack of Intellectual Property Protection of Contract
Terms, 88 N.Y.U. L. R
EV
. O
NLINE
(forthcoming 2013), http://www.nyulawreview.org/
online-features/bernstein.
146
See Davis, supra note 12, at 1093–95 (discussing the role of volunteers in nonprofit
initiatives).
147
See id. at 1096–97 (describing the tax benefits that accompany nonprofit status).
148
See id. at 1090–91 (discussing the greater credibility of nonprofits, relative to for-
profit organizations).
149
Id. at 1092–93.
150
See Bernstein, supra note 145.
151
See Revision Policy, A
M
. I
NST
.
OF
A
RCHITECTS
, http://www.aia.org/contractdocs/
AIAS076676 (last visited Jan. 30, 2013) (stating that in order to “reflect the best, most up-
to-date legal trends and building industry practices” and to “maintain such a high level of
accuracy and timeliness,” the AIA maintains a documents revision policy that “requires
periodic republishing of new editions and, after a stated grace period, withdrawal of prior
editions from the marketplace”).
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April 2013] CONTRACTS AS TECHNOLOGY 121
to the standard form.
152
The latest version of the software package is
fully integrated with popular word processing and spreadsheet pro-
grams, permitting data such as costs for the various components of a
construction project to be drawn directly from a spreadsheet.
153
The
AIA also publishes synopses of each document, clause-by-clause
guides, podcasts, and offers online training courses.
154
Some of these
materials are specifically designed to explain the impact of revisions to
the documents.
155
At least one trade association goes a step further toward reducing
the uncertainty associated with its documents and intervenes directly
in litigation concerning the documents it produces. Since 2000, the
ISDA has filed amicus briefs in over twenty cases, many of which
involved interpretation of the documents it produces.
156
2. Academics
In other contexts, academics play a significant role in innovation.
Little attention has been paid to the role of academics in contractual
innovations. One would think that academics’ ability to contribute to
innovation would be constrained by their relatively limited access to
up-to-date contracts and to the kinds of information about user needs
derived from direct experience. However, academics have generated
at least a few examples of contractual innovations. Dr. Richard
Sandor was a key innovator in the development of both mortgage
interest rate futures and futures linked to catastrophic events.
157
Mohammad Yunus, a former academic, is credited with the invention
of microlending.
158
A coalition of academic lawyers and computer
152
See Am. Inst. of Architects, Introducing the New AIA Contract Documents,
Y
OU
T
UBE
(May 11, 2011), http://www.youtube.com/watch?v=a7L7GeitDVk.
153
See Contract Documents, A
M
. I
NST
.
OF
A
RCHITECTS
, http://www.aia.org/
contractdocs/index.htm (last visited Jan. 30, 2013).
154
See Reference Material, A
M
. I
NST
.
OF
A
RCHITECTS
, http://www.aia.org/contractdocs/
referencematerial/index.htm (last visited Jan. 30, 2013).
155
See, e.g., Suzanne Harness & Phil Simon, Am. Inst. of Architects, 2007 AIA Contract
Documents: What’s New?, B
LUE
S
KY
B
ROADCAST
.
COM
, https://live.blueskybroadcast.com/
bsb/client/CL_DEFAULT.asp?Client=643475&PCAT=2773&CAT=2773 (last visited Jan.
30, 2013) (“Explore the revisions to the AIA’s major construction contract documents and
how these revisions may affect [the user].”).
156
See Amicus Briefs, ISDA, http://www2.isda.org/functional-areas/legal-and-
documentation/amicus-briefs (last visited Jan. 30, 2013) (compiling amicus briefs filed by
ISDA).
157
See R
ICHARD
L. S
ANDOR
, G
OOD
D
ERIVATIVES
: A S
TORY OF
F
INANCIAL AND
E
NVIRONMENTAL
I
NNOVATION
55–56, 243–45 (2012) (discussing Sandor’s early insight and
contribution to the development of these new markets).
158
See Devon K. Roepcke, “Should I Stay or Should I Go?”: Preventing Illegal
Immigration by Creating Opportunity in Mexico Through Microcredit Lending, 38 C
AL
. W.
