Tuesday Tips: New Scholarship from SSRN
It’s been nearly two months since we last reported on new and noteworthy scholarship. SSRN has become a muss less user-friendly site in the past year, and maybe more occasional check-ins area good solution. Here’s my highly subjective list of what seems most salient from works of scholarship posted on SSRN since May.
Abstract
The second Trump Administration has waged war against consumers and against the federal agencies that seek to protect consumers. It has tried to shut down the Consumer Financial Protection Bureau, expand the President’s authority to exert iron-fisted control over agency directors, and significantly shrink the federal workforce that in the past has sought to advance consumer protection. While these attacks on agencies have been highly publicized, one important aspect of the Trump Administration’s actions toward consumers that has fallen under the radar involves binding mandatory arbitration.
Although it is not particularly well known, the federal government plays a unique role in regulating arbitration. This is because the U.S. Supreme Court has interpreted the Federal Arbitration Act (FAA) — a 100-year-old law originally designed to allow arbitration of commercial disputes between merchants — to broadly preempt most state laws, regulations, and judicial decisions related to arbitration. While the FAA largely eliminates state power over mandatory arbitration, both Congress and federal agencies retain authority to regulate arbitration in various ways. Yet, with a Congress that is becoming less interested in enacting legislation with each passing year, and with a severely decapitated federal bureaucracy, the chances that the federal government will capably respond to the risks presented by mandatory arbitration seem slim to none.
This essay examines the implications of giving the federal government virtually exclusive domain over mandatory arbitration in an age of federal government dysfunction. It suggests that the current moment presents a valuable opportunity to reconsider the doctrine of FAA preemption and to look at models for federal-state cooperation in addressing the most serious risks of mandatory arbitration. It also proposes that states take the lead in determining which actions they can take without violating the FAA, and in expanding the work they do to protect the consumers whom the federal government has chosen to abandon.
Abstract
Do investors price the protection that mandatory arbitration clauses provide against class-action litigation? This paper answers that question by conducting an event study around eleven regulatory and legislative events—spanning the Consumer Financial Protection Bureau’s arbitration study, its proposed and final rule, and Congress’s 2017 repeal—that shifted the likelihood that class-action waivers would remain enforceable in consumer financial contracts. We compare cumulative abnormal returns (CARs) for 47 publicly traded consumer financial services firms over 2012-2017 using a 250-day estimation window and ±2 trading-day event windows, estimated under both the standard market model and the Fama-French four-factor model. Treated firms subject to the CFPB rule moved in the predicted direction significantly more than control firms (comparable financial-services firms without product lines subject to the rule): the Fama-French treated coefficient is +0.71% per event (p < 0.001). The Senate’s approval of the Congressional Review Act resolution is the strongest single signal, with a treated-control CAR differential of +2.22% (market model, p < 0.01) and +1.92% (FF, p < 0.05). Direction consistency across events is 6/11 under the market model and 8/11 under the FF model. Panel regressions controlling for market beta, event fixed effects, and sector confirm the main result; the FF specification is robust to excluding the dominant event, winsorizing, and dropping a potentially contaminated control firm. These findings are consistent with investors pricing arbitration protection as a meaningful source of firm value.
Abstract
We defend the common law conception of freedom of contract against criticisms that unregulated contractual freedom permits strong parties to impose unjust terms on weak parties. Common law courts enforce contracts when the parties are informed, competent and free from coercion, and performance of such a contract would not impose costs on nonparties. These contracts are “preferred” in the sense that each party believes that it reflects the best deal the party could have made given its circumstances. The contractual social justice critique responds that such a contract nevertheless can be unjust in four ways: (i) it divides the expected surplus a deal could yield unequally; (ii) it does not realize substantive justice between the parties because the contract contains unjust terms; (iii) performance of the contract would degrade the weaker party or otherwise violate his dignitary interest; and (iv) systematically enforcing unjust contracts-eg, very one-sided risk allocations-would increase the economic subordination of nonparties or otherwise negatively affect them.
Monika Leszczyńska
Abstract
When contract law invokes a reasonableness standard, whose standard applies-and what kind? Doctrine prescribes external benchmarks-industry custom, community expectations-rather than individual moral judgment. Two pre-registered experiments (N = 2,342) test which benchmark laypeople apply across twenty-five contractual scenarios. Personal injunctive norms-what individuals believe one ought to do-most closely track reasonableness judgments across scenarios, demographic groups, and five framings. Legal framing, unexpectedly, appeared to deepen rather than reduce this personal-norm dominance. Conduct conforming to trade custom or community expectations may nonetheless be judged unreasonable by jurors’ own moral standards-reintroducing the uncertainty the objective standard was designed to eliminate.
Abstract
The victim of a breach of contract can either sue or exercise self-help by withholding performance. However, the material breach doctrine perversely limits the self-help option in precisely those cases where the litigation response is likely to be unavailing. The result is a situation where contracts are likely to be systematically underenforced. This might be acceptable if the material breach doctrine rested on some firm alternative normative foundation, but this doesn’t seem to be the case. Parties to a mutually executory contract find themselves in a classic prisoners’ dilemma. Each has an incentive to accept the benefit of their counterparty’s performance while breaching. Contract enforcement can solve this problem in situations where litigation justifies its costs. Game theorists, however, have long recognized that in the absence of third-party enforcement, the problem can be solved by a tit-for-tat strategy of retaliation where parties are locked into repeated rounds of prisoners’ dilemma “games.” Under the rule of proportional breach proposed in this essay, every breach of contract would allow the victim of breach to withhold some portion of their performance. Doctrinally, the move from a rule of material breach to a rule of proportional breach would mirror the shift in tort law from contributory negligence, which like material breach had an all-or-nothing effect on legal rights, to comparative fault, in which each party’s rights are calibrated to the other party’s breach. Like the shift from contributory negligence to comparative fault, hybrid rules are also possible in which proportional breach could be combined with material breach to allow parties to completely abandon performance in the face of substantial misbehavior.