I
NT
’
L
L.J. 455, 458 (2008) (“Microcredit is a concept that began in Bangladesh with a man
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122 NEW YORK UNIVERSITY LAW REVIEW [Vol. 88:83
scientists founded Creative Commons.
159
These examples provide
modest evidence that academics (or former academics) and their col-
laborators can be involved in the process of creating novel sets of obli-
gations. The academics apparently were motivated principally by
intellectual curiosity, altruism, and possibly the desire for intellectual
recognition rather than pecuniary benefits.
Academic actors that are inclined to innovate are probably also
inclined to invest in disseminating those innovations, subject to
resource constraints. For example, Creative Commons makes its inno-
vative licenses freely available and does not appear to be motivated,
either directly or indirectly, by economic benefits accruing to any dis-
crete group of users. Its stated objective is to “increase the amount of
creativity (cultural, educational, and scientific content) available in
‘the commons’—the body of work that is available to the public for
free and legal sharing, use, repurposing, and remixing.”
160
Academic institutions and other mission-driven organizations are
also well suited to establish and maintain platforms that disseminate
user innovations. For example, the University of Missouri–Columbia
has sponsored the creation of a large collection of contracts culled
mainly from filings with government agencies.
161
The contracts wiki
established by Harvard Law School is a means of disseminating inno-
vative proposals on a clause-by-clause basis.
162
IV
I
MPLICATIONS FOR
P
UBLIC
P
OLICY
Users and law firms have limited incentives to disseminate their
work. Other for-profit providers have incentives to invest in dissemi-
nation but may not have strong incentives to invest in improving the
intrinsic quality of their documents. Trade associations and academic
named Mohammad Yunus.”). But see Rebecca Farrer, Exploring the Human Rights
Implications of Microfinance Initiatives, 36 I
NT
’
L
J. L
EGAL
I
NFO
. 447, 454 n.28 (2008)
(“While Muhammad Yunus is often credited as having created microfinance . . . the Self
Employed Women’s Association (‘SEWA’) predated Yunus’s first loan and Grameen
Bank.”); Molly Richardson, Note, Increasing Microlending Potential in the United States
Through a Strategic Approach to Regulatory Reform, 34 J. C
ORP
. L. 923, 926 (2009)
(“ACCION and Muhammad Yunus, founder of the Grameen Bank, claim to have both
independently pioneered the concept of microcredit.”).
159
Ben Adida, Creative Commons Announced,C
REATIVE
C
OMMONS
(Oct. 16, 2002),
http://creativecommons.org/press-releases/page/17.
160
What Is Creative Commons, C
REATIVE
C
OMMONS
, http://wiki.creativecommons.org/
images/3/35/Creativecommons-what-is-creative-commons_eng.pdf (last visited Jan. 30,
2013).
161
The CORI K-Base, CORI, http://cori.missouri.edu/pages/ksearch.htm (last visited
Jan. 30, 2013) (“Most of the contracts in the collection are executed agreements made
available in public disclosure filings or in filings with a regulatory agency.”).
162
See T
HE
H
ARVARD
L
AW
S
CHOOL
C
ONTRACTS
W
IKI
,supra note 130.
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April 2013] CONTRACTS AS TECHNOLOGY 123
actors, on the other hand, may be important sources of additional
innovation and often have incentives to disseminate their products.
Nonetheless, it is plausible that the overall supply of contractual inno-
vation will be sub-optimal.
This in turn suggests that some form of public intervention ought
to be considered. The extent to which judicially implied terms should
be used as substitutes for contractual innovation has been analyzed
extensively by Goetz and Scott.
163
Equally thorough analysis of other
possible interventions is beyond the scope of this Article. In the hopes
of inspiring others to explore these issues, here are some preliminary
thoughts about three possible interventions: (1) enhancing intellectual
property rights, (2) loosening restrictions on who is authorized to
practice law, and (3) expanding the role of public actors in dissemi-
nating contracts.
A. Intellectual Property Rights
One way to stimulate innovation might be to strengthen intellec-
tual property rights over contractual documents.
164
This could be
done, for instance, by allowing copyright holders to prevent copying
of works that are “derived” from—as opposed to close-to-literal
copies of—their documents. This would enhance drafters’ legal rights
to appropriate the benefits their documents confer upon copiers and
thereby increase the pecuniary benefits of innovation. This should in
turn serve to stimulate innovation by actors motivated by the prospect
of pecuniary gains.
Enhancing intellectual property rights is undesirable to the extent
that rights-holders fail to conclude licensing agreements with people
who would derive benefits from copying or who would generate bene-
fits for others by using the copy as a basis for further innovation. This
kind of bargaining failure may occur because of the costs associated
with identifying rights holders and agreeing upon the terms of or
drafting licensing agreements.
165
Suppose, for example, that the AIA
is willing in principle to license its documents but does not manage to
conclude licenses with all potential copiers. In this scenario, the cost to
society includes the losses suffered by people who are driven to less
163
See Goetz & Scott, supra note 7, at 273–80 (discussing the functions and sources of
implied terms); see also Davis, supra note 18, at 13 (arguing that optimal interpretive rules
will vary depending on the stock of available contractual documents).
164
See Goetz & Scott, supra note 7, at 292 (“The limits of copyright law create an initial
barrier to innovation by denying contractors substantial property rights in their formula-
tions.”); see also Kobayashi & Ribstein, supra note 11, 1193–94 (discussing the costs and
benefits of providing intellectual property protection for contracts).
165
See Lemley, supra note 109, 1048–67 (describing impediments to successful bar-
gaining with improvers of initial innovations).
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124 NEW YORK UNIVERSITY LAW REVIEW [Vol. 88:83
valuable substitutes. If those people would have drafted innovative
improvements on the AIA forms, then the cost to society will also
include the losses suffered by anyone who would have copied the
improved documents. Or to take another example, suppose that law
firms and other parties were able to assert copyright over documents
filed with the SEC. Database providers such as LexisNexis would have
to negotiate licenses with each author before compiling the documents
in a database. If the costs of negotiating such licenses prove to be pro-
hibitive, society will lose the benefit of any innovative search tools
that LexisNexis would have developed.
Intellectual property rights might also be problematic in a more
fundamental sense. They may allow rights-holders to appropriate the
benefits of copying documents that are valuable simply because they
are familiar, rather than because of their intrinsic value. This kind of
redistribution of value to drafters can be particularly problematic
when the potential copiers are competitors. Take, for example, an
insurance company whose policy has become familiar purely by hap-
penstance—perhaps because it happened to be the object of judicial
interpretation—rather than because it represents any particularly val-
uable innovation. Permitting the incumbent company to bar competi-
tors from using the standard form gives it an advantage over those
competitors, including those who are able to offer the same policy at a
lower price. This kind of anti-competitive effect is socially costly and,
as in this example, the social costs need not be offset by the benefits of
innovation.
B. Regulation of Unauthorized Practice of Law
Another way to stimulate the supply of contractual innovation
might be to relax restrictions on what types of actors are permitted to
engage in the practice of law.
166
As we have already noted, prohibi-
tions on unauthorized practice of law can be interpreted to prevent
firms that are not law firms from drafting contracts. The more tailored
the contract is to the needs of an individual user, the more likely it is
to run afoul of these prohibitions. As noted above, some online ven-
dors attempt to tailor forms to fit customers’ needs. The more tailored
the form purports to be, the greater the risk of the firm being liable
for unauthorized practice of law.
167
166
See Kobayashi & Ribstein, supra note 11, at 1218 (“This Article’s summary of many
potential legal information innovations that are constrained by licensing laws shows how
the rise of the legal information market intensifies arguments for reexamining lawyer
licensing laws.”).
167
See, e.g., Janson v. LegalZoom.com, Inc., 271 F.R.D. 506, 508 (W.D. Mo. 2010)
(alleging that the online document preparation service known as LegalZoom was engaged
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April 2013] CONTRACTS AS TECHNOLOGY 125
The rules concerning who is authorized to engage in the practice
of law also make it difficult to create hybrid entities that both engage
in the practice of law and produce contractual documents. This is
because U.S. lawyers are typically barred from splitting fees with or
practicing jointly with nonlawyers.
168
So, for example, it would not be
possible for Bloomberg Law to create an in-house law firm, complete
with external clients, to capitalize on the experience of the firm’s law-
yers when updating the documents in the Bloomberg Law database.
This regulatory scheme may well be justified on consumer protec-
tion grounds. It does, however, come at the cost of giving free-
standing law firms exclusive rights to draft certain types of documents.
This is costly to society to the extent that competition from other
types of producers, including alliances between law firms and other
types of entities, is desirable. There are plausible reasons to believe
that other types of producers will have inherent advantages over law
firms in producing innovative contracts. Even if those other producers
do not have any clear-cut advantages over law firms, additional com-
petition may be intrinsically desirable.
169
C. Dissemination by Public Actors
Public dissemination by governments or other public actors can
also help to address concerns about inadequate dissemination of inno-
vative contracts. Private actors can enhance the impact of dissemina-
tion by public actors by republishing data obtained from the public
sector and providing additional search tools.
in the unauthorized practice of law in violation of a Missouri statute); Complaint at 2–3,
Webster v. LegalZoom.com, Inc., No. BC438637 (L.A. Super. Ct. Apr. 18, 2012) (asserting
that the plaintiff had to hire a lawyer to remedy the problems with a living will she pur-
chased through LegalZoom). Complaints denouncing LegalZoom have been issued, in the
form of cease-and-desist letters and advisory opinions, by various groups including the
Supreme Court of Ohio’s Board on the Unauthorized Practice of Law, the North Carolina
State Bar, the Connecticut Bar Association, and the Pennsylvania Bar Association.
Catherine J. Lanctot, Does LegalZoom Have First Amendment Rights?: Some Thoughts
About Freedom of Speech and the Unauthorized Practice of Law, 20 T
EMP
. P
OL
. & C
IV
.
R
TS
. L. R
EV
. 255, 258–60 (2011). For a discussion of whether the preparation of legal docu-
ments constitutes the unauthorized practice of law, see id. at 261–65.
168
See M
ODEL
R
ULES OF
P
ROF
’
L
C
ONDUCT
R. 5.4(a)–(b) (2011) (noting that, subject to
exceptions, “[a] lawyer or law firm shall not share legal fees with a nonlawyer” and “[a]
lawyer shall not form a partnership with a nonlawyer if any of the activities of the partner-
ship consist of the practice of law”). See generally Paul D. Paton, Multidisciplinary Practice
Redux: Globalization, Core Values, and Reviving the MDP Debate in America, 78
F
ORDHAM
L. R
EV
. 2193, 2198–216 (2010) (offering an historical account of the multidis-
ciplinary practice (MDP) debates and their ultimate rejection of fee-sharing between law-
yers and nonlawyers).
169
Kobayashi & Ribstein, supra note 11, at 1218 (arguing that analyzing legal informa-
tion with the same tools applied to innovation generally could create a “robust legal infor-
mation market”).
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126 NEW YORK UNIVERSITY LAW REVIEW [Vol. 88:83
In the U.S., the most notable example of this phenomenon is the
SEC, whose rules require publicly listed firms to file material con-
tracts with it.
170
These filings are made available online through the
SEC’s Electronic Data Gathering, Analysis, and Retrieval (EDGAR)
database.
171
This disclosure requirement is designed primarily to aid
in corporate governance by making it easier for investors to obtain
information about the economic condition of issuers of securities.
172
In other words, the main objective is to elicit information about the
impact of the contract on its user. But the filing requirement has the
added effect of compelling dissemination of the contract itself. Several
private intermediaries have built databases of contracts relying prima-
rily on contracts filed with the SEC.
173
The impact of this particular
rule is, of course, limited to the types of contracts that qualify as mate-
rial to publicly traded firms subject to U.S. law. Other freely acces-
sible government-sponsored databases of contracts in the United
States include the Federal Energy Regulatory Commission’s (FERC)
database,
174
which contains a variety of agreements filed by regulated
utilities, and the California Electronic Access to Securities Informa-
tion and Franchise Information Database, which contains franchise
agreements.
175
Few public agencies appear to disseminate contracts for their
intrinsic value. An exception is the World Bank, which has compiled a
database of sample agreements relating to infrastructure projects
structured as public-private partnerships.
176
The database is part of a
broader effort to help developing countries improve the quality of
170
Regulation S-K, 17 C.F.R. § 229.601(a), (b)(10) (2012). Item 1.01 of Form 8-K
requires issuers to promptly disclose summaries of new material contracts. See 17 C.F.R.
§ 240.13a–11 (2011); Additional Form 8-K Disclosure Requirements and Acceleration of
Filing Date, 69 Fed. Reg. 15,594, 15,595–96 (Mar. 25, 2004).
171
Search the Next-Generation EDGAR System, S
EC
. & E
XCH
. C
OMM
’
N
, http://www.sec.
gov/edgar/searchedgar/webusers.htm (last visited Jan. 30, 2013).
172
When it proposed to introduce the requirement to promptly disclose summary infor-
mation about material contracts, the SEC said: “We propose these amendments to provide
investors with better and faster disclosure of important corporate events.” Proposed Rule:
Additional Form 8-K Disclosure Requirements and Acceleration of Filing Date, 67 Fed.
Reg. 42,914, 42,914 (proposed June 25, 2002).
173
See, e.g., The CORI K-Base, supra note 161 (“Currently, the collection is primarily
drawn from filings with the U.S. Securities and Exchange Commission’s (SEC’s) EDGAR
Database.”). Bloomberg Law’s DealMaker document database is also based on documents
from EDGAR. See DealMaker Documentation: Document Search, B
LOOMBERG
, http://
www.bloomberglaw.com/document/X2O5DG8 (last visited Feb. 5, 2013).
174
FERC eLibrary, F
ED
. E
NERGY
R
EGULATORY
C
OMM
’
N
, http://www.ferc.gov/docs-
filing/elibrary.asp (last visited Jan. 30, 2013).
175
California Electronic Access to Securities & Franchise Information, C
AL
. D
EP
’
TOF
C
ORPS
., http://www.corp.ca.gov/CalEASI/caleasi.asp (last visited Jan. 30, 2013).
176
See PPP in Infrastructure Resource Center: For Contracts, Laws and Regulation
(PPPIRC), W
ORLD
B
ANK
, http://ppp.worldbank.org/public-private-partnership/ (last vis-
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April 2013] CONTRACTS AS TECHNOLOGY 127
their infrastructure with private involvement and is funded by a group
of government-sponsored aid agencies.
177
C
ONCLUSION
Prominent scholars have expressed concern about the volume of
contractual innovation, especially in modern U.S. law firms.
178
This
Article suggests that though important, the volume of contractual
innovation that takes place in law firms is not necessarily of broad
social concern. Of greater interest is the overall volume of innovation
in society and, as noted above, there are many sources of contractual
innovation besides law firms.
Other potential producers of innovation face significant obsta-
cles. The obstacle posed by inability to appropriate the pecuniary ben-
efits earned by copiers is well known. But there are other ways of
deriving pecuniary benefits from innovation. This is most obvious in
the case of user-innovators, whose benefit from innovation will not be
commensurate with the social benefits but may still be substantial.
There are also a variety of indirect pecuniary benefits associated with
producing innovative contracts. Finally, some innovators may not be
motivated primarily by pecuniary benefits.
Of greater significance may be regulatory barriers to innovation
such as the prohibitions on unauthorized practice of law that dis-
courage firms that are not wholly owned by attorneys from producing
customized contractual documents. Also of great significance are the
factors that discourage innovators from disseminating their contracts.
Dissemination, both to users and potential innovators, is crucially
important to realizing the value of contractual innovations. The obsta-
cles to dissemination, particularly for user-innovators, have not
received sufficient attention in the recent literature. Those obstacles,
as well as public interventions that might either assist private actors in
overcoming them or supplant private actors entirely, all warrant fur-
ther study.
ited Jan. 30, 2013) (describing the World Bank’s library of public-private partnership-
related documents).
177
See About PPPIRC, W
ORLD
B
ANK
, http://ppp.worldbank.org/public-private-
partnership/about-pppirc (last visited Jan. 30, 2013) (listing the government-sponsored aid
agencies that fund the PPPIRC).
178
See Gulati & Scott, supra note 8, at 101–08.